Strategies To Identify and Prevent Payroll Fraud in Your Business

It is becoming alarming to know that payroll fraud is costing businesses a lot. Costs that run into billions of dollars every year. It has become a common problem in businesses and organizations.

About 27% of these entities experience some form of payroll fraud. But it's not all bad news. If measures are put in place, the chances of falling prey to such incidents would be minimal.

In this piece, we'll highlight the ways to identify and prevent payroll fraud. You'll also learn the next line of action if it happens.

What Is Payroll Fraud?

Payroll fraud refers to some unlawful actions that happen around pay. They're acts by an employee who aims to get hold of the money that was to be processed as payroll. The culprit could be any person in the organization processing the payroll. It could be someone inflating the number of working hours. It can also be managers, manufacturing employees or clerks diverting the payment. 

Common Types of Payroll Fraud

To be able to prevent payroll fraud, one needs to be able to identify it:

1. Ghost Employees

Fictitious employees occupy one of the leading positions in big fraudulent schemes. Non-existent workers are introduced into the payment system. Such fraudsters collect actual paychecks for workers who never existed in the business. 

2. Stealing Time

Time theft is a situation in which employees perform an act of embezzlement. They forge the number of hours they have worked and the money they deserve to be paid. Remote and hybrid teams cannot make use of manual time tracking. There is a lot of reliance on trust, and so they are most vulnerable.

3. Commission Fraud

Here, commission fraud entails sales staff projecting sales. They may also claim that they made a sale that has never been made. The aim is to receive a higher commission.

4. Compensation Fraud

This entails situations where an employee provides fake or exaggerated claims of injuries. This is to qualify for workers’ compensation benefits. Sometimes, it could be an employee who deliberately injures himself. Other times, they may fake an injury they got at home as if it occurred at the workplace to claim compensation. 

5. Expense Reimbursement Fraud

Expense reimbursement fraud is where an employee exaggerates expenses and submits a fake claim. The most obvious ones are things like claiming non-business expenses or double dipping. Another one is tampering with receipts to inflate the amount claimed.

Signs and Red Flags To Identify Payroll Fraud

Payroll fraud prevention also entails knowing possible indicators of such fraud. 

The data in the payroll records is narrative and may help you spot a potential problem. Normal inputs are consistent. Most alterations to data related to employees occur based on milestones in their lives. Fraudulent activities are always a camouflage that is often found in normal activities, such as updates. So, when assessing payroll records, you have to look for the signs.

For example, cases where two or more employees use the same bank account. Another is where there are no or few deductions in taxes and benefits. Also, check if there is a sudden increase in overtime for particular teams, and much more.

Many of the tasks involved in payroll are routine and are likely to be executed during working hours. Any exception to those norms needs further examination. For example, payroll data is being opened at late hours. Maybe there are several attempts to log in from different locations. Check if there are changes to employees’ records without appropriate permission.

Usually, any signs of financial fraud exist as discrepancies. Any specific hikes in the general payroll costs may be a sign of issues. It could be a percentage of revenue or employee growth. Comparing payroll reports to financial statements is a good practice. It enables one to see disparities before they aggravate.

What To Do When You Suspect Fraud

Do not act out of impulse, but instead, take the right steps:

1. Create a Plan

First of all, do not lose your temper. It is wiser to avoid conflict rather than to engage in one. Do not confront the suspect or dismiss them immediately. However, do that systematically. Prepare a plan and gather information before proceeding with the process. 

2. Collect Evidence

The collection of evidence should be done carefully once you get suspicious. Secure all important financial information and communication by creating backups. If possible, copy or save the information in some other manner. That includes hard drives, emails, and any documents relating to the payroll processes. These records are usually easily accessible to individuals who commit fraud. If they fear being apprehended, they can tamper with or even erase it.

3. Use Discretion

It is important that you do not draw attention at the inception of your investigation. Many fraudsters always look for signs to indicate if they have been caught. Investigate together with a small number of people. Pick based on the “need-to-know” principle. This ensures the suspect is not informed about the process. A good certified fraud examiner can usually go about investigations in a discreet manner.

4. Consult Professionals

Consult professionals before taking action. Consult your lawyer immediately. Also, you'll need an accountant and a certified fraud examiner on the team. These professionals are fully aware of the legal and financial requirements related to fraud investigations. They can assist in proper preservation. Inform your insurance company if you have employee dishonesty coverage in force.

5. Take Appropriate Action

Once there is a confirmation of fraud, take the necessary measures. This almost always entails the dismissal of the employee at the least. It may often extend to involve action in civil court as well as the filing of criminal cases. A good example held through proper consequences is a way of discouraging other people from engaging in fraud.

Strategies To Prevent Payroll Fraud

To prevent payroll fraud, you need to implement some things into your process: 

Use Secure Payroll Services

Modern payroll services are designed in such a way that security is incorporated within them. This means that it is difficult for fraudsters to perpetrate fraud. Since the process is automated, the chances of having raw records manipulated are minimized.

All accounting transactions have detailed audit trails. Employ an all-in-one system where you can track time, manage expenses, and monitor compliance. This helps to reduce the lapse or gap that anyone can take advantage of between the various systems.

Establish Strong Internal Control

There is a need for strong internal control to be in place. Adopting measures in all matters concerning payroll processes is important. That includes corrections, adjustments, and approvals. This means that employees cannot indulge in fraudulent activities.

There is a standard procedure set down in the organizational policies. Ensure that they are available and easily understandable to all the concerned staff. Those controls should be updated as and when they are needed for new emerging risks. 

Conduct Audits

Auditing is another important tool that must be used in payroll fraud prevention. Periodically test the payroll system with regular and surprise checks. Periodic review is also useful because it enables one to identify cases of overtime and commission while they are still small. Such audits ensure that employees’ records are current and correct.

You'll also use it to be sure access permissions are appropriate. Most firms conduct annual process improvement reviews. This way, they are able to seal such loopholes before fraudsters are able to exploit them.

In Closing

As a business, you need to ensure you take steps to prevent payroll fraud. This usually gains successful results only when the company utilizes strong systems. It also involves developing a suitable culture that discourages unlawful actions. Thus, you should put into practice the necessary measures. You should also stay alert for certain threats. This would make it possible to minimize the risks in your business. Keep in mind that it is always much better to prevent fraud than to cope with its consequences.

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