Are You in Danger of Payroll Fraud? How to Prevent it?

Truth is stranger than fiction. Imagine Ghost Employees working for the organization. Sounds more like the plot of a horror series, rather. But, contradictorily ghost employee is a prime character of Payroll fraud, and not fiction. It is not every day that one comes across news titles like “Payroll Handler Pleads Guilty in $100 Million N.Y. Fraud Case.” While not entirely prevalent Payroll frauds have shaken the functioning of organizations in many cases and led to huge losses. So, how do you know whether your organization is at risk too? To understand this, let's look at Payroll fraud a bit closely.

What is Payroll Fraud? A generic explanation would be: any fraud that involves the stealing the company’s money by using the payroll system. Goes without saying that the people targeted are mostly those involved in human resources, payroll, finance, and taxation. But it is not just ghost employees we are talking about when it comes to Payroll fraud. Payroll fraud can be done by the top management, by the employees and even by third parties.

Employer Payroll Fraud:

This involves the employers or the top management of the organization themselves. This involves illegal classification of employees to avoid certain costs like payroll taxes and employee insurance, etc. This kind of approach is detrimental for the employees and if detected it can result in penalties for the company as it violates the labour laws in many countries.

Employee Payroll Fraud:

Now, this is something that often goes unnoticed when done in stealth, unless a major audit is conducted every once in a while. There are three types of employee payroll fraud:

• Ghost Employees: Now that’s where the discussion began, right? Imagine an employee who has left the company and is still drawing the salary or an employee who doesn’t even exist receiving payments for work. Such fake profiles or ghost employees could be created by employees who have access to the payroll system, hence withdrawing funds without even being noticed.
• Pay Rate Alteration: This kind of fraud often involves two players, the employee involved and someone from human resources or finance. Minor alterations are made to get the hourly pay rate increased. While this may be small at first the cumulative amount can be huge.
• Timesheet Fraud: Changing time on the timesheet is the easiest data manipulation in the book. While a change of 15-30minutes may not seem much at the time and is overlooked, but imagine the same for a long period and with by many employees!

Third Party Payroll Fraud:

While this may not happen quite often, in rare cases where the contract has loopholes and the controls over the bank accounts and the transfer of funds into and out of clients’ and employees’ accounts are weak, the third-party may end up being tempted to make a break.

 While you are still wondering whether your organization is in Danger of Payroll Fraud, here’s what the ACFE’s 2020 Report to the Nations on Occupational Fraud and Abuse, highlights. “Small businesses are at 2times more risk when it comes to Payroll fraud, in comparison with large organizations. Moreover, Payroll frauds can last for over 2 years before they are even detected.”

So how do you know whether your organization is at risk? Here are a few things that can be cause a misgiving.

• Employees using same bank account number, could be couples even.
• Finance or Payroll team members staying late, on various occasions.
• More than a certain number of employees with no payroll deductions, i.e., taxes or benefits.
• Employees who continuously earn more than the team members, unless they are exceptional geniuses and perform extraordinarily well.

It’s easy to see the signs, but very often way too late when the frauds are even detected. What follows is a long investigation, lawsuit and loss of time that results in little compensation for the ones affected. It is hence advisable to have a safety mechanism to prevent payroll frauds.

How to Prevent Payroll Fraud?

Timesheet frauds, ghost employees, pay rate alterations can all be detected by having periodic audits. In addition, there are certain in-built mechanisms too that can prevent the general tricks. Here are a few:

Strict Shift Rules: Many organizations already have limited time frame for logging in or out of work. This can help in time-theft, as the system would calculate and flag any discrepancies.

User Authenticated Login: This prevents false punch-in, punch-out by colleagues. More reason to invest on fingerprint scanner or face recognition. Such access rights can also prevent misuse of credentials and payroll mismanagement.

Divide the payroll processing duties: There are more chances of frauds if the payroll is processed by a single individual. It is hence, better to have a team that handles payroll processing, with distinct duties instead.

Payroll Outsourcing: Hiring a third party with reliable credentials to handle payroll management is another way to prevent fraud.

Payroll management Software: If outsourcing is not an option, then investing on a good software that allows to set flags for variances in wage and bonus amounts, run internal audits, etc. among other features.

Audits: Running periodic audits is the best way to get hold of fake accounts and identify things that are out of order.

In addition, having proper offboarding, double checking the user permissions from time to time, and thorough verifications of documents, contracts etc. can help in preventing the existence of ghost employees and employee misclassification.

In the long run, opting for payroll outsourcing is an optimal solution that saves both cost and effort. From payroll inputs, to processing payroll and tax reports, to meeting statutory compliances and filings, payroll outsourcing can take care of it all, accurately. So, your organization gets the freedom to focus on the core functions, while the service provider handles the payroll process efficiently and prevents frauds too. After all, the ghosts in Payroll fraud just need tracking. Remember, Fraud prevention is not about being mistrustful, but about being careful.