How to prevent payroll fraud

When you have 10, 20, or 30 employees, it is relatively easy to know everyone on the payroll. But as a business grows from 30 to 100, 200 + employees – the risk of payroll fraud increases. It becomes more difficult to keep an eye on everyone and their timesheets. Hence the importance of having good internal control systems, processes, and procedures.

 Payroll fraud occurs when company money is stolen through the payroll system.

 Payroll fraud can arise in a number of ways - by paying ghost employees, paying employees more than the company should, or employees falsifying timesheets.

 What are ghost employees?

Ghost employees are essentially fictitious (bogus) employees that have been invented by fraudulent employees or external administrators (e.g., bookkeeper, accountant).

How can payroll fraud occur?

Payroll fraud can occur when employees or external administrators are trusted without having formal internal controls within their business, systems, and processes.

When there’s a lack of internal controls - especially around employee records - additions, terminations, and amendments – the risk is increased.

Those individuals that have Masterfile database access are able to create fake employees and pay themselves or an associated party. They are able to falsify pay rates or sales numbers to obtain higher commissions. 

Such fraudulent activities can continue until they are detected or when the fraudulent employee leaves.

 Sadly, the average period of payroll fraud is 36 months! 

Yes. That’s right. 3 whopping years.

Payroll fraud is more common in casual workforce environments; however, it can happen in any workforce.

How to prevent payroll fraud in your business? 

The best way to prevent fraud is through the establishment of a strong internal control environment accompanied by a thorough review process. The review and approval process should be done before payroll payments are released.  

There is a combination of steps that should be taken to help protect you and your business from payroll fraud (not a comprehensive list):

1.    Control how employees are created and terminated into the payroll system;

2.    Control who can make changes to the payroll system;

3.    Segregate payroll processing duties amongst employees;

4.    Independently review changes made to the payroll system;

5.    Report changes made to the payroll system; and

6.    Conduct physical verification of employees.

For the full article and specific details for each step, visit Tranquil Consultancy (link in comments).

Be proactive

To ensure you and your business are protected from payroll fraud train yourself and your employees to understand the payroll process and the risks exposed at each stage.  

Mitigate the risks through system controls and internal controls along with an internal audit report to Management.  

If you’re unsure about how to implement internal controls, please get in touch. 

We will gladly access your payroll processing system and guide you through safeguarding your business.

Thank you, Fotini x