Payroll fraud is when employees cheat the system so they get unauthorized pay. According to the Association of Certified Fraud Examiners, 27 percent of all businesses experience payroll fraud at one point or another. If fraudulent payments are being made for an extended period of time, it could cost a company tens of thousands of dollars or more.
The best way to try and cut these losses is through understanding and prevention. Knowing what types of payroll fraud are possible and how to avoid them can keep your business better protected.
Types of Payroll Fraud
There are a few different types of payroll fraud that can be committed, both by employees and by the employer:
- Salaried employees may increase the amount they get paid or create a fake employee used to collect an additional salary or wages. The latter is often referred to as a “ghost employee,” and can be a person who doesn’t exist or an old employee not removed from the payroll system. Generally, the person committing the fraud will have an account set up in the fake employees name and get direct deposit to that account for each paycheck.
- Hourly employees can commit fraud by lying about hours worked. This may mean adjusting times in and out so more hours are logged per shift or logging time for shifts they didn’t have. Anyone from the employee to the supervisor or someone in payroll can falsify hours worked, resulting in extra pay given to the employee.
- Employers can commit fraud by misclassifying employees. Labeling a salaried worker as a contractor means the company doesn’t have to pay payroll taxes or insurance for that employee. Sometimes this is done on purpose, but other times the employer is committing this fraud unknowingly. Either way, if the government finds out, the company will most likely be penalized.
- Employees working on commission can misreport number of sales or the rate that should be paid per commission. Unless a tracking system is in place noting the rate and completion of every unit sold, it may be easy for salespeople to increase their pay without someone knowing any better.
Payroll Fraud Prevention
By understanding payroll fraud, you may be able to better prevent it from happening to your business. When you notice pay going to employees you don’t know or the numbers don’t match with your business records, someone may be trying to steal from you.
If you know what to look for, you can take extra caution when reviewing payroll records and submitting payments. This often means having someone other than your payroll department review your payroll process and records each quarter.
Other things you should do to avoid payroll fraud include:
- Don’t allow any employees access to payroll data unless it is critical to their job functions.
- Segregate tasks so the person who reviews the completed payroll is not the same as the person who processed it.
- Educate your employees on the consequences of payroll fraud – fines, repayment of money taken, loss of employment and even jail time.
- Do background checks on all employees upon hire to make sure they have no history of fraudulent or criminal activity.
- Outsource to a payroll company that is trained to look for fraud and can keep payroll out of employee hands.
Taking the appropriate steps to try to prevent payroll fraud may not always keep it from happening, but it can help make it a little harder for fraudsters to achieve. Whether you are concerned about your employees or not, it’s a good idea to review your payroll records and track your processes regularly.