Payroll fraud is one of the most common and costliest forms of asset misappropriation and lasts an average of 30 months before it is detected which can potentially cost hundreds of thousands of dollars.
According to the Association of Certified Fraud Examiners, payroll fraud is defined as “any scheme in which an employee causes their employer to issue a payment by making false claims for compensation.” It’s also fraud that is especially insidious in a company’s accounting department, where bookkeepers or payroll managers have access to bank accounts and checks and an ability to manipulate financial statements. In fact, the median fraud loss in accounting departments is $212,000.
Understanding how to prevent payroll fraud begins with understanding how it occurs. The most common forms of fraudulent payrolls schemes are:
This is one of the easiest schemes to perpetrate. An employee claims they worked hours that they didn’t or asks a coworker to punch their timecard when they weren’t even on the clock. People with access to the payroll system can manipulate information to pay themselves more than they should earn by inflating commissions or increasing their wage rate.
Ghost employees. In some instances, companies are defrauded when payments are issued to former or even fake employees. This type of fraud can easily go undetected in large organizations, or in businesses who hire and furlough workers seasonally, such as farms.
There are several different types of fraudulent benefit schemes, but they all involve the same crime: an employee illicitly receives extra benefits or compensation they did not earn, such as excess PTO.
In sports, it’s often quoted that the best defense is having a strong offense and the same is true for preventing payroll fraud. Having strong internal controls is the best way to deter and detect payroll fraud before it spirals into thousands or even millions of dollars.
Here are 11 practical suggestions for preventing payroll fraud:
1. Set the tone at the top.
2. Require mandatory vacations.
3. Regularly review payroll reports after payroll is processed.
4. Monitor overtime payments.
5. Review PTO accruals.
6. Require supervisor approval for timesheets.
7. Segregate job duties.
8. Cross train and rotate the job duties of employees who handle payroll processing.
9. Implement direct deposit for payroll and bonuses.
10. Review bank statements and cancelled check images each month to spot anomalies.
11. Prosecute fraudsters.
Payroll fraud can be financially devastating to your clients because payroll is often a business’ most costly expense. Knowing what to look for and the importance of internal controls will reduce the likelihood of internal fraud in the payroll department.