Our second in a series of tips for cutting T&E waste is focused on identifying and addressing misclassified expenses.
T&E management systems streamline the process for travelers to account for their expenses. They make it easy for travelers by allowing for receipts to be photographed and electronically attached to reports. They present drop-down menus for making it easy to select expense types. It’s a lot easier to select “hotel”, “taxi”, and “airfare” than it is to type in the expense type. It’s also easier for travel managers and finance managers to categorize and report on expenses with consistent reporting. The challenge comes when travelers erroneously select an expense type or intentionally select an expense type that is inconsistent with the transaction. Errors happen. Unfortunately, misclassification errors can impact the deductibility of expense for IRS reporting purposes, they can misrepresent the distribution of spending, and they can also conceal expenditures that are not compliant with company policies.
For our customers using Insights On Demand T&E Fraud and Policy Misuse Insights, it is not unusual for them to identify five to seven misclassified expenses per 1,000 expense reports. While some of these are simple errors, some of the repeating patterns we have seen across customers include athletic event tickets expensed as “hotel”, women’s handbags expensed as “airfare” and “rail”, and monthly dating website memberships expensed as “taxi” and “meal”. Other popular items for misclassifications include iTunes, electronics, jewelry, and liquor store purchases. In some cases, the purchases are obviously non-compliant and the merchant category code (MCC) should be blocked. In other cases, the misclassification can lead to inappropriately categorizing an item as an expense when it really should be a capital item. In all cases, it is worth reviewing to determine if the purchases are necessary, should they have been put through either a corporate purchase card or the PO/invoice process instead of the travel card and expense reports, are they indicative of other unwanted behaviors, and should policies change to address these scenarios?