How to Stop Payroll Fraud Dead in Its Tracks

How to Stop Payroll Fraud Dead in Its Tracks

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Search your favorite online news source for stories about payroll fraud and you shouldn’t have trouble finding something interesting to read. Though payroll fraud may not be as common as speeding, it is a very real problem in the United States. It behooves in-house payroll departments and third-party payroll providers to prevent fraud whenever possible.

According to a 2013 article from Forbes, the average payroll fraud incident goes uncovered for about three years. When finally exposed, it could be responsible for hundreds of thousands of dollars in losses as well as penalties for failing to pay required payroll taxes. It is not a pretty picture. What’s worse is that the Forbes article claimed that 27% of all American businesses have been victimized by payroll fraud.

The obvious goal is to prevent fraud from happening in the first place. In cases where it does exist, management needs to be able to identify it as quickly as possible and stop it in its tracks. There are a few key strategies for doing just that.

Get Rid of Manual Time Sheets

BenefitMall, a national payroll processor based in Dallas, says the first and most important strategy for reducing payroll fraud is getting rid of manual time sheets. Written sheets are an open invitation to workers looking to inflate their hours. Replace them with an automated time and attendance system using ID card or some other means of digital tracking and you eliminate most of the risk associated with misreporting hours.

Regular Employee Audits

Another common way to commit payroll fraud is by utilizing ghost employees. These employees are either terminated workers who are still listed on the payroll or fictional workers who don’t actually exist. Either way, the fraudster is making sure ghost employees are paid but pocketing the money instead. This type of conduct is easily thwarted by regular employee audits.

Management should be routinely looking at staffing numbers and lists of names. Auditing once a month would eliminate nearly all ghost employee scenarios because payroll department workers would know their work was being checked by managers who are familiar with their employees.

Multiple Approvals for Rate Increases

Payroll fraud related to unapproved rate adjustments is less common than some of the other kinds of fraud, but it can be just as damaging. Payroll employees who give themselves raises or bonuses not approved by management can cost a company hundreds of thousands over the course of many years.

To stop this kind of fraud in its tracks, companies should establish policies requiring multiple approvals before a rate increase or bonus pay is awarded. The more approvals and signatures required, the more eyes paying attention to rate increases.

Audits of Tax Accounts

Last but not least are regular audits of tax accounts. Unfortunately, payroll fraud is frequently coupled together with a failure to pay taxes. Those responsible for the fraud borrow against tax accounts with every intention of paying them back. But then they don’t, and so taxes do not get paid.

Company owners and managers should be auditing tax accounts at least quarterly, if not monthly. If there’s any sign that payroll taxes haven’t been paid, the payroll department or third-party provider should immediately be subject to intense scrutiny. Falling behind on payroll taxes could lead to both criminal and civil penalties if fraud is uncovered.

Human nature dictates that there is no way to eliminate all fraud from the payroll equation. Learning to identify where fraud occurs and putting policies in place to stop it goes a long way toward preventing years of fraud from ruining a company.

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