Employee expense claims are paperwork heavy and intensive processes for any business. It is tempting to allow the process to go unsupervised so long as employees receive their reimbursement, and amounts appear reasonable. However, a lack of expense claim controls creates several business risks including; additional tax liabilities for the business, opportunities for employee fraud and loss of budget controls.
Many small businesses accept these business risks as it can be complicated to implement proper for expense claim controls.
This article focuses on tools that small businesses can use to introduce simple but effective control activities into their expense claim process.
But first, let’s look at the most common business risks associated with expense claims in China and how they arise.
Additional tax liabilities
When expense claims fail to produce all the required documents to be deducted for a company’s income for corporate income tax purposes, this results in the business paying unnecessary taxes.
The most common practice that results in additional tax liabilities is reimbursing employee’s without having the proceedures in place to thoroughly check for supporting VAT fapiao. Other activities include; incorrect fapiao information, missing supporting documents such as contracts etc. and fake fapiaos. Without control proceedures in place to check for these common mistakes, a business might be unknowingly increasing its tax liabilities come the end of the financial year.
For more information on how to manage one’s tax liabilities resulting from expense claims, read part 1 of our expense claims series.
Foreign companies face mandatory annual tax adjustments where an external auditor will check for the completeness of supporting documents for employee expense claims. If any expense claims are found to be missing documents or unqualified, the business will not be able to deduct those expenses from its Corporate Income Tax. If expenses are staff’s personal expenses, the company will need to pay individual income tax in addition to the additional to any fine for the tax shortage.
Risk of employee fraud
When employees are given the authorization to make purchases on behalf of the company, it empowers the business to run more efficiently and take advantage of greater opportunities. This requires employees to act with integrity and exercise their best judgement. However, this freedom runs the risk of employee’s using their purchasing ability for their personal benefit.
Such bad actors will try to claim fake fapiaos, duplicate fapiaos or fapiaos that are irrelevant to business activity, for their own financial gain. The likelihood of these bad actors going unnoticed abusing their privilege is high without internal control for expense claim procedures.
In China it is not uncommon for employees to try to fully utilize their travel budgets by collecting fapiaos irrelevant to the business activity. By comparing the date on the fapiao with when it was uploaded to the system, this gives accountants and managers more information to identify bad actors.
In some cases, simply knowing that internal control for expense claim procedures is in place is a great deterrent to fraudulent behavior in itself and also helps catch the bad actors.
Budgets exist to keep costs in-line with the business goals such as sales targets, business development, customer relationship goals and more.
Left unchecked, staff could abuse the lack of control and spend excessively on things such as travel, ultimately impacting the profitability of the company or a particular client.
Most companies will set limits for staff depending on their seniority which allows them to exercise a degree of autonomy when on the job. This is both beneficial to the company and often essential for getting the job done.
Expenses incurred by employees go on to impact the management functions of an organization. Expenses are often booked by projects, cost centers and departments to measure the performance or profitability of an activity.
It is easy for expenses to get passed as overhead without proper controls. This completely removes them from any kind of management metric used to manage costs and grow the business.
How to implement expense claim controls
Addressing the issues above requires a business to examine how it handles expense claims and implement steps in the process to control employee’s activities systematically while still allowing them the autonomy to do their job.
Firstly, its important to clearly define staff member’s budgets and issue company policies regarding allowances for travel and other activities in advance and communicate them clearly. The organizational structure for authorizing expenses is important for ensuring expense claim controls work and should be communicated clearly.
For most small business’ the procedure for handling expense claims should look something like this;
Creation of expense claims
Staff are required to submit the supporting documents for business expenses. Most often this is just an official fapiao with the company correct tax information but could also include contracts and other supporting documents.
For more on collection of documents for expense claims, read part 1 of this series.
Expense claim software can be used by managers to set soft limits for expense claims submitted by staff. This creates an alert if the staff exceeds their daily allowance or travel budget and requires special approval.
Authorization of expense claims varies between businesses. Most often it is managers that are required to authorize and approve expense claims within certain authorized limits according to the companies policies before they are processed by accountants. At this stage, managers check whether all expenses are in accordance with business activity and the completeness of supporting documents before approving the expense claim.
The most common risk is that managers or authorized persons approve expenses without carefully reviewing the expense claims. Software tools enabling managers to do this kind of administrative work efficiently and at their convenience, enabling them to perform the task more thoroughly.
Collection of original documents & cover page
Staff must provide the original fapiao and the supporting documents to the accountant for bookkeeping. It is up to the accountant’s discretion whether they need additional supporting documents to prove the transaction authenticity.
Its important that the accountant checks the authenticity and completeness of supporting documents for expense claims in order for them to be entered into the accounting system and become deductible for corporate income tax purposes.
Expense claim software allows accountants to efficiently scan the QR code on fapiaos to check their authenticity and whether the fapiao has been claimed before.
The accountant is also monitoring at this stage the booking of expenses against the internal budgets set by management. This enables managers and accountants to better manage their cash flow and control budget spending.
Accountant should also be monitoring for tax deduction limits for expense claims. Exceeding deductible limits causes all expenses to incur additional 25% corporate income tax. Spotting this early allows businesses to control their spending and maximize their deductible amounts for a given period.
Accounts Payable & Payment
If the expense claim passes the accountants audit, the expenses get submitted to accounts payable. The amount gets recorded in the accounts receivable and the accountant and manager then decide when to make payment based on the company policy and cash flow requirements.
Software plays an important role in facilitating the collection of documents, streamlining approval processes and verifying the authenticity of documents and budget controls efficiently. These tools exist to enable business managers to implement proper expense claim controls without drowning their employee’s and themselves in additional work.
The first step for small businesses in China is to examine how it handles expense claims and identify their business risks. From there they can consult a financial professional or a virtual CFO on how to implement control activities and restructure their expense claim procedures to better manage these risks.