I’ve seen and heard of many different approaches to managing expense accounts, but it’s actually pretty straightforward. Expense accounts are someone else’s money, so expenditures have to be carefully considered.
As a young chartered accountant and audit manager, I was asked by the CEO of one of my clients to take a look at the expense account of the chairman of his company. The chairman had been assigned to the CEO’s company early in the fiscal year and had racked up quite the expense charges during the year. The CEO’s company was the subsidiary of a public company, so the chairman of the sub was not a typical chairman. In fact, it was more of an honorary position, something that the chairman of the public company had conferred as part of the deal to acquire the honorary chairman’s company years earlier. Apparently, the deal was employment for life and an expense account. The CEO wanted to know what claims were legitimate business expenses and what were personal.
It took me about a week to go through the whole expense file and carefully itemize each of the expense claims. At the end, I presented the report to the CEO and told him that there were just 2 items – that’s right, 2 expenses that looked like they should be charged through to the company. I knew that the CEO was pleased with this report. In the midst of my work he had confirmed why he had requested it, which was substantially beyond normal audit procedures – because the assignment of the chairman to the subsidiary had lowered the company’s profitability to the point where it significantly reduced the management team’s bonuses, and that was not a good thing.
Financial burdens
This assignment was an interesting one from a couple of perspectives. It was incomprehensible that significant costs (a salary and expense account) could be loaded onto a subsidiary without an adjustment to the bonus targets or some agreement that those costs wouldn’t otherwise impact the calculation. It’s easy to see that people would resent the reduction to their bonus for a cost that they couldn’t control and that was not budgeted at the start of the fiscal year. I appreciated what the CEO was asking me to do and why he was doing this for himself and the team.
Illegitimate expenses
More amazing than this, though, was the expense account itself. The fact that it took me a week to work through a year’s worth of claims indicates how many expense items there were. Out of all that, to find only 2 items that would qualify as legitimate business expenses was just stunning. The details of personal expenses put through his account was actually quite embarrassing for me to see. The chairman’s personal life was laid bare, and it should have been an uncomfortable disclosure for him to have put through the company’s accounting team. From a tax perspective, personal expenses like this are not deductible and that was a further point for the CEO.
Squeaky clean expenses
The experience with the chairman’s expense account reinforced a standard of behavior in my mind that has guided me through the years. I am squeaky clean on items that I claim as an expense, feeling confident that nothing is in my account that anyone could ever legitimately challenge. I don’t need detailed rules or guidelines to tell me what is and isn’t reasonable. Even as a CEO, I have never thought that I had a blank check or that I could literally charge any expense.
Reviewing expense accounts
Other friends who are executives take a similarly hardline view on expenses. Some have terminated high-performing staff because of cheating on expenses, and the amount has been irrelevant. Others have offered amnesty to staff to reconsider their expense accounts with great effect. Some bring in auditors to look through all management expense accounts each year. They are clear in their communication that expense accounts are a serious matter that they will review and challenge. These deliberate actions get and maintain their team’s attention on expense accounts.
Expense account parameters
Expense accounts are not entitlements. Just because someone is out of town, it doesn’t mean that the company owes them a great dinner with a nice bottle of wine – something that they wouldn’t otherwise choose if they had to pay for it with their own money. Similarly, if two work colleagues are out together at night in their home city and they talk a little business (or maybe a lot of business), that doesn’t translate into a meal on the company.
There is no end to the expense games that people have tried to play. It’s easy to imagine that, with a wink and a nudge, a manager may try to suggest that his subordinate put a dinner expense on his expense account so that the manager can approve an extravagant event in which he has participated, if not initiated. In my book, the senior person always takes the bill to eliminate the chance for any of these shenanigans or the perception of fiddling with expenses. Additionally, just because others are loose in what they claim for expenses is no justification for others to follow suit. An entitlement mentality may have worked decades ago, but not today in the new accountability environment.
Best to take an attitude of frugality and responsibility around expenses and treat an expense account for what it is – someone else’s money.
