T&E Audits Put You in Control

A revealing new study
There is no room for error—with intense IRS scrutiny and tough Sarbanes-Oxley (SOX) audits, organizations must be certain their own internal financial controls are completely reliable and above reproach. To learn more about how companies are managing their audit processes to increase compliance, the Institute of Management and Administration (IOMA) conducted a major research survey into corporate Accounts Payable (AP) and Travel and Expense (T&E) policies and procedures ("Managing Accounts Payable," IOMA, April 2006). Their preliminary findings include some surprising statistics and several key best practices.

Results of IOMA Survey — Audits up more than 30% in the last 5 years
In response to the newly stringent enforcement of IRS regulations, businesses are now conducting more in-depth audits of expense reports than in the past, requiring high-level approvals, and penalizing employees for abuses or for not filing reports on time. As a result, 91% of companies surveyed report they are in compliance with SOX requirements.

While the number of expense reports most companies audit has increased significantly--from 20% five years ago to 68% today — most do not review every report for 100% of expenses. Many companies audit based on a percentage of expenses, typically about 44%.

IOMA recommends a targeted approach
IOMA recommends a targeted approach both for the percentage of expense reports audited and for the percentage of expenses audited per report. Companies that process a large volume of small-dollar reports may want to choose a lower percentage to audit, while companies where expense reports tend to be quite high may want to choose a higher percentage.

There are number of useful ways to target reports:

• Set a dollar threshold (reports that exceed the threshold are automatically audited)
• Reduce the threshold for checking receipts (the IRS reduced the threshold required for receipts to $75 from $25)
• Target specific sets of employees (employees with a record of unauthorized spending, new employees, etc.)
• Consider travel distances (reports that exceed the distance limits are automatically audited)
• Pinpoint specific categories of spending (air, car, hotel, etc.)
• Target internal policy categories (proper approvals, adequate documentation, and use of preferred vendors)

If audits reveal a substantial number of errors or problems, IOMA suggests increasing the percentage of reports audited.

Policies designed to increase compliance
IOMA researchers also studied the T&E policies and procedures companies have implemented to find the best balance of cost effectiveness and maximized internal controls. Their report concludes that:

• 87% of companies require approval of expense reports by a supervisor or department head
• 92% of companies do not limit the number of reports an employee may submit, but 21% penalize employees for late submission of reports
• 60% of companies maintain a policy for terminating employees for inappropriate use of a corporate credit card
• 74% of companies have immediate access to year-to-date spending information
• 48% of companies negotiate preferred rates for hotels; 44% negotiate preferred rates for car rentals; 32% negotiate preferred rates for airfare

Target your audits
While, as IOMA advises, companies will want to select the number of expense reports to audit based on their needs, we see many clients choosing a 10% random audit and 100% audit for any special employee groups a company may wish to target. Target audits for risky populations are especially critical—some companies audit 100% of reports for senior executives and board members, for example.