5 Things Every Finance Leader Should Know About Spend Risk

As CFOs, we have a lot on our plate.

We spend far more time worrying about maximizing performance and hitting quarterly sales targets than we do thinking about the comparatively minor risk of hypothetical fraud, misuse and waste impacting our payables ledger.

But don’t be lulled into a false sense of confidence when it comes to the spend risk endemic to our systems: Most organizations could add millions back to the bottom line every year if they better understood where spend risks occur organizationally and what they can do to avoid costly mistakes.

Want the lowdown on the risks lurking in your expense reports and payables programs? Here are five things every finance leader should know about spend risk in their organization:

Duplicate payments can soar into the millions annually

There are many factors why duplicate payments happen, but regardless of how they come to be, it’s at what rate that’s truly in question.  Across enterprise corporations, the world’s most effective A/P departments encounter duplicates at a rate of .01%, which can still mean more than $1 million lost annually. For less effective A/P teams, the numbers only get higher.

To address duplicates more effectively, understand the three most common ways duplicates are issued: high volumes of transactions spread across multiple systems, a lack of vendor master vendor file integrity, and manual invoice processing.

Address these vectors for duplicates, and you can save your organization millions annually.

Fraud runs at 5% of revenue on average

If a fraction of a percent lost to duplicates sounded bad in raw figures, consider the possible impact of fraud. According to the Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, as presented by the Association of Certified Fraud Examiners (ACFE), the average organization loses a stunning 5% of its revenue to fraud each year. In 2020, the Fortune 500 alone logged $14.2T in revenue and lost somewhere north of $700B to fraud.

To reduce fraud in your organization, the first important action to take is to identify the repeat offender.

Repeat offenders are responsible for most of your fraud

In most organizations, a small group of employees is responsible for the vast majority of fraud, misuse and waste. In fact, based on Oversight’s analysis of annual spend across its 200 enterprise partners, just 5% of employees generate more than 95% of all high-risk activity in T&E.

That same 5% of employees are the most likely group responsible for fraud elsewhere in the organization. A recent ACFE study found that in 75.6% of cases of expense reimbursement fraud, the same employee was found to be engaged in additional forms of occupational fraud.

Remote work isn’t doing risk profiles any favors

With T&E spending down more than 50% in the wake of global travel restrictions, it would’ve been a reasonable expectation to plan for a reduction in fraud, waste and misuse. Less money spent, less fraud – right? Yet, the data tells a different story.

According to the 2021 Spend Insights Report, enterprises greatly underestimate the risk that remote work introduces to expense violations. In fact, last year, there was a 292% increase in T&E spend violation rates compared to the period before the pandemic, and 79% of all companies studied saw an increase in overall fraud in 2020.

The good news: You can smash the status quo

For most employees, compliance is trainable. Beyond the 5% of serially non-compliant employees are a second group; an additional 25% of employees engage in waste and misuse, but at far less frequent intervals. They are trainable, and by and large, they represent a group of unintentionally non-compliant employees.

How do we sort the two groups out? By leveraging the power of patterns. It’s far more impactful to address an employee with a pattern of non-compliance over time than to seek information on any single instance. The resulting behavioral changes among the unintentionally non-compliant once patterns are brought to their attention tend to resolve within a matter of months and result in an average 70% reduction in T&E policy violations within the first year.

The same pattern-based approach can be used to all but close the book on duplicate payments. Imagine the financial result of a program that reclaimed the 5% of revenue lost to fraud and reduced duplicates to a number near zero, coinciding with a reduction in T&E policy violations by 70%.

Together, these data points add up to ROI on reducing fraud, misuse and waste. And, they showcase an important idea about spend risk: While a significant sum of money is wasted annually in most large organizations, there is a better way. With the right approach, leaks plug. Bad actors rise to the surface. Duplicate payments disappear. Trend lines head north.

While today’s CFO may consider spend optimization efforts to be secondary, or “nice to have, but not imperative,” that understanding may soon shift.