In any kind of business that issues payroll to employees, the possibility of payroll fraud exists. According to the Association of Certified Fraud Examiners most recent Report to the Nations, payroll fraud can be financially devastating since it takes place over an extended period of time, and on average, goes undetected for 30 months. Like most frauds, the perpetrators are often some of the company’s most trusted, loyal and reliable employees, managers and even business owners.

What systems does your company have in place to protect it against payroll fraud? Arm your business against payroll fraud by understanding the common scams and how to defend against them.

Common Payroll Fraud Schemes

There are several ways in which employees can commit payroll fraud. Common types of payroll schemes include:

•   Ghosting employees – A payroll employee enters a fake employee into the payroll system or continues to issue checks to an employee who no longer works for the company and alters the payment record so the direct deposit payment or paycheck is made out to them for personal use.

•   Unauthorized hours – Likely the most common type of payroll fraud is employees padding their time with additional hours not worked. A fraudster may ask a coworker to “punch the clock” for them in their absence or assist in covering up tardiness or leaving early. Usually this is done in small increments to escape being caught by a supervisor.

•   Improper deductions – Employees with access to the payroll system can alter their checks to avoid paying mandated deductions, such as federal and state withholding taxes and Social Security, ultimately leaving the employer left with the bill to pay them.

•   Rate adjustment – Employees who are friends with a payroll clerk might plot with them to increase the amount of their hourly pay in the payroll system for a period of time, later returning it to its correct pay rate.

•   Fraudulent expenses – If employees are responsible for covering their own expenses, such as travel, they may be inclined to claim more expenses than they actually incurred for work purposes.

•   Commission fraud – Often perpetrated by sales employees, this type of fraud occurs when an employee inflates sales numbers in reporting systems to receive higher-than-earned commissions.

•   Unpaid advances – An employee requests an advance on their pay, but never makes an effort to pay it back. Often this goes unnoticed due to inappropriate monitoring by accounting staff to collect on the repayment.

Prevention Steps to Take

Having strong internal controls in place is the best way to overcome payroll fraud. Consider implementing some of these best practices to minimize its risk to your business:

•   Create a separate payroll account to pay regular payroll and bonuses separate from your general business accounts.

•   Separate payroll set-up, approval and processing functions with a proper checks and balance system in place.

•   Review payroll reports after payroll has been approved and processed to verify payee names, rates of pay, hours and deductions are appropriate.

•   Require managers to approve timesheets and overtime requests.

•   Have a monthly procedure in place to review advances and monitor repayment efforts.

•   Cross train and rotate job duties of employees in payroll and human resources.

•   Conduct an independent internal audit to double check your company’s finances and operations, including payroll.

•   Establish a zero-tolerance policy for fraud and prosecute violators to set an example.

DM Payroll Services does its part to help clients ensure proper measures are taken to safeguard their payroll from fraud. An added bonus of working with DM Payroll Services is our ability to leverage our affiliate firm Doeren Mayhew‘s resources. Should you ever suspect payroll fraud within your organization, they have a team of Certified Fraud Examiners that can help uncover the hidden evidence.

“Doeren Mayhew” is the brand name under which Doeren Mayhew Assurance and Doeren Mayhew Advisors, LLC and its subsidiary entities provide professional services. Doeren Mayhew Assurance and Doeren Mayhew Advisors, LLC (and its subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Doeren Mayhew Assurance is a licensed independent CPA firm that provides attest services to its clients, and Doeren Mayhew Advisors, LLC and its subsidiary entities provide tax and business consulting services to their clients. Doeren Mayhew Advisors, LLC, DM Payroll Solutions and their subsidiary entities are not licensed CPA firms.