Payroll Fraud and It's Prevention


”Payroll Photo by stuartmiles - yayimages.com

Payroll fraud refers to the theft of a company’s funds by manipulating its payroll system. It is usually carried out by the senior staff of the department responsible for managing and disbursing salary payments to the employees.

According to a study conducted by the Association of Certified Fraud Examiners a few years ago, roughly 11 percent of workplace scams are carried out through the exploitation of payroll systems and on average, it takes nearly three years for any such scam to get busted. It’s a long time period and an organization can incur significant losses of funds in that duration.

In this article, we will outline different types of payroll fraud and how they can be prevented.

Classification of Payroll Scams

At the core of it, payroll fraud is a type of asset misappropriation. Different approaches are taken by perpetrators to exploit this type of scam. Usually, long-term and trusted employees are at the center of these organizational thefts.

Timesheet Fraud

Inflating working hours to get illegitimate compensations from the company are categorized as timesheet fraud. In most cases, it is done in collusion where one employee is punching in on behalf of the other.

This is fairly common. Sometimes if may just be an employee calling a co-worker to tell him he is going to be late and to ‘punch the clock for him’, while other times, it could be a continuous, all out theft of services. The first instance may not be that the individual is afraid of losing some hourly payroll. It may be more of a fear of getting reprimanded by his supervisor. Although this is still wrong on the part of the employee, it might not be considered payroll theft. The later would surely be one that they would consider fraud and termination is very likely, as well as jail time, should the company determine that a large amount of money has been misappropriated. In cases, where individuals are tampering with a timesheet, the organization has the prerogative to try both parties involved in rigging the punching system.

Lately, this type of fraud is being diminished by the use of electronically entering a worker’s time via the use of biometric scanners or similar device that guarantees it is the right employee who is entering his/her time.

Manuliping timesheets can also be carried out by those responsible for managing the company’s payroll. For instance, they can do slight inflations of working hours in timesheets and pocket the additional funds. In some workplaces, where the rate of pay is calibrated on the basis of various attributes, dishonest payroll staff can falsify a timesheet to change the nature of rate of pay to steal money from both the company and the affected employees.

Prevention

By taking up different auditing and control measures, organizations can limit the instances of workplace and payroll fraud involving timesheets.

  • As previously mentioned, upgrade to electronic timesheets to prevent tampering. It is difficult to alter records once they are submitted to electronic registries.
  • Each and every timesheet should have an intermediary supervisory check and approval.
  • Make sure that there is no delay in the submission of timesheets. A delay can provide a window of opportunity for the tampering of records. Moreover, it will be difficult for the manager to confirm or deny an anomaly in timesheets after a long delay.

Auditing of timesheets and work schedules from a third-party can also help in finding discrepancies. Moreover, a comparative analysis of payment data with the doled out payroll budget can aid in identifying timesheet fraud.

Falsified Salaries

False quotations of salaries can be exploited by employees responsible for taking care of generating payrolls. It’s essentially a tampering of the company’s record where the perpetrator of such fraud generates false pay details of employees by misquoting or adding fabricated categories in pay slips.

This falsification of pay record shows inflated wages where the extra money is transferred to the fraudster’s account before the issuance of paychecks with the correct amount to employees. Sometimes, the employee whose pay slip is being tampered with is also a part of this payroll scam.

Prevention

  • Keep a vigilant eye on each and every outward transaction to ensure that money is not being transferred to an unauthorized source.
  • Separation of responsibilities can also help in preventing this payroll fraud. For instance, duties of crediting employees’ account/issuing them paychecks and processing payslips should be done by different personnel.

Audits of payment histories and having a rotation policy in the department responsible for taking care of pay slip generations can also help in preventing the theft of company’s fund through falsified salary statements.

Expense Reimbursement Fraud

Reimbursements are regulation expenses in any workplace. However, they are also one of the most exploited categories of business scams. From fictitious claims to inflating the actual amount of reimbursement, these payroll frauds are carried out in multiple ways. Exaggerating travel expenses is one if the most popular. I.E. Falsy extending the number of miles driven or entering expenses for items or food that was not purchased.

Prevention

  • Have a comprehensive preset expense reimbursement plan and policy
  • Have a system in place which carries out thorough reviews of receipts submitted for the reimbursement of expenses

Have your own services providers (travel companies and healthcare facilities) set up an authentication procedure so that every receipt can be verified automatically.

Ghost Employees

Companies with inefficient and loosely established hiring processes can suffer payroll scams. Such is the case where fictionist employes can exist (AKA no-shows). Senior employees responsible for corporate finances associated with the company would have the authority to set up these fake employees.

It can be done by using made up information (fake address, SSN no., etc.) to create a ghost employee. The salary of this fictitious employee ends up in the account of the fraudster.

Prevention

  • A system should be in place to authenticate all the documents and other information regarding any newly-induced employee
  • Record keeping of employees working in the company and issuance of payroll should be done by separate entities.

Moreover, background checks and provision of references can also authenticate whether an employee is real or fake.

Defrauding through Misclassification

Misclassifications of employees can be an honest mistake. However, in some cases, it is deliberately carried out by employers to save money in the name of payroll taxes and compensation of insurance funds. Showing them independent contractors or altering their status can be used to misclassify employees for saving and pocketing company’s fund.

Prevention

Individuals getting hired for a new job must read their contract in detail before signing it. Moreover, take help from an experienced attorney to understand any vague clause or legal jargon used in the contract.


Posted On May 27, 2018