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Julie DiMauro: What can we learn from employee reimbursement program disasters?

The streak of expense-claim abuses that reportedly caused some 200 employees to lose their jobs at Fidelity Investments may be familiar to the many firms that offer partial reimbursement for expenses such as computers and accessories or fitness memberships and equipment.

The attention given to the Fidelity abuses serves a lesson that such programs require documentation, oversight, periodic spot-checking and attestations of ethical conduct.

Boston-based mutual fund company Fidelity fired or let resign about 200 people during the past year after discovering that some employees misused the firm’s partial-reimbursement program, the Wall Street Journal reported, citing a source familiar with the matter.

The program provided employees with 20 percent of the expense of a new computer they would use at home. The fitness program offered different percentages of reimbursement.

Employees abused the Fidelity program was by canceling orders or returning the equipment and pocketing the reimbursement money — as much as $2,000 in some individual cases.

The misbehavior was not concentrated in any one of Fidelity’s offices but were scattered across multiple jurisdictions.

A review of Financial Industry Regulatory Authority (FINRA) data by the Wall Street Journal found at least 60 Fidelity employees registered with the body were terminated or allowed to resign since early 2017 over allegations related to the benefits programs.

The company alleged in all of those cases that these employees were “inappropriately paid” under the computer or fitness programs.

In some cases in California and New York, Fidelity worded it as employees having submitted “altered receipts.”

The program was discontinued as part of a broader change in employee benefits in 2016.

Some former employees speak out. Some of the individuals whose employment was terminated or who were allowed to resign have complained on a website called TheLayoff.com, saying that the firings were an overreaction or a disguised cost-cutting measure.

Fidelity has said the terminations did not affect customers. “In the very small percentage of instances where we identify misconduct, we take appropriate action,” Fidelity said in an emailed statement to Reuters and other outlets.

Preventing misuse of reimbursement programs. Even if the expense-reporting misconduct at Fidelity did not harm the investing public, it casts a spotlight on lack of controls around an area of reporting and monitoring for Fidelity — and seemingly an ethical disregard on the part of a number of its employees.

But a business need not be as large as Fidelity to fall victim to the practice. Whether it is a multinational corporation or a smaller organization, any business can fall victim to expense-reimbursement fraud.

Approximately 14.5 percent of all asset misappropriations investigated involved expense reimbursement fraud, according to a report by the Association of Certified Fraud Examiners.

Strongly-worded warnings and good examples set by top managers are starting points to avoiding expense misconduct, technology is also essential in monitoring and preventing improprieties. The existing behavioral compliance arsenal might provide some of those tools.

Furthermore, a reimbursement policy must be specifically articulated and the warning to individuals that there will be spot-checking on the integrity of the program and its use must be built into the program and clearly explained.

In addition, handing employees a check might not be the wisest way of reimbursing employees when a payroll credit could be assigned, as the more formal aspect of payroll crediting and payroll record-keeping should give at least some employees pause.

Corporate credit cards are meant to do the same — dissuade any misuse by creating a lasting, formal record of purchases that need to be approved by a manager.

External audits should not be the organization’s primary fraud detection method. External audits, said the report by the fraud-examiners’ group, have a preventive effect on potential fraud, but their usefulness in uncovering fraud is limited. Such audits detected only three percent of the frauds reported to the study researchers, and they ranked poorly in being able to limit fraud losses.

An effective routine to fight reimbursement fraud could be to scrutinize the purchases of a select group of employees using the program, and letting employees know this will be a regular effort.

Top managers can help promote honest behavior by calling attention to expense reimbursement fraud as a misdeed that hurts the company. A research study on the topic of behavioral ethics and compliance notes that at the time an employee takes the first deceptive steps the employee not fully recognize an ethical or legal problem.

Awareness can be raised and possibly greater adherence obtained by having employees sign attestations in which they agree to follow program policies or face consequences, including dismissal.

Even if individual transgressions involve relatively low sums, expense reports can expose a business to risk. Small deceptions can give rise to larger ones, as some researchers have noted.

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Julie DiMauro is a regulatory compliance expert whose analysis appears on Thomson Reuters’ Regulatory Intelligence subscription service designed for compliance and risk professionals in financial services. Follow her on Twitter @Julie_DiMauro and email her here.

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