Your credit card payments are encrypted, you back up all your data securely on the cloud, and you’ve enabled two-step authentication on all of your software. You feel safe, secure, and impenetrable. But what about your payroll security?
Payroll fraud, while often overlooked, is very expensive. Some fraud is unintentional and other fraud is on purpose. While you would think payroll fraud would be obvious, well-hidden fraud is not obvious to business owners. Unfortunately, by the time most businesses discover payroll fraud, the illegal actions have been occurring for months or even years. The good news is knowledge is power. By understanding what payroll fraud is, as well as the most common types of fraud, you can be proactive when it comes to preventing payroll fraud.
What is Payroll Fraud?
Payroll fraud is the act of stealing money from a business using the payroll system. This form of fraud can manifest in a few common ways. If you’re new to payroll accounting, some of these methods may be unfamiliar to you. So, let’s take a look at the most common types of payroll fraud.
A “ghost employee” is a fake employee created in the payroll system. During this scenario, someone creates an employee in the payroll system and then pockets the money disbursed to the non-existent employee. If you are a smaller company, with fewer than 50 employees, it would be challenging to hide a ghost employee. However, for larger companies or companies seeking to expand, someone could easily hide a ghost employee. So always be diligent by auditing your payroll to ensure all employees are legitimate employees. For larger companies, consider having a few employees dedicated to reviewing current employees to make sure they are all currently working and there are no fake employees on the payroll.
Additional tips for preventing ghost employee payroll fraud include:
- Randomly auditing payroll databases, especially for employees who have no deductions in their pay (such as healthcare, retirement, or withholding for dependents).
- Cross referencing the company’s payroll roster for duplicate addresses or duplicate direct deposit accounts.
- Require all employees to physically sign and show proof of identification in order to receive their first direct deposit or paycheck.
Wages can be falsified. Employees can falsify their wages in a variety of ways, including lying on their timesheets, padding their expense reports, or exploiting commission loopholes. More experienced criminals can break into payroll accounts and assign unearned bonus pay to themselves. Common timesheet fraudulent activities include buddy punching and paycheck diversion. Buddy punching is when one employee puts in a timesheet on behalf of another while they take the day off or they clock them out when they leave work early. Paycheck diversion is when one employee takes the paycheck of another employee and cashes it, collecting the money for themselves. Additionally, payroll or accounting staff with access to payroll systems can manipulate rates of salary or hours worked.
Timesheet fraud can be stopped before it starts by installing by taking a few simple measures:
- Use sophisticated timesheet systems or clocks that require unique passcodes for each employee, which must be entered whenever an employee clocks in and clocks out.
- Require executive approval for all kinds of bonuses.
- Require supervisor or manager approval for all timesheets/timecards, overtime, and vacation reimbursement.
- Require executive approval for all paychecks and/or before payroll is disbursed.
- Mandatory vacations for anyone with responsibilities related to payroll with another employee conducting payroll functions in their absence.
- Restrict the number of people that can modify rates of employee wages, bonuses, commissions, add employees, etc. These individuals should have their records audited on a regular basis.
Fake Compensation Claims
Employees in every industry can slip and fall or suffer another workplace injury to get time off. In the case of fraud, an employee fakes or stages their workplace injury to file a workman’s compensation claim. While most people associate this type of payroll fraud with construction or warehouse work, this type of fraud can happen in any type of workplace. It’s important to have managers monitor their employees, install workplace cameras to monitor employees, require several medical opinions for certain injuries, and insist all injuries are reported within a specific period. These simple measures can help to ensure compensation claims are valid and not created for fraudulent purposes.
General Tips to Stop Payroll Fraud Before it Starts
While payroll fraud is hard to stop entirely, there are several simple actions your company can take to ensure they do not fall victim to payroll fraud.
- Set up a system of checks and balances.
- Switch to a modern timesheet system that uses a passcode or two-step authentication.
- Conduct regular internal audits for payroll taxes.
- Install CCTV cameras to monitor payroll activities.
- Regulate employee behavior for suspicious behavior. For example, the payroll department is not one that typically works late hours or takes home files/timesheets.
If you are concerned about fraudulent payroll activities, the experts at SOURCEitHR can help. Our innovative outsourcing payroll services are designed to streamline your payroll operations and minimize fraudulent activities. Contact our team to learn more.
Co-Founder & Managing Partner