When accounting for a business transaction it is important to record and validate the usual suspects of information: who, what, where, when, how, and why. All but one of these are mostly objective and relatively easy to account and audit for. One, however, is very subjective and this makes it very difficult to deal with. Companies should think carefully about providing and enforcing guidelines for accounting for the “why”.
In travel and expense reporting the majority of the facts of the transaction can be verified against the supporting documentation.
- Who – this is the traveler or the person submitting the expense report.
- What – this is the amount and expense type (hotel, car rental, lunch expense, etc.).
- When – the date of the transaction.
- Where – this is the vendor who provided the goods or services.
- How – this is typically the payment type; cash, corporate credit card or personal credit card.
These basically tell most of the story of the transaction and are usually visible on the receipt for the transaction. For example: Joe Smith spent $25 on Dinner on 9/25/2016 at McVee’s restaurant in Southfield, Michigan using his Corporate American Express card. This is the story the traveler enters into their expense report when they record the transaction. Similarly, an auditor can verify this story by looking at the details of the receipt. The only remaining question is: why did Joe Smith execute this transaction?
In this simplified example the answer is so obvious that even asking the question would be silly. Why did Joe Smith have dinner? Probably because he was hungry; but that’s just a guess. The same would apply to asking why someone got a hotel room or why they had an airfare expense. The “why” as it relates to an expense report is a bit different. It’s not about why Joe Smith had dinner; that’s obvious. Rather it’s about why Joe Smith was traveling in the first place.
The “Why” in an expense report is about the business purpose; why did the company need to incur this expense? Why did the company pay to have Joe Smith travel to Southfield, Michigan? The company should include guidelines in their travel and expense policy to help travelers properly complete their expense reports. In most situations there will likely be two scenarios: one where the “why” is obvious and a second where the “why” is potentially vague.
Companies should provide guidance to employees as to how to record the business purpose based on their own unique requirements. Most of the time they can keep it simple because even the business purpose is obvious. But in certain key situations the employee should include certain details, such as the vendor or customer to which the expense relates. Recording the party that benefits from the expense can help ensure the expense report is approved in a timely fashion, is accounted for accurately, and will survive an audit.