Fighting Payroll Fraud? Combine Education and Oversight for Best Results

Payroll fraud can severely damage businesses of all sizes. Here’s what you can do to prevent it.

Fraud is a serious problem for organizations. 27 percent of all businesses experience payroll fraud, per Entrepreneur magazine, which helps explain how U.S. enterprises lose $50 billion to employee theft each year, as reported by CNBC.

How do financial leaders determine the sources of fraud and take steps to stop it?

Common Causes

Who’s committing payroll fraud? According to a study by Association of Certified Fraud Examiners, 44 percent of perpetrators are employees, 34 percent are managers and 19 percent are owners/executives. There are several types of payroll fraud including:

Time Fraud: Employees might log extra hours worked or have other staff members clock their time cards in/out so as to leave an inaccurate record. Employees may also claim extra overtime worked.
Benefit Fraud: Staff may leverage sick days or workers’ compensation claims inappropriately.
Ghosts in the Machine: In these cases, staff create fake employee profiles or use the information of workers who have recently left the organization to keep collecting checks.
False Expenses: Inflated or falsified travel and expense claims can add up over time, especially if individual amounts aren’t large enough to catch the attention of finance leaders.
Error Issues

While it’s tempting to attribute all payroll losses to fraud, watch out for payroll errors. For example, if employees are misclassified as exempt under the Fair Labor Standards Act, you may not be paying them overtime, or for time spent training.

The lesson here? Make sure payroll solutions are working properly before you go looking for fraud.

Mitigating Factors

So how can you help limit the chance of payroll fraud? It starts with employee training. Be up-front about the causes and outcomes of fraud and encourage staff to speak freely about their concerns. The goal is to create a corporate culture of integrity and respect.

Careful oversight is also essential. This means conducting a regular, thorough evaluation of current payroll procedures, which can help spot possible “ghost” payments, catch time-card fraud and reduce the chance of expense-claim fraud.

It’s also a good idea to have a third party perform regular audits. This offers a dual benefit: In the event that payroll staff are committing fraud, outside evaluation may help detect irregularities, and having a fresh set of eyes examining time-card, overtime and benefit claims can help identify issues that might otherwise go unnoticed.

The bottom line? When it comes to payroll fraud, be both proactive and reactive in order to create a system where malicious theft is easy to detect and a culture where employees are unlikely to want to attempt it.

This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice. As with all matters of a legal or human resources nature, you should consult with your own legal counsel and human resources professionals.