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5 ways to prevent employee credit card abuse

How business owners can control employee company card spending

By LaRita Heet

Left unchecked, without the proper policies and regular reconciliation in place, employee credit card abuse can run rampant.

The seemingly endless parade of government agency employees who have abused their employee credit cards, also known as purchase cards or p-cards, using taxpayers' dollars to gamble, take vacations and purchase computers, iPods, cars, and just about anything else their hearts desire, is enough to make a business owner consider shredding his employees' company credit cards. After all, if the federal government, with its innumerable statutes and regulations, can't control its own spending, what hope is there for your small business?

Luckily, financial experts say it's easy for businesses to maintain financial safety and integrity of its company credit card program -- and its company -- by following a few basic guidelines. 

1. Partner with your credit card company
The first step in preventing unauthorized purchases means checking with your credit card issuer to find out which protections can be built into the credit card network. Robert Hammer, president and CEO of R.K. Hammer Investment Bankers in Thousand Oaks, Calif., recommends asking your credit card company to put a programming code to operationally block the card from being used at all in certain locations. These Merchant Category Codes, also known as MCC codes, can prevent corporate credit cards from being used for gaming, at certain nightclubs or with other specific types of merchants. For instance, "There are lots of card companies that won't allow cash advances at an ATM near a casino. When you try to get it, it will just say, 'Unavailable to be used here,'" says Hammer. 

Though this preventive tool has been available for 10 years, many business owners do not know it exists, says Hammer. Other business owners choose not to restrict their employees' card usage, saying, "Hey, it's there to be used. They've got a credit line; they can use it," but Hammer discourages business owners from this practice, because of the financial risks inherent in allowing employees free rein to shop till they drop. 

Business owners can also work with credit card issuers to determine spending limits by user, per transaction or per day. Larger expenditures must be approved on a case-by-case basis by a supervisor or the business owner, thereby avoiding any nasty sticker shock come statement time.

Consider a corporate credit card that includes free employee credit cards with spending limits the business owner controls, monthly employee spending reports and Employee Misuse Insurance Protection. Some cards offer reporting tools that provide spending summaries according to merchant, cardholder, and a variety of dates, allowing you to receive alerts of "unusual spending," and catch discrepancies or unusual spending patterns.

It's a luxury for me to have a card that I can charge business expenses to without having to use my own personal credit card, and I don't want that luxury taken away.

-- John Bruegger, attorney

2. Create a clear, written company policy
Design a company policy that strictly sets forth the do's and don'ts of corporate credit card usage -- and the penalties for violating these restrictions -- with your human resource department or your attorney.  Each employee who has or uses the company card must first read this policy and sign an agreement stating compliance with this policy. Such written agreements don't always work, but they do provide written proof that the employee has read and agreed to the terms you've established.

If you don't yet have a written company policy that addresses corporate credit card usage, you're not alone. John Bruegger, a lawyer in St. Louis, has a company credit card that he uses for work-related travel, meals, and other business expenses. Though he's never been given a strict outline about allowable credit card purchases, he has been told to use his own discretion -- something he takes seriously. In spite of this lack of limitations, he is adamant about using the card for work expenses only, he says. "It's a luxury for me to have a card that I can charge business expenses to without having to use my own personal credit card, and I don't want that luxury taken away. I don't abuse it -- I use it for what it's intended for."

Not all his co-workers feel the same. Not long ago, his former boss's credit card was used by a company employee to pay that employee's electric bill. "I don't know how people think they can get away with that stuff, because you never do," Bruegger says. "They will find out what was purchased and where and who did it."

Unfortunately, many business owners have no set company policy regarding corporate credit cards and their appropriate handling. Assuming that your employees understand your company's unwritten rules for corporate credit cards -- and will follow these imaginary rules -- can be a dangerous and potentially disastrous financial risk for your organization.

3. Do your due diligence
If you have a company policy regarding corporate credit card usage, you're only half way there, say experts. The most important aspect of the company policy is enforcing it. Regardless of the exact reconciliation or accounting policy used, all organizations should make sure a consistent, careful review is conducted by all administrators -- and, whenever possible, by an outside auditing firm.

"I think it's just important for any organization, governmental or private industry, to make sure that the people who are signing approvals for these things, that those people are indeed exercising oversight to make sure they know what they're signing," says John Jahera, a finance professor at Auburn University in Alabama. "That's where you have a breakdown. Many times, people get busy and they sign so many approvals that they just don't tend to pay a lot of attention."

4. Don't assume anything
How does an organization determine which employees are trustworthy and ethical enough to handle company plastic with care? Surprisingly, says Jahera, it's almost impossible to judge. In a recent state university case, he says, the p-card abuser was a longtime staff member of about 25 years. "Sometimes, someone that you trust the most may be the person who defrauds you," he says. "The department heads and senior administrators who were approving the payments each month to reconcile the card just trusted the person."

The recurring theme in the corporate credit card fraud cases was and is the lack of reconciliation and supervision on purchases. Whether there is a breakdown in oversight because the spender is perceived as being trustworthy, or because the supervisor neglects his duty to thoroughly examine the purchases regularly, many such crimes continue undetected for years.

No one at your company should be exempt from having his or her purchases reviewed by another person, or an outside auditing firm. Corruption is just as likely to occur at higher levels, where the executives or upper management are free from scrutiny -- and above reproach -- as at lower levels in the company.

5. Say what you mean, and mean what you say
"I think if you talk to any company, the business-related or governmental-related purchasing cards or credit cards are an easy opportunity for fraud, because you're typically dealing with smaller items also. You're not going to go out and buy a million-dollar piece of equipment on a credit card," says Jahera.

Most importantly, strictly enforce your company credit card policies. Don't be afraid to remind an employee that having a company credit card is not a right, but a privilege you will revoke at the slightest hint of fiscal impropriety.

"I would think with a corporate card or an employee card, I'd want to say, 'This is only to be used for business purposes, such as purchasing supplies. It's never to be used for any personal use, and if it is, you're fired,'" says Hammer. "Once somebody starts getting fired for that, it's not going to happen again in that small company, because the remaining employees will see that's the penalty for doing something unethical."

Updated: April 8, 2009

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