What is Payroll Fraud?
As per the Association of Certified Fraud Examiners, you can define payroll fraud as a scheme used by an employee where he or she falsely put up compensation claims. In most cases, the scam finds its roots in the accounting department of the company, where the accountant or bookkeepers or payroll manager has complete access to the accounts of the company. These people are experts in keeping books; thus, it is easier for them to manipulate the financial statements on an average large scale payroll fraud clock close to $212,000.
To understand the different methods of how one can implement to prevent payroll fraud, it is crucial to have an idea about the types of fraudulent payroll schemes that people use to create false claims. Here are a few common forms of fraudulent payroll schemes which you can notice:Ghost Employees:
It is one of the most common fraudulent schemes used by fraudsters to create false claims. Such programs often work perfectly in large organizations, businesses, or government schemes where a large number of employees work, and it is not easy to keep track of every entry of the employee is correct or falsified. In such cases, the fraudsters create fake or dummy records of the employees who are paid salaries and other compensation based on the bills, etc. It is something you can avoid by hiring experienced payroll providers.Falsified wages:
Two types of falsified payments are easily noticeable if checked carefully. The first type of falsified payment is those in which one employee punches the timecard for another employee who is not even working that day. The second type of falsified wage is done by the payroll managers who pay themselves more than they should get. They manipulate the books to inflate the commission and increase the rate of the wage they are going to get. This type of manipulation is so complex in some cases that you may need an expert to audit the books to find if there is a fraud happening in the company or not. Many companies hire payroll vendors to avoid such scams and detecting them before they can do any significant damage.Benefit schemes:
The fraudsters often misuse the benefit schemes provided by the public or private sector. Let it be special compensation paid to the students, teachers, employees, or part-time workers, or it is about the compensation one gets for an unforeseen accident. In such cases, the fraudster creates false documents to claim the compensation, and in most cases, such frauds happen on a vast scale, clocking thousands of dollars every year.
How to Protect Your Small Business from Payroll Fraud?
In the business world, it is always better to work on the prevention and weed out possibilities of any fraud that can happen in a company. Many ways can trigger alarms for the management in case there is a chance of any fraud that can happen or is happening in a company. Let's discuss some of the methods that you can follow to prevent payroll fraud.
- Keep doors open for whistleblowers: If we study the stats, a high percentage of frauds are reported by the whistleblowers in the company. It is possible only if the top management has an open-door policy, and the employees who care for the company have nothing to fear. It is essential to have a culture of ethics and responsibility in the office, which can help the employees to have a better connection with the management.
- Mandatory leaves: In many cases, it has been noticed that the most dedicated employees who prefer to come early and stay up late are involved in some fraudulent activities. Such employees often do not ask for any extra perks for the overtime they are doing. Thus it is essential to make it mandatory for the employees to take paid leaves. It is vital for the accountants, payroll managers, and anyone who has access to the payroll database. By sending the regular payroll managers on mandatory vacations, you will enable someone else to access the payroll database, which is one of the most common ways to detect and prevent payroll fraud.
- Review the payroll reports: One of the biggest mistakes most of the employers do is that they do not check the payroll reports properly, assuming their managers have done the best possible jobs. It is essential to check the reports as well as randomly check the bank accounts and addresses of the employees at regular intervals to make sure there is no fraudulent activity going on in the company.
- Check for overtime: Most of the payroll frauds happen in the name of overtime. It should be a norm to check if the employee has stayed for overtime or not before issuing the payment. If you want this aspect to be analyzed carefully, you must outsource the entire responsibility to any of the reputed payroll vendors.
- Review the benefits: In many cases, it has been noticed that some employees who went on leave are still getting higher rates for the benefits, which should be lower for the period they were on vacation. It is one of the significant red flags that show they are getting paid higher than they should be.
- Supervisor approval for timesheet: If you are still using the signature-based or excel based timesheet, it should be mandatory to get supervisors' signatures for approval. You can also shift to the biometrics system for logging in and logging out from the building, which will make it easier to keep track of who is working on a particular day and who is on leave. Also, it helps in keeping track of the overtime.
- Outsource: You can also hire payroll vendors that provide payroll solutions for large companies. It will help you in keeping the records straight and reduce the load on the company as well.
- Job rotation: It is vital to keep the teams and responsibilities of the employees on rotation so that they do not spend a lot of time with a single set of employees. It also makes it easier to keep the employee who is handling the payroll away from any possibility of fraud entries in the system.
- Direct deposits: Nowadays, the best way to avoid any payroll fraud at the accounting level it makes the direct deposits in the employees' accounts. It is not only easier but also saves a lot of time and energy.
- Review canceled payments and cheques: It is important to regularly check the canceled payments and images of the canceled cheques to keep an eye on any anomalies. It will help you a lot if you want to prevent payroll fraud.
- Use data analysists: From time-to-time, you should hire a data analyst to audit the payrolls of your company. Using the help of such experts will help you in detecting the fraud activities or any possibilities of fraud activity. The use of payroll solutions for a large company can prove to be beneficial in several ways.
- Divide the responsibilities: Never give complete access to the payroll process to a single person. It is always better to divide the duties into two or more people depending on the size of the company.
- Ask for receipts: Do not make any payments based on verbal confirmation of an expense. Ask for valid receipts with all the information on the costs and the establishment where the purchases were made before issuing any payment.
- Documentation: Before any employee joins the company, make sure the documentation about his or her background is in the file. It is better to do the background check of the employee before you hire. It will not only help in avoiding any frauds joining the company, but it will also help in reducing the chances of having any ghost employees in the company.
- Check for commissions: Some employees make a higher number of sales while some make moderate sales. However, in some cases, some employees punch-in the not-so-realistic number of sales every once in a while. Such sale reports should be formally investigated before making any payments against the commission for the transactions.
- Approval for payroll change: In large corporations, generally, HR department handles the increments, etc. However, it is the best chance for fraudsters to manipulate the system. You should make it mandatory for the HR department to take approval from the management to increase the payroll or in fact, for making any changes in the payroll.
- Know the law: When you catch a fraudster, mostly, they are not prosecuted because of the lack of knowledge of the law. Make sure you either have a legal team in your company, or you have knowledge about the law under which you can file a legal complaint against the person. Such strict actions will keep the employees at bay, and they will not indulge in any unethical activity. You can look for payroll solutions for large companies and outsource the tasks to capable hands.
- Offer perks and pay raise: The company needs to make sure that the employees are happy too. You should offer attractive perks and pay increases if an employee shows excellent performance. If the company well pays an employee's efforts, there are very fewer chances that he or she will do anything against the interest of the company.
- Group sessions: Every other month, ask the employees to join in for group sessions where they can discuss problems they are facing in the company with the management if you find any request, genuine and feasible act on it, and get the facility for the employees. It will keep the employees happy and loyal, which in turn can help you to prevent payroll fraud.
- Medical and other benefits: In many cases, fraud happens because the employees are not getting essential benefits like medical, education, and other perks. You should keep it in mind that health benefits are the most common perk demanded by the employees. If the employee does not have to worry about the future, there are very fewer chances that he or she will do anything against the interest of the company.
Payroll frauds are shared across the business world, and they are devastating for the companies. With little care and vigilance, most of the scams are avoidable. Hiring payroll providers can also help in reducing the chances of any payroll fraud. If you know what you should look for to avoid them, it is easier to trace them and stop them even before they can happen.