How To Prevent Payroll Fraud

Payroll fraud is the leading cause of employee theft and accounting fraud, affecting 27% of all organizations. It occurs twice as frequently in small firms with less than 100 employees as in large organizations.

According to some research, the typical duration of payroll fraud is about two and a half years. The average loss from payroll theft over 30 months is estimated at $63,000. The additional monetary cost to the firm comes from regulatory penalties for failing to comply with payroll compliance obligations.

Have you recently reviewed your payroll security? Payroll fraud is a common yet costly way for small businesses to waste money. Some payroll fraud is unintentional, but the majority is purposeful. The good news is that you can prevent payroll theft by being proactive. The first step is understanding how it occurs, and the second is stopping it.

Types of Payroll Fraud

Ghost Employees

In your payroll system, a “ghost employee” is created. This will be fine if you have less than 50 people, but it is something to watch as you grow. In this case, someone establishes a bogus employee and steals the funds intended for this non-existent employee. A flourishing corporation can easily have an extra “employee” in its system unless you pay great attention.

Timesheet fraud

Employees falsify their timesheets to include hours they did not work. This results in excessive payments to personnel who are not entitled to them, causing the firm to lose money. Employees sometimes have other coworkers clock in and out for them when they are not working.

Fake Compensation Claims

A false workers’ compensation claim is submitted. Workers in almost any profession can create a slip and fall or other workplace accidents to obtain paid time off. While you might identify this type of fraud with warehouse or construction work, an employee could just as easily claim to have slipped on the floor close to a leaking water in your break room.

Workers misclassification

Employee benefits determine whether workers are classed as employees or independent contractors. It happens accidentally when employers misclassify employees.

However, employers commit fraud in many circumstances by purposely categorizing employees as independent contractors to avoid paying payroll taxes, unemployment benefits, or workers’ compensation insurance.

Wage falsification

This sort of payroll fraud is frequently a two-person show, with an employee and a member of your payroll staff working together. The employee is paid more than they are owed and splits the money with their payroll-based accomplice.

The fact that the offending payroll staff member can later return the employee’s salary back to normal after receiving the inflated sum makes this particularly difficult to identify.

How To Prevent Payroll Fraud

Payroll fraud can be considerably minimized with proper supervision and appropriate payroll systems. The system will ensure that only authorized employees are paid and detect any irregularities in payroll processes.

Check information carefully

The first guideline for preventing payroll fraud is knowing what to look for, which entails recognizing the indicators. To do so, thoroughly review all of your payroll information. This includes wages, taxes, and personal information such as names and bank account numbers.

Any instances of duplicate payments, names, or addresses should raise an alarm. Payments sent to people with identical names or variations on the same name should likewise be regarded as suspicious.

Segregation of duties

Giving one individual complete authority over any component of the payroll process poses a significant risk. One of the most significant actions you can take to combat payroll fraud is to segregate jobs, which means having distinct personnel do crucial payroll functions. For example, you may delegate payroll approval, distribution, and reconciliation to separate employees.

Checks and balances that work

Overtime payments and commission checks should be subject to scrutiny through a senior executive’s approval. It would help if you put in place a mechanism for quarterly and annual payroll book reconciliation. Additionally, had a third party analyze your payroll records to detect ghost employees and other instances of payroll fraud.

Restricted access to payroll data

You should restrict payroll information access to only those personnel who execute important payroll processing responsibilities. The role-based access will allow you to protect payroll information while also assuring data privacy and security.

Payroll fraud is rarely discussed, yet it may be quite costly. It is extremely harmful to startups and small businesses. While it is unlikely that you will ever be able to construct completely fraud-proof systems, there is no reason not to try.