Payroll fraud involves siphoning money from a company by manipulating the payroll process. The ascent takes an investigative mindset to explain eight types of payroll fraud and how to spot them.
People go out of their way to steal from their employers. A quick Google search turns up the funniest stories, including one about an Illinois state treasurer who stole more than $50 million over 20 years and was later made into a documentary.
But not all trade secret misappropriation is sophisticated. If you need to pay more attention, this could be happening under your nose.
Payroll fraud is corporate theft that occurs through the payroll processing system, usually by employees. Fraudsters are generally employees because they need to be someone who understands (and has access to) the company’s payroll process.
Does it happen to you? The answer is likely to be yes. Depending on the system you use to pay your employees and manage their attendance, there are several nefarious ways your employees can cheat the system.
Who are Ghost Employees?
This is where fraudsters create a fake “ghost” employee (let’s call him Casper) in the payroll processing system. It is paid and entitled to all bonuses and benefits like the rest of your employees.
The only difference is Casper doesn’t exist, and those wages go directly to the crooks’ bank accounts.
Scammers can also pull off this scam by extending the salary of departing employees. The employee may have left, but the scammer stayed – collecting a paycheck and going after your business.
What starts as a “little favor” among colleagues can quickly take a toll on your business. “Buddy Punching” is when an employee arranges for another employee to record him even though he is not there. Their shifts were recorded and paid for the day—though they were nowhere to be found.
What is Payroll fraud?
Payroll fraud is an irregular process that allows a person or group of people to withdraw funds from a company for the wrong reasons.
Not only is he evil, but he’s more prevalent in small businesses than you might think. A 2020 Association of Certified Fraud Examiners (ACFE) report found that payroll fraud is twice as common in small companies as in larger organizations.
Both employees and business owners are guilty of wage fraud. CFE reports that owners and executives commit 20 percent of all occupational fraud schemes, causing more financial losses than employee fraudsters.
This type of payroll fraud is usually a double act involving collaboration between the employee and the payroll employee. The employee gets paid more than he’s worth and splits the cash with his payroll-based criminal partners.
What makes this especially hard to detect is that the offending employee on the payroll can get the employee back on track after receiving an excessive amount. Learn how to stop this below.
Other common ways of payroll fraud.
The list of ways your employees can claim extra money from your business account is seemingly endless. The pattern of these payroll frauds can be as simple as taking the salary of absent colleagues or simply not paying advances.
On a minor scale, payroll fraud can take the form of employees adding an extra 15 minutes to their schedule. Every day, you’re talking about pounds and pence. But you could see thousands of pounds in lost income over a year.
Remember – no matter how trivial some payroll scams are; they are harmful. As such, it can lead to severe penalties for scammers who are attacked.
Not all payroll errors end up in the IRS, but it’s a good idea to take them to an accountant to ensure corrective actions don’t lead to more errors. If you suspect fraud, don’t hesitate to bring a legal professional to help you with the next steps. Hiring a payroll tax internal audit team is always beneficial for your business growth, so hire the best internal auditors in Dubai.
What are the penalties for payroll fraud?
As with all crimes, wage fraud penalties depend on the crime’s severity. A seasoned conman who has had hundreds of thousands to millions of pounds stolen from the services over the years will draw more legal wrath than an ex-con.
The maximum penalty for false accounting in the UAE is seven years in prison. Lower-range offenses carry fines of up to 150% of the fraudster’s weekly earnings or community service work.
None of this is particularly interesting. If you’re going to commit payroll fraud, don’t do it. However, if you (hopefully) want to learn how to prevent this from happening in your business, read on.
How to Prevent Payroll Fraud: 5 Top Tips
From common sense to biometrics, we’ve identified five tips to help prevent payroll fraud in your business.
Carefully check the information.
The first rule of thumb in preventing payroll fraud is knowing what it looks like, and that means being capable of spotting the signals. For this, you need to check all payroll information thoroughly. That means salaries, taxes, and personal details such as names and bank account numbers.
Employees without tax deductions or national insurance
Suspicious salary differences between employees with the same job title
Multiple employees with the exact personal details
Any duplicate payments, names, or addresses should ring alarm bells. Likewise, payments to similar names (or variations of the same name – e.g., JO Bloggs, J O Bloggs, J Bloggs) should also be considered suspicious.
These are basic and obvious things to look out for. But good crooks cover their tracks, so ensure you’re diligent with your checks. Continuing to process all this information means you will be less susceptible to ghost employees and the downright terrifying impact they can have on your bottom line.
Use the time and attendance system.
It is important to install a time and attendance system that can go a long way in reducing payroll fraud in your business. Employees use their biometric data, such as fingerprints (in the case of secretive government labs, retinal scans), to verify their identities.
A time and attendance system eliminate buddy tags from adversely affecting your work and records breaks, vacations, and annual leave, reducing administrative burden and protecting you from payroll fraud.
Outsourced Payroll Services
Would you believe it or not? One of the hassle-free ways to prevent payroll fraud is not to do payroll. While we’re not suggesting that you deprive your employees of their daily bread, we’re saying that outsourcing their payroll is a more efficient and cost-effective way to pay.
However, it also makes sense from a security perspective. Plus, by putting your payroll in the hands of a reputable and respected vendor, you take it out of the few internal employees who might choose to take advantage of it.
Separate your processes
In a small company, it may be easy to have one person (or team) responsible for performing multiple functions. Or, just as the lines between sales, marketing, and advertising blur, HR and payroll can easily merge into one entity.
Appointment of auditors to monitor payments
Regularly monitoring your payments will help you spot payroll fraud and prevent it from happening. But even if you don’t have the time or patience to do it yourself, don’t miss out, as you can still hire an external auditor. This will cost you in the short term, but the long-term benefits will pay for it.
Start securing your payroll operations to prevent your payroll system from being triggered. But don’t fall into the trap. Keep your HR and Payroll as separate departments, managed by different people. That way, any details about the employee your accountant enters into the payroll system must be verified by someone in HR rather than having one person handle the whole process. This helps ensure all your payments go to the right place and reduces the chance of payroll fraud.