Overhauling your expense systems

There are some very good reasons for this: financially, law firms have bigger things to worry about right now. And besides, lawyers are honest folk and are unlikely to be fiddling their expenses.

On the other hand, there are some compelling reasons why giving your firm’s employee expense system a thorough overhaul should be given a higher priority on your list of jobs for 2010.

Despite the almost total focus on expense fiddling during most of 2009, due to the MPs’ expenses scandal, improving compliance is actually the driving force behind most firms’ decision to improve their expenses system.

Partners and fee-earners mainly incur expenses on behalf of clients: be it a taxi fare to a client’s premises, photocopying documents or a business lunch. It is important that these disbursements are recorded accurately and quickly, and, where appropriate, to the correct matter code in order to make sure the firm recovers its costs correctly.

Clearly, firms that use a manual or paper-based system are at a disadvantage. Manual systems are easy to get wrong and difficult to understand. They are unable to ensure compliance with policy or HM Revenue and Customs’ rules and will require additional keying of data into accounting or billing systems, duplicating the workload.

A correct and timely method of recording expenses for bill-back purposes not only improves a firm’s cashflow position, but, in a growing climate of costs transparency, clients need accurate descriptions and details of the costs incurred on their behalf to support invoicing. Cost is where the current battle line for business is drawn. On whichever side of the line you sit, the ability to demonstrate transparent additional costs will be a benefit.

Although an unpleasant subject to broach, expense fiddling is a reality and not just at the junior end of a firm or for small ticket items. The recent example of a KPMG director who stole £500,000 in expenses claims to fund his wife’s lavish lifestyle is a lesson that the professions are not above this type of behaviour, and that senior and trusted members of staff are as likely to abuse the expense system as anyone else. The pressures are in abundance this year: threat of job loss, salary freezes and reduced profits and, hence, bonuses.

This expenses fraud was facilitated by a system that did not require authorisation for expense claims up to a value of £5,000 from staff members above a certain level in the firm. While partners and other rainmaking fee-earners should not be bound by piffling bureaucracy and clearly demand a level of trust, there should be limits. Other partners in the firm (incorporated or otherwise) would clearly want to know if one of their number was claiming significantly more in expenses for no noticeable increase in income. The lesson is to have a clearly defined expenses policy that reflects the different requirements of different staff, which is monitored and enforced equally.

Large incorporated firms will no doubt be aware of the new senior accounting officer (SAO) role introduced by the Finance Bill 2009. The SAO, who will be designated to HMRC, must attest that there are sufficient procedures in place to ensure tax information is materially correct. If the procedures are not up to scratch then the SAO will be personally liable to the tune of a maximum fine of £10,000 and the firm can be fined £5,000 and become subject to in-depth HMRC audits for the next few years. That liability exists for all tax-related items including expenses.

Although this only applies to large organisation so far, if successful, it will no doubt be rolled out to other types of organisation, particularly larger, profitable ones. Unless firms have very efficient manual audit procedures it will be impossible for the SAO to sign-off the employee expenses system. The move towards personal liability for compliance in business could be the last word in the argument for revamping your firm’s employee expenses system.