Employee theft and accounting fraud are both primarily caused by payroll fraud, which impacts 27% of all organizations. In comparison to huge firms, it occurs twice as frequently in little ones with less than 100 employees. Payroll fraud often lasts for two and a half years, according to the Association of Certified Fraud Examiners. The projected average loss from each payroll fraud that lasts for 30 months is $63,000. The organization will also lose money because of fines imposed by regulatory bodies for not complying with payroll compliance regulations.
Worldwide, payroll fraud can affect any type of organization. You tell yourself, “It’s fine. We’re secure because we recently purchased new payroll software. However, you are not. Payroll fraud is still a major concern for small organizations that employ payroll software without utilizing the proper capabilities or putting in place crucial protocols. This article is to educate you about the nuances of payroll fraud and to teach you how to keep yourself safe from one. Read Ahead.
Table of Contents
What Forms of Payroll Fraud are there?
In order to permit fraudulent payments to be current or nonexistent employees who cause financial losses to the firm, payroll fraud basically entails manipulating personnel records, time cards, pay scales, or job categories.
Typical forms of payroll fraud include:
False Employee Reporting
It alludes to the addition of false or nonexistent personnel to the payroll records. These employees’ pay is unlawfully transferred to other employee accounts or stolen in various ways. Large firms with many employees and shoddy internal controls often have a higher prevalence of it.
Without a strong offboarding procedure, your business is likely to overlook crucial processes like removing departing employees from the payroll system.
How to prevent it?
A thorough offboarding procedure can be formalized in a project management or HR software system to guarantee that everything is done correctly and consistently each time an employee leaves.
In order to make payment tracking easier, you should already be checking your payroll system’s user permissions twice and switching as much cash and check payment as you can to direct deposits or pay cards. But occasionally, that’s insufficient. You can find any fraudulent accounts and avoid long-term harm by doing a proper quarterly payroll audit.
Timekeeping Fraud
Employees cheat by adding extra hours they haven’t worked to their timesheets. This causes the organization to lose money since extra payments to personnel are made to whom they are not entitled. Employees occasionally ask other coworkers to clock in and out on their behalf when they are not there.
How to prevent it?
Employee self-service has its advantages and disadvantages. In addition to giving employees a sense of autonomy, you want to let them clock in and leave on their own shifts since doing so relieves management of a significant administrative burden. Giving your staff too much discretion over their schedules could make it easy for them to take advantage of this policy, which is something you don’t want to happen.
By integrating your payroll software with the appropriate time and attendance system, you can avoid flagrant time theft thanks to two essential features:
- The time period during which employees can clock in and out of work is constrained by predefined shift regulations. If they attempt to do so after the specified window of time, the system won’t let them. Rules may be established for specific people, groups of people, or the entire organization.
- By requiring employees to present a distinctive identification when they clock in and out of shifts, user authentication prevents buddy punching. This identifier might be an ID badge, a fingerprint, or even a picture of the employee’s face, depending on the system’s complexity and its ability to interact with any hardware, like a scanner.
Misclassification of Employees
Benefits for employees depending on whether they are regarded as employees or independent contractors. Employers occasionally misclassify workers without intending to do so. To avoid paying payroll taxes, unemployment benefits, or workers’ compensation insurance, companies frequently self-inflict fraud by mistakenly designating employees as independent contractors.
How to prevent it?
Sometimes it might be difficult to tell whether a worker is an independent contractor or an actual employee. The one crucial inquiry you must answer, however, is one that the IRS itself provides: “How much influence as a business do I have over the worker?” [7]
A worker is more likely to be an employee than an independent contractor the more influence you have over them. Your level of control depends on the following three factors:
1. Behavioural Control:
- Are you teaching the employee how to perform the task?
- Do you offer the tools or equipment needed to do the task?
- Do you specify how outcomes must be obtained?
2. Financial Control:
- Is the employee receiving payment for company expenses?
- Is the employee free to look for other business ventures?
- Can the employee gain money or lose money?
3. Type Of Relationship
- Does the employee offer a crucial service to your company?
- Do you provide the employee any benefits?
- Does your business have an ongoing relationship with the employee?
Payscale Adjustments
Employees’ grades or hourly rates are manipulated in this payroll fraud in order to qualify them for a larger salary than they are legally entitled to. Employee cooperation with the payroll and human resources (HR) departments is to blame for this fraud.
How to prevent it?
According to Mason Wilder, a research specialist at the ACFE, putting all of your eggs in one basket is always a recipe for disaster. This is not any less true when it comes to payroll.
Even if your business is staff-strapped and lacks a payroll department, you still need to separate your payroll processing responsibilities. Generally speaking, it is advised that one party handles authorization, another party handles distribution, and a third party handles reconciliation.
There are a few things you can do with your payroll software to stop workers from inflating their pay:
- Mark any very high bonus or pay amounts. Many payroll systems can automatically indicate odd wage rates or bonus payouts in addition to flagging odd time entries. If this functionality isn’t enabled, speak with your vendor.
- Utilize your auditing abilities. Your payroll system should include auditing capabilities that let you know what payroll adjustments were made when they were made, and by whom. Check the payroll records if you believe a worker is faking their pay.
Payroll theft
It is a payroll fraud committed by the employer where employees are in fact, paid less than the legally required minimum wage in order to meet compliance standards. The additional types of wage theft include unauthorized deductions, off-the-clock offenses, and others. Since pay fraud can take many different forms and compliance problems aren’t always recorded or acknowledged, measuring it can be difficult. All low-wage workers combined—across all demographic groups—are impacted to a degree of 17%.
How to prevent it?
If you don’t foster an environment of honesty within the company, no amount of mitigating measures for payroll fraud prevention will make much of a difference. Top management must lead by example in terms of anticipated conduct, and it must also be periodically reinforced through internal staff communication.
Conclusion
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 promote direct deposits throughout your organization. By doing this, the number of actual checks that could be stolen or manipulated will be reduced.
Payroll fraud is rarely discussed, despite the fact that it can be very expensive. For small firms and startups, it’s extremely catastrophic. While you might never be able to fully develop totally fraud-proof systems, there’s no reason you shouldn’t try.
