Dealing with dodgy expenses: how to spot it, how to handle it and how to prevent it

We are seeing an increasing number of employees helping themselves to extra cash from their employer, in the form of false expenses.  The examples range from partners in top city firms falsely claiming over £1 million to the odd claim for £20 to £100s – whatever the size or the employee’s reasoning, the act of falsifying expenses has a long list of serious implications.

How to spot an employee falsifying expenses

Employers cannot be expected to police every employee on every expense every time.  Not least because the relationship between an employer and employee is built on trust and confidence.  But, there are some acts or omissions that should trigger warning signals, such as:

  • An employee who regularly files expenses, which do not necessarily correspond with their day to day work.
  • A senior employee (e.g. director or partner) who regularly files high cost expenses with no explanation of the purpose of the expense and which they authorise themselves.
  • The absence of receipts or proof of payments.
  • Unexplained cash withdrawals on company credit cards.
  • Expenses incurred during a weekend, late evening or holiday, with no explanation.
  • Unusual or lavish expenses, such as clothing, jewellery, sporting equipment or extravagant weekends away. 

How to handle it – possible causes of action against the employee

Employment implications:

  • Breach of Contract: Falsifying expenses will most likely amount to a breach of the employment contract.  In most cases, it will amount to gross misconduct, warranting summary dismissal. 
  • Breach of Duty: If the employee is sufficiently senior (director, manager, partner), it can amount to a breach of their fiduciary duties: for example, the duty to act in the best interest of the company, the duty to not make a secret profit.

Action?

  • Suspend the employee pending investigation.
  • Investigate the employee’s expenses. 
  • The investigation should be conducted by someone who does not work with the employee. 
  • Keep in mind the company’s expenses policy as a whole – has there been a lax attitude toward expenses?  Is the employee only guilty of poor filing/record keeping?  Or has the employee claimed for non business/ fictitious items?
  • Involve the employee as you ordinarily would in an investigatory and disciplinary exercise.  If appropriate, the employee should be given an opportunity to explain the expenses or correct any errors or omissions (to the extent that there is an ‘innocent’ explanation). 
  • Discipline or dismiss – Decide whether the conduct is sufficiently serious to amount to gross misconduct warranting summary dismissal (assuming the contract allows for this).  Consider whether the conduct amounts to a breach of duty.  Carry out the disciplinary or dismissal meeting in the normal way and, if appropriate, allow the employee the right to appeal. 
  • Ongoing contractual obligations?  Don’t forget to remind the employee of ongoing duties of confidentiality and any post termination restrictive covenants.    
  • Avoid dismissing the employee outright, if possible.  A failure to follow proper procedure or hasty decisions on whether the employee’s actions amount to a breach risk claims being brought against the company.  Such actions could amount to a breach of contract by the employer resulting in any ongoing contractual obligations (such as restrictive covenants) as unenforceable.

Regulatory implications – FSA, SRA:

  • SRA:  If the employee is a solicitor, the act of falsifying expenses will fall foul of a number of the duties and obligations under the Code of Conduct, such as the duty of integrity.  If the expenses are being charged to clients, the employee is misusing client money which amounts to a number of serious breaches under the Code of Conduct (and has criminal implications). 
  • FSA: If the employee is a FSA approved person, the act of falsifying expenses is likely to mean that person no longer satisfies the requirement of honest and integrity under the fitness and propriety test in the FSA handbook.  The employee therefore risks losing his/her approved person status.

Action

  • In both scenarios, the employer is obliged to report the employee’s conduct to the relevant regulator. 

Other implications?

  • Criminal:  Claiming for fictitious expenses (particularly large scale) can amount to theft from the company or from the clients of the company.  The employee can therefore face criminal charges.
  • Tax:  a company is entitled to claim back VAT on some business related expenses.  Where expenses have been falsely claimed and the company has in turn reclaimed VAT on those expenses, the company could be in difficulty with HMRC if it cannot show it has proper checks and controls in place.

How to prevent it – implementing an expenses policy and procedure

Tips on how to minimise the risk of employees claiming fictitious expenses:

  • Implement a written expenses policy and procedure.
  • Introduce guidelines and limits on expenditure (such as on taxi fares and client entertainment).
  • Require prior approval for client entertainment and events.
  • Implement a system of checks and controls – try to ensure that no employee (no matter how senior) is authorising their own expenses.
  • Do not have company credit cards - or, if the business requires employees to have company credit cards, try to limit the number of employees that have access to a company credit card and have a low limit on the card.  Prohibit cash withdrawals on the credit card.

 

Evie Meleagros is an Associate in the Dispute Resolution department and can be contacted on emeleagros@foxwilliams.com or 020 7614 2593.