Payroll Fraud – What it is and Tips on How to Prevent it
Updated: May 5, 2020
We now live in a world where we all have a digital footprint, whether it is banking, buying online, or even sending a letter electronically. With all this digitalization we expect security for everything. Fraud has existed as far as we can tell, even before the digital era. For those who don’t already know, fraud is when “a person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities” as defined on Oxford University Press (OUP).
If I were to ask you all, “How many of you took office supplies home?,” I am sure the answer is all of us. Now, the occasional taking a pen home by mistake because it was in your pocket, etc. is not going to harm the company, but let’s say everyday you took a pen home and the rest of the employees were doing the same thing, this would cost the company a lot, and it can soon become a problem if not recognized. Another is when we get complacent with taking office supplies occasionally thinking that the business won’t miss it or it won’t harm them, this is considered stealing more than fraud, but it is just as costly and deadly.
Just as fraud effects us all in many ways, it can also have an impact on company payroll as well. Payroll fraud isn’t only subjected to employee dishonesty, it can also be executed directly by the company in many ways as well.
Types of Payroll Fraud
There are many ways payroll fraud can present itself. Some of these examples you may have already heard of, and some you may not, I will try to capture as many as I can.
Ghost Employee – creating an employee in the payroll system who doesn’t actually exist or modifying former employees and changing their direct deposit account. This usually is a problem for larger organizations as there are so many employees and you may not be able to catch it as quickly as you would with a smaller (50 or less employees) organization.
False timesheet reporting – employees can easily falsify timesheet records by lying on their timesheets, or even getting someone to clock in or out for them in order to receive a full pay for the day.
False expense reporting – employees can easily inflate their expenses, without showing proof of their expenditures, or claiming twice – once through payables and a second time through the payroll system. There is no check to see if this was approved by their manager and paid via payroll or payables before sending it for payment. Another form is when an advance is given to an employee before the expense occurs, and no receipt/audit of the expenses is completed, so the employee pockets the difference if it goes unnoticed.
Fake claims filed – employees that abuse the system knowing they will get certain benefits, such as claiming WSIB for a slip or fall at the workplace, or an accident that happens outside of work and claiming short term disability (STD) or other leaves.
Misclassification of employees – where employees are misclassified as contractors when they are actually employees of the company. This can happen intentionally or unintentionally. This is considered tax fraud but can also be classified as insurance fraud committed by the organization, if the employee is classified as a contractor instead of an employee.
Suggestions to Minimize Payroll Fraud
There are several ways you can help prevent payroll fraud and minimize the risk. Let’s take a look at a few possibilities:
Ghost employees – ensuring there are appropriate audits and checks prior to entering an employee into the system. Making sure the right authorizations and paper trails are documented. Segregation of duties in maintaining the payroll/personnel records.
False timesheet reporting – implementing a software or procedure where it is difficult to alter to or clock in for someone else. If having a punch in and out system, maybe requiring them to sign in with their handprint or unique identifier. Implementing a procedure where their supervisor/manager approves their time before submitting to payroll can be effective as well. Another excellent suggestion is requiring the supervisor/manager to enter and approve timesheets per day versus waiting for the whole pay period to be completed, I personally support this idea.
False expense reporting – have an expense reimbursement policy, ensure all expense claims submitted have receipts to back up the claim. Examine the receipts to ensure they match the expense report and the purpose of the expense, example – check the dates and places of the receipt. Make sure the receipts are authentic and don’t look like someone created them on the computer. Check to see if the claim amounts match past amounts and if an employee is consistently missing receipts when filing an expense report. Another is ensuring if you have two different ways of processing expense: one through payables and two through payroll – you should have a way to verify the employee is not reimbursed twice for the same expense. Maybe have the manager approve both expense reports going to both departments, so they can see if it has been claimed before. Expenses should also be submitted in a timely manner so accurate auditing can be completed.
Fake claims filed – beware of employees who are constantly looking for ways to get off work, asking what leave benefits they may be entitled to, and possibly looking for ways to falsify claims. Anyone who is constantly filing claims or injury reports and looking for payment may be an example of abusing the system. Ensure you have a policy to document behaviour or events so you can address the situation if you see a definite trend. Having cameras in areas where you can review footage of accidents, examples in the warehouse, cafeteria, hallways, etc. can be an excellent resource for investigating employee injuries.
Misclassification of employees – ensure you are complying with all legislation. If you are not sure whether your employee is a classified as a contractor or not, please confer with an expert to ensure you are complying with current compliance standards.
Other general tips to avoid payroll fraud is ensuring you have segregation of duties. Often companies will have one person entering the employee wages into the payroll system and another to approve the payroll before submitting it to the bank. Having more than one person with the control will minimize the risk. Be aware of unusual behaviour of employees working with sensitive information; are they working late all the time or taking home sensitive information. Setting checks and balances in place throughout your payroll process to ensure if an internal/external audit occurs, it will pass the assessment. Have a reconciliation every month or quarterly to ensure there isn’t anything happening that shouldn’t be happening. Catching any unusual activity early is crucial to minimize the exposure for the company.
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