Payroll fraud is defined as employees cheating the payroll system so as to receive funds that they are not entitled to. This is a common problem across the globe with studies showing that 27% of businesses suffer from this. The problem occurs twice as often in the small businesses that have less than 100 employees. On average, the instance of payroll fraud lasts approximately 36 months.
For salaried employees, the payroll fraud involves boosting the amount they are meant to receive or adding ghost employees to the list in order to collect their wages. For those who are paid on hourly basis, the fraud methods used include altering the total number of hours they have worked, signing in and out of work at incorrect times or even claiming to have worked whereas they were not at work.
Commission workers, on the other hand, falsify their records such as the number of sales they have made or the total number of units produced. Payroll fraud is also seen when employees falsify expenses. This can be as little as meals with family to taking personal trips that are labeled as business meetings or trips.
How to Detect the Payroll Fraud
Payroll fraud loses employers significant amounts of money. This is more so when considering the 2011 studies, which showed that business in Britain lose up to £38 billion a year to the payroll fraud. Learning how to detect payroll fraud is the first step to preventing the problem.
Some of the things you need to do to detect fraud include the following:
- Conducting payroll audits regularly
- Checking for multiple employees who share bank account or address and they are not family members.
- Checking for anomalies in the payroll records
- Signs of employees leading a lifestyle that is overly expensive for their income
How to Prevent the Fraud
Although it is important to check for fraudulent payroll activities, it is equally important to ensure payroll fraud does not happen. One way of preventing the fraud is making sure that employees are aware of the dire consequences of payroll fraud. The consequences should go beyond work disciplinary or just having to pay back the money. There should be jail sentences involved.
Hiring independent staff to closely check the payroll records will also increase the chance of finding wrongdoing. At times, mistakes may be construed for payroll fraud. An independent professional will help distinguish the two and correct the error.
Investing in good Payroll software will further help solve the problem. Payroll software will automate the process thereby eliminating the human interface, which is the root cause of most payroll frauds. The program offers support for both ‘Live’ and ‘After-the-Fact payroll. You can use it in all 50 states as well as the District of Columbia and Puerto Rico. Having a safe and secure system is the key to preventing payroll fraud.
Ways to Detect Payroll Fraud
Needless to say, Payroll fraud is a serious threat to the growth of a business. Failure to safeguard about this problem can cause complications that may even cause your business to nosedive. There are a few methods you can use to detect as well as prevent payroll fraud.
- Check Information
One of the best ways to prevent payroll fraud is to check the payroll data keenly. This is more so when staffs leave the company or move jobs. This needs to be done at department level where the responsible managers approve the proposed payroll for every month. Closely monitoring the employee data will ensure that employees do not continue being paid after their contract has ended.
It is also important to double check special considerations such as overtime. There should be procedures that state that additional pay has to be signed off by a specific department head then passed on to be approved by the Human Resources department.
- Closely Monitor Payments
Payroll fraud often occurs when employees start paying out to people who are not registered or don’t exist all together. Early detection is needed to prevent these costly losses. You need regular audits using an external company. This will help identify the errors and ensure payments are in order.
During payroll audits, you need to check for duplicate names or addresses, duplicated payments, payments to variations of similar names, payments that seem higher than they should be, payments to unrecognized names and anything that is suspicious.
- Separate Processes
Separating processes is a commonly used method in payroll fraud prevention. Here, a company has separate payroll and HR divisions. This means the payroll has to be approved by both departments before payment can be confirmed. It is also possible to outsource your payroll.
- Background and Security Checks
Most employers don’t take the time to conduct a thorough background and security check. As a result, they never know if their new employee is genuine or not until it is already too late. Before bringing a new employee on board, take time to check the references. Every new employee should have at least 2 references. Make sure you are hiring a genuine person.
You cannot expect fraudsters to report their own fraud, can you? If you suspect fraud, spend a little money on independent audit companies. They are unbiased and will help identify the exact problem. Additionally, you can outsource to a payroll agency. There are many reputable companies that offer bureau services and support. They will help with payroll approval, check for irregularities and offer a range of other services.
The above information will help you detect and prevent payroll fraud before it cripples your business. The most important thing to do, however, is to make sure that you use secure payroll software to handle the processes. You can also enlist the help of a trusted staff or agency to help with payroll management. Even so, you have to take time to counter check your records in order to ensure that everything is in order. Regular payroll audits will help you identify fraud in good time.