Life is full of choices and opportunities, and let’s face it – we humans don’t always make the best decisions. While there might be a few skeletons in my closet, an auditor would never find a questionable purchase on one of my expense reports when conducting a travel and expense audit.

Call it my business ethics or call it simple paranoia (I always get caught). But whatever you call it, one of the life lessons everyone should learn is to “never bite the hand that feeds you.”

As a former controls and compliance manager, I’ve seen some pretty interesting things hiding in expense reports. I also have first-hand experience that poor spending choices don’t stay hidden forever. I don’t know about you, but I’m not willing to risk losing my job over a bad purchasing choice.

To the business owners and the executive teams out there, think about the cost of doing business – inventory, materials and services, insurance, payroll, taxes, etc. You have to spend money to make money, right? The highest risk for any organization often lies in the payments that go out the door.

Let’s switch our focus to travel and entertainment. Most large companies utilize an expense management software for employees to book travel and manage other business expenses. These systems allow expense data to be submitted, approved, and stored in one single place.

How do businesses mitigate spend risk for employee travel expense reimbursements? Payment policies, system controls, delegation of authority, and workflow approval are a few things that come to mind. But auditing expense reports is perhaps the best control.

If I could teach every person who has a job (and reads my blogs) one thing, it would be that size matters. I’ll explain why in just a second.

One of the most volatile areas of spend is employee travel and expense (T&E), making it a prime candidate for periodic internal audits. Depending on the size of an organization, the sheer volume of corporate credit card transactions and accompanying expense report receipts can be extensive.

Auditors don’t have the bandwidth to look at every transaction, so they must take a different approach when auditing T&E. At the end of the day, size does matter. Audit sample size, that is.

Employee Travel & Expense

Employee travel and expense is simply a part of doing business. In fact, according to the New York Journal, companies spend around 10% of their revenue on business travel-related expenses. With such a significant impact to the financial statements, expense report audit procedures are not only recommended, but necessary.

So, do internal auditors actually look at every transaction when they are analyzing T&E spend? The simple answer is no. Instead, they utilize an investigative technique called audit sampling where less than 100% of the total transactions is selected to be analyzed.

Audit Sampling Objectives and Benefits

Let’s review the objectives of the audit sample selection process:

Gather enough evidence to conclude an audit opinion

- Reduce the number of resources used
- Provide the basis for auditors to issue a conclusive audit opinion
- Detect any errors or fraud that can occur
-Prove that auditors have completed their audit fully in accordance with auditing standards
-Used as a tool for investigating

Once a representative sample is reviewed, assertions are made about the entire transaction population. However, the methodology used to select that sample has a bearing on the conclusion.

With expense transaction auditing, a statistical sample approach, also known as random-sample auditing, is the method used most often. The sample size will be a predetermined percentage of the total transaction count.

A non-statistical audit sampling process allows for a sample to be chosen based on an auditor’s judgment, or by certain criteria. For example, auditors may choose to review a sample of transactions that are only greater than $5,000.

Audit Sample Limitations

Because auditor observations or conclusions are based on estimations or generalizations, there is room for error. The two main types of errors that occur when performing data sampling are selection bias and sampling error.

Selection bias is the bias introduced by the selection of individuals to be part of the sample that isn’t random. Therefore, the sample cannot be representative of the population that is looking to be analyzed.

Sampling error is a statistical error that occurs when the researcher doesn’t select a sample that represents the entire population of data. When this happens, the results found in the sample don’t represent the results that would have been obtained from the entire population.

Audit sampling helps keep costs down by streamlining the internal control testing process, but it isn’t a perfect science. While the intention is to save time, money, and human effort, there are limitations of a sample-based audit approach that can result in missed opportunities to curb employee spending.

Consider these statements:

If you do not select a transaction for further review, you will not find anything wrong with it.
It is absolutely possible that you will find nothing wrong within your sample.

Let’s do some simple math to help you understand the limitations of audit sampling.

A simple scenario: You are auditing T&E spend for a particular employee who has had 100 expense transactions in the last quarter. Your audit process requires you to review a 10% random sample (10) to determine if the employee has been compliant with company spend policies.

What are the odds you will potentially identify a non-compliant transaction among the 100? 10 out of 100 (10%)
What are the odds you will potentially find nothing out of compliance among the 100? 90 out of 100 (90%)
Now, consider the odds of potentially finding nothing out of compliance among the 10 transactions selected. 10 out of 10 (100%)

Would you bet on those odds?

When you think about data this way, it is easy to conclude that random sample audits may identify something is wrong, but it is more likely not to identify anything at all. Sample-based auditing is still labor-intensive, and at the end of the day, it relies solely on the use of an auditor’s individual judgment when looking at exceptions and drawing conclusions.

And you know what they say about making assumptions…

Here’s some food for thought - Have you ever wondered if your employees are following your procurement and payment policies? Is every charge a business expense, or are there some personal ones in the mix?

Have they selected a lavish hotel, or flown first class on the company dime? Are they buying expensive gifts for their employees, or for themselves? Do your approvers really look at the support, or are they just hitting that approve button?

If these questions keep you up at night, the good news is that there are other ways to make certain your employees are making good choices with their spending and card purchases.

The Advantages of Modern-Day Technology

Employers place a lot of trust in their employees. However, when it comes to T&E spend, they rely heavily on policies and manager approval processes to deter any misbehavior.

Research has shown that only 70% of employees are compliant with policies, 25% are engaging in some form of waste and misuse, and 5% of employees are causing 95% of all high-risk activities. Sample-based auditing will not identify the five percent, but there is technology available that will. (Oversight Data)

Artificial intelligence (AI) makes it possible to analyze high volumes of data to identify risky spend and other patterns of spend behavior. Using this advanced technology to monitor employee spend is not only quicker and more cost-effective than traditional auditing methods, but it also removes the risk of selection bias and human assumption that come with random sampling.

Oversight’s Expense Management model takes this technology even further. Using advanced analytics to continuously monitor all spend transactions, Oversight will flag the exceptions, rank them by risk, and prioritize them by confidence levels for you. In other words, you’ll spend less time looking only at the transactions that need your attention.

Summary

Can a sample really be representative of the population? Maybe with census studies, but not to determine if all employees are following your spend policies. There is a high probability the risky spend will be overlooked without reviewing every transaction.

Deterring expense fraud won’t be solved through approvals, receipt requirements, or randomly selecting items to review. In a fraction of the time it would take to select a data sample, AI makes it possible for you to analyze 100% of your transactions to identify non-compliant spend.

Bottom line - what you don’t know can hurt you when it comes to mitigating spend risk. And the only way to eliminate any chance of an audit sampling error is to test 100% of the population.

Let Oversight’s AI analyze your transactions and sort through the details to find the red flags. It will even prioritize them for you.

See It All