Expense Fraud Prevention for Startups: Red Flags, Controls, and Practical Guidance

How to Spot Expense Fraud in Startups: Common Red Flags

For early-stage startups, every dollar of runway counts. While founders focus on product and growth, a subtle drain on cash can emerge from internal expenses. This is not always malicious, criminal fraud; more often, it is unintentional cash leakage from duplicate claims or personal expenses slipping through manual reviews. According to the ACFE occupational fraud report, expense reimbursement schemes are a common source of loss. This leakage inflates burn, erodes runway, and can create significant problems as you scale.

The challenge is implementing just enough process to prevent this without creating bureaucracy that slows the team down. The key is knowing what to look for and applying controls that match your startup's current stage, whether you are a five-person SaaS team or a fifty-person biotech firm. This discipline is a core part of effective expense management.

Before you can build controls, you need to answer the question, "What should I actually be looking for in our monthly expenses?" The goal is not to prove guilt, but to use red flags to identify suspicious patterns that require a closer look. These patterns often point to one of five common expense schemes.

1. Mischaracterized Expenses

This scheme occurs when a personal or non-compliant expense is disguised as a legitimate business cost. A classic example is a team meal that includes non-employees or exceeds policy limits, but it can be more subtle. For a SaaS company, this might be a personal software subscription listed as a business tool. For an e-commerce startup, it could be personal packing supplies bundled with a business order.

• Red Flag: Vague or generic descriptions are a primary indicator. An expense report simply stating "Client Meal" or "Software" is a flag. A policy-compliant description provides clarity and context. For instance, a vague entry like "Client Dinner" should instead be detailed as, "Dinner with Jane Doe, CEO of Acme Corp, to discuss Q3 contract renewal."

2. Inflated Expenses

An employee overstates the cost of a legitimate business expense. This form of employee expense abuse is common in cash-heavy situations, like claiming higher mileage than was actually driven or submitting a receipt for a more expensive item than what was purchased. It can also happen digitally, such as expensing a premium-tier software license while only using the free version for business tasks.

• Red Flag: Look for expenses consistently at the maximum policy limit. If the meal per diem is $75, and an employee always submits expenses for exactly $74.99, it warrants a review. This pattern suggests the employee is treating the policy limit as a target rather than a ceiling for reimbursement.

3. Policy Circumvention

This involves intentionally splitting a large expense into multiple smaller ones to fly under an approval threshold. This is also known as "structuring." If your policy has a $50 "no-approval-needed" expense limit, you might see two separate claims for $45 from the same vendor on the same day. This not only costs the company money but actively undermines the control environment.

• Red Flag: Multiple expense claims from the same employee, at the same vendor, in a short time frame, all just below the approval limit. This is a direct sign of someone trying to avoid oversight and is a clear indicator of startup fraud risks that need to be addressed.

4. Personal Expenses

This is the most straightforward scheme: an employee knowingly submits a receipt for a personal purchase. Without clear policies and diligent review, these easily slip past manual checks, especially in a high-volume environment. This is a common challenge when a startup relies on manual spreadsheet tracking, leading to limited real-time visibility into spending.

• Red Flag: Weekend or holiday charges for items that do not align with the employee's role. A software developer expensing a large meal on a Sunday evening or office supplies from a non-approved vendor on a national holiday should be questioned. Similarly, purchases from merchants unrelated to business functions warrant scrutiny.

5. Duplicate Claims and Detecting Fake Receipts

An employee submits the same expense more than once. This can happen accidentally, but it can also be intentional. A scenario we repeatedly see is where an employee pays with a corporate card, then submits the itemized receipt for personal reimbursement, hoping the accounting review misses the duplication. This is particularly critical for preventing unauthorized spending in R&D-heavy companies.

• Red Flag: Identical amounts from the same vendor on different dates or submitted through different channels are a major warning sign. Consider a biotech startup where a lab manager purchases specialized reagents. They might pay with a company card, and the transaction feeds directly into QuickBooks. A month later, they submit the paper receipt for the same purchase through an expense report, hoping it is approved for cash reimbursement. Detecting fake receipts or duplicates here is crucial for managing R&D budgets.

Implementing Expense Policy Controls at Every Startup Stage

Knowing the red flags is the first step. The next is to build stage-appropriate controls. What a pre-seed company needs is very different from a Series B company, and the goal is to prevent fraud without creating friction. The reality for most startups is that the finance function is handled by a founder or a part-time bookkeeper, so controls must be simple and sustainable finance team safeguards.

Pre-Seed and Seed Stage (1-15 Employees): The Principles Phase

At this stage, bureaucracy is the enemy. The focus should be on creating clear guidelines, not a 20-page formal policy. What founders find actually works is an "Expense Principles" document.

• Create Expense Principles: This is a simple one-page document outlining the company's philosophy. It should include clear, quantifiable rules. For example, specify a daily meal limit for travel, such as $75 per day, and a "no-approval-needed" threshold for small purchases, like $50. This empowers employees while setting clear boundaries.
• Use Proactive Controls: The best way to prevent bad spending is to make it difficult. Issue corporate cards from providers like Ramp or Brex with built-in spending limits instead of relying on reimbursements. You can issue virtual cards for specific SaaS subscriptions and set hard limits to prevent overspending.
• Centralize Founder Review: With a small team, the founder can review all expenses monthly in an accounting system like QuickBooks (for US companies) or Xero (for UK startups). This direct oversight maintains discipline and reinforces the company's spending culture. This regular check-in is one of the most effective early-stage finance team safeguards.

Series A and B Stage (15-50+ Employees): The Policy and Automation Phase

As the team grows, a founder can no longer review every transaction. Missing or inconsistent approval workflows make it easy for fraudulent claims to go unnoticed. This is the stage where formalization and automation become necessary to manage startup fraud risks effectively.

• Formalize Your Expense Policy: The one-page principles document should now evolve into a formal policy. This document is your single source of truth and should clearly define compliant spending. It must include categorical spending limits (e.g., software, travel, meals), the required level of detail for expense descriptions, and a firm deadline for submissions, such as within 30 days of the expense being incurred. This prevents a backlog of old claims at the end of a quarter.
• Implement Expense Management Software: Manual reviews using spreadsheets are no longer scalable. Tools like Expensify, Navan, Ramp, or Brex automate policy enforcement and integrate directly with your accounting system. For example, these tools can automatically flag any transaction submitted without a receipt, sending a reminder to the employee and preventing the expense from being approved. This automation, such as Ramp receipt automation, directly addresses the pain point of limited real-time visibility into spending.
• Delegate Approvals and Conduct Internal Expense Audits: The founder should no longer be the sole approver. Route expenses to an employee's direct manager for the first line of review, as the manager has the best context. Then, introduce reactive controls through spot-audits. The finance lead or fractional controller should perform a quarterly audit of a random 10% of expenses. This internal expense audit keeps everyone honest and demonstrates good governance to investors, without requiring a review of every single line item.

Practical Takeaways for Building Investor Confidence

Preventing expense fraud is not about fostering a culture of mistrust; it is about creating a culture of financial discipline that protects your runway and builds investor confidence. Always aim to follow the IRS guidance on accountable plans to ensure compliance.

The journey from a small founding team to a scaling company requires an evolution in financial controls.

• For pre-seed and seed startups, the minimum effective dose is a simple one-page set of expense principles, founder-led reviews in QuickBooks or Xero, and the use of corporate cards to limit reimbursement risk. Your goal is clarity and simplicity.
• As you grow to the Series A or B stage, that informal system must mature. This shift from principles to policy is crucial. A formal expense policy, implemented through an automated expense management tool, becomes your primary defense. Delegating approvals to managers and conducting quarterly spot-audits of a random 10% of expenses creates scalable oversight.

Ultimately, clean expense management has a direct impact on your relationship with investors. During due diligence, organized, policy-compliant expense data demonstrates operational maturity and responsible stewardship of capital. It shows that you are managing burn effectively and have the internal controls in place to scale efficiently. Cash flow is king, and so is trust.

Frequently Asked Questions

Q: What is the difference between expense fraud and an honest mistake?
A: The key difference is intent. An honest mistake, like accidentally submitting the same receipt twice, is unintentional. Expense fraud involves deliberate deception, such as creating fake receipts, knowingly submitting personal items for reimbursement, or structuring expenses to avoid approval thresholds. Pattern recognition helps distinguish between the two.

Q: How should we manage expenses for a fully remote team?
A: For remote teams, a clear policy is even more critical. Define what qualifies as a home office expense and set clear limits. Use corporate cards, especially virtual cards for online subscriptions, to control spending proactively. Expense management software helps streamline submissions and approvals across different time zones.

Q: Is expense management software worth the cost for a small startup?
A: Yes, it often provides a strong return on investment even for small teams. The cost is typically offset by the time saved on manual reviews, reduced cash leakage from errors and fraud, and improved real-time visibility into spending. It also establishes good financial habits early on, which is vital for scaling.

Q: What are the first steps to creating an expense policy from scratch?
A: Start with a simple one-page "Expense Principles" document. Outline your company's spending philosophy, set clear limits for common categories like meals and travel, and define the approval process. As you grow, you can expand this document into a more detailed policy covering more specific scenarios and compliance rules.