Payroll fraud is incredibly common. White collar crimes can be slippery because they aren’t always as obvious as someone swiping a stack of bills from the cash register. Some perpetrators likely don’t even think of themselves as thieves. They’re just “redirecting” funds they feel should be theirs anyway, “manipulating their payroll records” to show they had extra vacation time, or clocking in when they’re not actually on duty. Those last two, by the way, were done by police officers and a firefighter, respectively.
What is Payroll Fraud? What Are The Stakes?
Payroll fraud is a misappropriation of funds that can happen a variety of ways. It could happen in the form of paying “ghost” employees or vendors. Such entities look legitimate but exist solely as a front. They may be workers who’ve quit, been fired, or died but are still receiving paychecks. They could be vendors that seemingly provide a service, but are in fact, nonexistent.
Another form of payroll fraud is when a worker clocks in when they’re not working or has someone clock in for them when they’re running late. Any form of falsifying hours falls under the umbrella of payroll fraud. Businesses lose billions in reported cases and small businesses are especially vulnerable. The duration of the schemes varies, but some businesses only find out after a worker has been fleecing it for years.
Resources to Prevent And Detect Payroll Fraud
Depending on a company’s setup, payroll fraud can sometimes be remarkably easy to pull off. Businesses with small payroll departments are most vulnerable, but it happens at the big companies and even feel-good nonprofits, too.
As usual, the best approach is prevention. Preventive measures discourage a would-be fraudster from trying something unsavory in the first place. They also make it easier for companies to catch perpetrators early on. Any resources a company puts toward preventative measures pales in comparison to the potential cost of lax procedures.
- Hire with discretion. Use the Social Security Administration website, E-verify or the IRS website to confirm candidates’ identities. Continue the process by conducting a background check before hiring anyone as well as at regular intervals even after they’re on the team. Institute a process and apply the same level of scrutiny to every employee at every level.
- Separate duties. This applies especially to smaller businesses where one person fills multiple roles. If the same person makes entries, writes checks, and audits the books, they have too much power and can cause problems. Separating duties when possible and having a system of checks and balances (pun intended) in place goes a long way toward preventing fraudulent behaviors.
- Conduct audits. Both internal and external audits can identify fraudulent activities and each has benefits. When used in conjunction, these efforts can pay off big time by preventing issues or detecting them early. Quarterly reviews are a healthy standard practice for companies of all sizes.
Something Doesn’t Seem Right. Now what?
So let’s say you’ve taken preventive measures to minimize risks and something still doesn’t add up. If you see any red flags, it’s time to dig.
- Watch for ghosts, unusual behavior, and anything out of the ordinary. Twitter made headlines in 2022 attempting to identify if there were ghost employees sucking up payroll. This article identifies other red flags to watch out for. Hint: an employee who never takes a day off may not be as dedicated as you think.
- Provide an outlet for other employees to report suspicions. Company leaders can’t have their eyes on everything and it’s often the ones in the trenches that will be first to identify when something is amiss. Organizations with hotlines receive more tips to potential fraud than those without.
- Follow the 💰. Corruption always leaves a trail. If more than one employee uses the same bank account, unknown vendors are receiving checks, and unusual expenses are popping up, it’s worth looking into. If something seems like it could be amiss, investigate. If you have the resources to conduct a thorough internal investigation, that’s a good place to start. If not, hire someone to do it for you. And do it quietly so you don’t tip off the fraudster(s) before you have all the information you need.
Can Businesses Conduct Payroll Fraud?
We’ve talked about the workers, but companies can be guilty of a different kind of payroll fraud as well. Businesses that misclassify employees as independent contractors to avoid paying payroll tax and other costs associated with employees are also guilty of payroll fraud. It’s not the focus of this post, but we cover worker classification in depth. Contact us for a free risk assessment if you think your worker classification practices could use a second look.
Now is a great time to identify vulnerabilities, and determine a course of action. Most payroll fraud, while incredibly frustrating and costly, is highly preventable. If you’d rather offload some of your payroll completely, call 303-526-4900 or email us. We minimize the time, effort, and risk associated with worker classification, payroll, and more.