Although it’s the large situations like these that highlight that payroll fraud is a very real issue, there are many much smaller cases that can go unnoticed. It’s important to create robust systems and processes to ensure that your business doesn’t get stung.
What does Payroll Fraud look like?
Payroll fraud is a broad term that refers to a range of ways that employees alter the payroll or benefits system, in order to gain an unauthorised financial gain. The recipient of the funds can by the employee or an associate.
There’s a range of ways that payroll fraud can take place:
- Time Theft – This is when an employee accepts pay for work that they’ve not done. This can range from lying about what hours they’ve done, or whether they’ve actually turned up for their shift, overextending breaks, taking excessive personal time (including phone calls and breaks) or internet theft, when an employee spends excessive amounts online rather than the duty they’ve been employed to do.
- Rate Manipulation – When employees (often those who have access to the administrative side or at a manager level) change pay rates to receive more than the agreed upon amount.
- Leave Theft – This occurs when employees are not honest about the amount of leave that they have taken, incurring extra hours in paid annual leave.
- False or Inflated Expense Reimbursements – When employees are entitled to be reimbursed for work related items, they are able to commit fraud by lying or inflating prices for their claims.
- ‘Ghost’ employees – The aim of this payroll fraud is for an employee to gain an additional wage paid to a ‘ghost’, who they have created falsely. This often happens in larger companies, when employees are spread over different locations and payroll is in one centralised location. To commit this type of fraud, the employee often needs to be in a position to have some access to the payroll accounts in order to add the ghost.
- ‘Ghost’ suppliers (channeling inflated deductions) – Much like a ‘ghost’ employee, a ghost supplier refers to when an employee creates a fake supplier account but pockets the funds.
With so many payroll fraud types, unfortunately it can be easy to get stung – particularly as your business grows in size. So, how does one safeguard a business to prevent instances of payroll fraud?
- Reduce any chance of a single point of failure
As the saying goes, ‘don’t place all your eggs in one basket’. Relying on a single person can increase instances of payroll fraud. Instead, segregate duties across a number of employees. This includes implementing approval processes across timesheets, payroll, bank details, salary changes and new employees. Making sure that there’s another employee checking on these things will lower the control placed on a single source and reduce chance of payroll fraud. Ultimately, this means your payroll and HR departments working as one team.
- Implement policies
Document the policies and procedures in place to leave a solid audit trail for the company. Eliminating paper based processes and moving to a cloud based platform to place all information into a single platform can reduce the chance of payroll fraud. Using a HR system to track and create reports on all changes across the business can ensure that all business activities are easily tracked and recorded. Further, it will help to workflow the approval process implemented in point one.
- Keep the system secure
Make sure that your system remains secure by regularly updating logins, passwords and delete any obsolete information. If your company uses an in-house system, limit access to the database. For example, does your IT department need access to the payroll database beyond a read only file? Make sure that there are limits on who can edit what, and keep tight control over these elements. Monitor the use and keep track of any out of hours or unusual access. For added security, make sure that the access to backups and restore files are under lock and key as these are the tools that can be used to cover up fraudulent activity.
Importantly, the ABA file is the one that holds instructions to the bank for payroll disbursements and can be edited. Make access authorised, normally only by the CFO.
- Regularly audit
Make sure that your business is regularly conducting audits. From monthly variance reports, keeping track of employees worked versus employees paid, any bank detail changes and salary changes, these should never go without regular checks.
- Keep an eye on employee behaviours
Another tell tale sign of any wrongdoing can be seen in an employee’s behaviour and any changes that you may notice. If any employee is leaving beyond their means, it can be an indication that something is up. Any notable addictions, especially a gambling addiction, should be monitored.
One of the easiest ways to achieve the above points is to partner with a provider. Introducing a third party provider significantly reduces the risk involved for any payroll fraud. Beyond this, there’s a number of additional benefits from payroll outsourcing, like reducing time spent on admin and enabling your employees to focus on what you do best.