Business Credit Cards Have Legitimate Uses – Fraud Isn’t Among Them

Oct 22, 2021

By Pauline Perrone, CPA – Senior Manager

It seems like more and more forensic accounting cases are focusing on the abuse of business credit cards by all levels of employees. So, what enables these individuals to enrich themselves at will? Oftentimes, it comes down to two preventable factors: deficient internal controls and lax supervision.

Corporate credit card abuse is a growing problem. Consider a case where an Illinois pharmaceutical company executive and his girlfriend managed to spend $5.8 million of unauthorized charges. Many common business-related embezzlement cases involve millions of dollars of theft, yet the time of misconduct usually exceeds three to four years. In this case, the executive in question was accused of stealing $5.8 million over 15 months.

How can an employee incur such a large amount of monthly credit card charges and get away with it for so long? No one reviewed the credit card statements and paid the executive’s credit card bill each time it came due. That’s a costly mistake. In this case, if the company’s accounting department reviewed the credit card statements, they would have seen over $600,000 in purchases for clothing and accessories; over $550,000 spent on home décor; and $250,000 spent on health and beauty-related products and services, including plastic surgery. To highlight the absurdity of this case, moving potted plants from Illinois to California cost the company $24,000. Many of these expenditures were for the girlfriend’s new business venture – a spa in her house in San Diego.

All these expenditures, if adequately substantiated, should never have been approved, let alone paid unless they were charged to the employee’s loan account (provided that such a business/employee relationship existed). In addition to the outlandish expenditures listed above, there were excessive charges for travel, lodging, and entertainment – all of which are common and necessary business expenditures – so long as they are incurred for legitimate business purposes and within the boundaries of the company’s travel and entertainment policy.

Corporate credit cards are a reality in nearly every business. We are advocates of having employees use their personal credit cards and requiring them to adequately substantiate the expenditure (i.e., provide receipts and clearly state the business purpose) to the company that would, in turn, reimburse the employee. This approach enables the company to avoid reimbursing the employee for unauthorized or unsubstantiated expenditures. Accordingly, that employee is then left with the responsibility of having to make the balance of the credit card payment from personal resources. This method also serves to quickly correct unacceptable credit card charging behavior on the part of those who regularly fail to provide actual transaction receipts.

Examining credit card statements and supporting documents can be time-consuming for many accounting personnel. However, a credit card statement alone will not pass adequate documentation requirements for the IRS, and possibly your state as well (i.e., Use Tax).

Ask yourself: Does everyone in your company know the company’s policy regarding what an allowable charge is and how to properly document the charge? This is where investing the effort in compiling and implementing a detailed travel and entertainment policy becomes a valuable undertaking. Some companies do not permit alcohol, entertainment clubs, gambling, and even spouses to travel. Other companies require employees to stay at certain hotels and establish dollar limits on client entertainment meals, airfare, vehicle rentals, or accommodations.

Below are four strategies for helping to prevent business credit card fraud:

  1. Require substantiation for all credit card charges.
  2. Establish comprehensive travel, entertainment, and credit card policies.
  3. Require that all credit card statements and documentation be reviewed by company accounting personnel. You can even utilize the resources of an independent contractor.
  4. For those employees who habitually fail to provide adequate substantiation, you should take away their corporate card and require them to manually submit expense reports with the required documentation.

Corporate credit cards are a tool provided to employees. They are not a benefit nor are employees entitled to them. Most employees use corporate credit cards in compliance with the business’s rules and regulations and would never think twice about using the card for a personal purpose. Rather, it’s the employee who is non-compliant and thinks she does not have to comply and compels diligent companies to remain on the alert.

If you have any questions regarding corporate credit card programs, please contact the professionals at MichaelSilver. We are ready to help. Contact us at 847.982.0333.

Pauline Perrone, CPA – Senior Manager, has more than 25 years of accounting and assurance experience. As a Senior Manager at MichaelSilver, she manages audit, review, and compilation engagements and provides business, accounting, and tax consulting services for a variety of industries including automobile dealerships, professional services, rental real estate, manufacturing, and the not-for-profit sector.