When we hear of employees stealing from their place of employment, the first thing that springs to mind is the theft of supplies like legal pads, office stationery, or other things from the supply closet and to prevent payroll fraud, we need to look further. Payroll fraud, on the other hand, is a more expensive sort of fraud that is currently affecting many firms.
Are you aware that, payroll fraud schemes affect, on average, over 30% of businesses? One of the worst possible outcomes for a business is payroll fraud. This is due to the fact that payroll fraud is a fraudulent act that often takes place over a long period of time rather than being a scheme that is executed quickly.
Payroll fraud schemes are long-term fraudulent acts, and it takes roughly 24 months from the time they begin to be discovered, according to a study by the Association of Fraud Examiners, or ACFE. Unfortunately, this is enough time for a business to suffer significant financial harm.
How then do employees defraud payrolls so that they are either overpaid or underpaid by companies?
Let’s look at some typical employee behaviors that come under payroll fraud to help you with that.
Buddy Punching
This kind of payroll fraud happens when an employee asks a coworker to time-in or punch the hours into the company’s time clock while the employee is out on casual duty or is late for work.
While this is a typical practice in many small and medium-sized businesses, large commercial organizations have developed suitable internal controls, such as biometric time clock equipment, to prevent such payroll frauds.
Ghost Employee
In this kind of payroll fraud, a fake employee profile is created in the payroll records. Additionally, this could be accomplished by delaying the payment of a departing employee’s compensation. The payroll staff alters the payment record or adds a ghost employee to a department whose supervisor has recently left in order to commit this type of payroll fraud. However, businesses should continue the practice of routine payroll auditing in order to detect such payroll frauds. Since fraudsters want to take the most money possible, a different way to keep track of someone is through pay checks that have no deductions.
Worker’s Compensation
Any type of firm could be impacted by this kind of payroll fraud. In order to defraud their insurance provider or employer out of hundreds of dollars, personnel in this activity pretend to have back, neck, or other medical ailments. Similar to this, they fabricate incidents of workplace injuries in order to receive the lucrative benefits provided by the worker’s compensation system. Self-insured businesses are more likely to be impacted by this fraud, while others may see their premiums go up.
How to Prevent Payroll Fraud
You might be inclined to hide beneath your desk right about now. Don’t do it, though. Instead, put one of these five payroll fraud prevention tactics into practice to stop it before it costs you money. Even while payroll fraud is difficult to completely eradicate, being vigilant will help you catch it sooner rather than later. Here’s how to keep an eye out for potential payroll fraud.
1. Set Up a System of Checks and Balances
Even in a small business, the employee who enters a new worker into the system shouldn’t also be the one who balances the payroll books and reconciles quarterly reports. Get a second pair of eyes to review quarterly and/or annual payroll reconciliations, at the absolute least. Additionally, you might ask executives to sign off on all commission and overtime payments. This might deter workers from adding a few sporadic extra hours or sales in the hopes that they won’t be noticed.
We advise you to put in place a system for checking the books quarterly and yearly to look for mistakes that could signal instances of payroll padding or ghost employees. Set your bookkeepers and payroll staff to “see only” and integrate them into your financial data.
This gives them the information they need to perform their duties, but it also necessitates that management approve payroll and make sure there are no indications of fraud.
2. Switch to a Modern Timesheet System
Use a complex timekeeping system. Consider using a clock-in system that requires a passcode or other two-step authentication in place of having employees self-report their hours. This will stop false reporting. To prevent buddy punching, make sure the system has a biometric or two-step authentication procedure.
3. Do an Internal Audit of Payroll Taxes
Reviewing the payroll taxes that are paid on a regular basis. This can prevent any unintentional fraud on your company’s behalf. A regular examination of payroll taxes may help you find the error before it causes too much damage if an employee is mistakenly designated as exempt or an independent contractor.
4. Install CCTV Systems
Installing CCTV systems in locations where workplace accidents are likely to occur. You and the employee are protected if you can depend on video evidence in an injury report. To prevent erroneous worker’s compensation claims, require employees to work on specific projects in pairs, especially those that need a ladder.
5. Regulate Employee Behavior
Pay close attention to how employees act. The payroll department does not frequently necessitate working late or taking files home. Keep your spidey senses on high alert if you have a worker who frequently wants to work alone and handles important payroll data. Ask them to keep office hours or do a sporadic audit to ensure everything is in order. Additionally, if possible, we advise you to encourage direct deposit within your organization. By doing this, the number of actual checks that could be stolen or manipulated will be reduced.
Bottom Line
Payroll fraud is rarely discussed, despite the fact that it can be very expensive. For small firms and startups, it’s extremely catastrophic. There’s no reason not to try, even though you might never be able to design systems that are completely fraud-proof.
SW HR Consulting has been helping companies to build their teams and values for over 10 years. Contact us to find out more about our unique hr outsourcing services and see how our expertise can benefit you.
