Expense claim scandals are big news in Canada. An Alberta Premier was forced to resign, Senators were suspended from Parliament and the head of the Toronto Pan Am Games was dismissed – all following allegations of impropriety relating to expense claims. While most of the media coverage relates to public or broader public sector organizations, with the ever more intense focus on executive compensation, expense claims present an area of potential risk for both businesses and executives in all sectors.

A few lessons learned:

Expense Claims Make Great Headlines

Even where expense claims are clearly within the applicable expense policy, regular run-of-the-mill expenses can make juicy headlines. For example, many employers will reimburse stationary supplies,  but media reports and commentary have questioned the propriety of claiming for these items.

Keep the Expense Policy Current

Recent changes in law, public policy and technology have significantly altered practices relating to expense claims. For example, it may now be prohibited to incur expenses which may benefit persons who cannot receive even minor benefits or gifts pursuant to laws and practices designed to protect the integrity of procurement and political processes and comply with anti-bribery and conflict of interest  rules. As another example, the widespread availability and use of digital technology to receive, store and retrieve old receipts has resulted in updated expense policies that increasingly require receipts in all cases, with no exceptions, in order to reflect increased accountability standards and enhanced corporate ethics regimes.

Audit

Expense claims should be subject to a periodic compliance review by an organization’s internal audit process. Non-compliance with anti-bribery or conflicts of interest legislation can result from weak enforcement of an expense policy. In the US, the Public Company Accounting Oversight Board (“PCAOB”) (which oversees the auditing profession) has recently proposed amendments to the auditing standard respecting related party transactions which now will specifically direct auditors to consider performing procedures for the purpose of:

“Obtaining an understanding of established policies and procedures regarding the authorization and approval of executive officer expense reimbursements.”

The PCAOB further notes:

“Based on the auditor’s assessment of risk, the auditor might determine that additional procedures are necessary. For example, the auditor might read available reports from the internal audit function that contain an evaluation of the expense report process. In other cases, the auditor might determine that it is necessary to inspect executive officer expense reimbursement documentation for unusual items.”

Alternatives to Expenses

Generally speaking, expenses mean the repayment to the executive of an amount the employee has already paid a third party for goods or services relating to the business. In many instances, various items which in the past have been expenses, such as airplane tickets, may be invoiced to and paid by the organization directly, and not directly or indirectly by the executive. The executive would still travel, but the airplane ticket would be paid directly by the organization and hence there would be no expense reimbursement.

Other Issues Relating to Expenses

Expense claim issues involve the interaction and compounding of risks across a range of different traditional legal disciplines: employment, governance, taxation and privacy, and for public and broader public organizations, freedom of information.  For example:

  1. Perquisites

Instead of permitting executives to claim expenses, some organizations provide a fixed amount per year to cover the cost of various business related expenses. So, the executive gets a fixed amount per year to cover, e.g., business entertainment, and submits no claims for business entertainment. This practice can reduce arguments over whether a particular expense is a perk and simplify disclosure of executive perks for organizations required to provide executive compensation disclosure in compliance with Canadian securities laws. Such organizations are otherwise required to disclose perks paid to certain of their senior executives, including the CEO, if the total annual value of the perks is the lesser of $50,000 or more than 10% of the executive’s base salary. Where such threshold is exceeded, the organization must identify and quantify any  perks which individually are valued at least 25% of the total perk value.

  1. Privacy

Expense report disclosure does compromise various privacy interests. It is important that organizations properly balance disclosure and privacy requirements and make decisions based on the relevant privacy requirements.

  1. Freedom of Information

Public sector and broader public sector organizations can expect that information about expenses and the administration of the expense policy will be requested under freedom of information/ access to information laws, and that exemptions for business confidentiality and personal information, including information related to third parties, will be very limited. It is important to take the application of such laws into account in the design and administration of expense reimbursement regimes.