Worried about payroll fraud? Here’s how to prevent and detect it.

The ragtag group of employees who set out to redirect “fractions of pennies” to themselves in the movie Office Space didn’t think of it as stealing. They’re even portrayed as the heroes in the movie—sticking it to the man and finding themselves in the process. Likewise, payroll fraud is so common in the real world that many don’t even think of it as fraud. They’re not thieves! They’re just “redirecting” funds they feel should be theirs anyway. This mindset, along with how easy payroll fraud sometimes is to pull off, makes for a dangerous combination. Businesses with small payroll departments are most vulnerable, but it happens at the big companies and even feel-good nonprofits, too. We’ve collected a tool kit of tips and resources to help you prevent and detect payroll fraud.

What exactly is payroll fraud and why should I care?

Payroll fraud is a misappropriation of funds commonly in the form of paying “ghost” employees or vendors and various types of falsifying wages/hours. The Association of Certified Fraud Examiners (ACFE)’s biannual 2018 Global Study on Occupational Fraud and Abuse covers some of the impact of such fraud. Among its key findings are:

• Businesses lost over $7 billion among reported cases
• Small businesses lost more than twice as much per scheme
• Fraud schemes’ median duration was 16 months

Okay, so how can I prevent it?

As usual, the best approach for protecting yourself is preventing problems in the first place. Preventive measures discourage a would-be fraudster from trying in the first place while also making frauds more likely to be caught early on. Any cost or perceived hassle of preventative measures pales in comparison to the potential cost of lax procedures.

1. Start at the beginning. Use the Social Security Administration website, E-verify or the IRS website to confirm candidates’ identities. Conduct a background check after that. Continue the process at regular intervals even after hiring. Making this level of scrutiny regular practice ensures it doesn’t appear personal toward a particular employee.
2. Separate duties. When the same person makes entries, writes checks, and audits the books, they have too much power. Having multiple points of control and separation of duties ensures you keep a system of checks and balances (pun intended) in place.
3. Conduct internal and external audits. According to the ACFE report, internal audits “accounted for 15% of the frauds detected” and external audits caught 4% of the frauds. Quarterly reviews are a reasonable and healthy standard practice for companies of all sizes.

Something seems fishy. Now what?

So let’s say you’ve taken preventive measures to minimize risk and something still doesn’t add up. Even if they have to get more creative and sneaky, some people will try to overcome the obstacles you’ve put in place. So now you have to dig.

1. Watch for red flags. This aforementioned article—about the ghosts among us—identifies some of the major red flags to watch out for. Hint: an employee who never takes a day off may not be as dedicated as you think.
2. Provide a hotline for tips. The ACFE report notes that tips are the most common detection method and that organizations with hotlines receive more tips (46%) to potential fraud than those without (30%).
3. Follow the money. Corrupt behaviors tend to leave a money trail. More than one employee using the same bank account, vendors you’ve never heard of receiving checks, and unusually high expenses are all signs something may be awry. If something seems fishy, investigate or 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.

Bottom line

The ACFE provides in-depth fraud prevention checkup that can get you thinking about the topic in a new way, identify vulnerabilities, and help you determine a course of action to put preventive measures in place. Most payroll fraud, while incredibly frustrating and costly, is highly preventable.

 

Note: A third type of payroll fraud is committed by businesses that misclassify employees as independent contractors to avoid paying payroll tax and other costs associated with employees. We’ve covered misclassification in depth (see more here) and focused on the kind perpetrated against a company for today’s post.

About PayReel:

At PayReel, we minimize the time and effort it takes to get you ready for your project. Rely on PayReel to assume all of the risk associated with worker classification and get back to the business at hand. We make sure you get paid quick and easy, and have Client Relationship Managers on call around the clock to answer your questions. All you have to do is call 303-526-4900 or email us. The PayReel team makes event payroll easier, faster, and seamless.