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Payroll Fraud – A Big Threat And How To Avoid it

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Payroll Fraud is a nightmare for any payroll manager. Make no mistake about it.  According to the Association of Certified Fraud Examiners, it’s the #1 source of accounting fraud and employee theft. More than 11% of workplace frauds involve payroll, and the average loss of such fraud is $48,000. What’s even more shocking is the average scheme went undetected for nearly 36 months.

The mere existence of internal control mechanisms is simply not enough in this day and age. They must be monitored and enforced. Your primary weapon for overcoming payroll fraud and minimising its risk to business is adherence to these internal controls.

Here we explain payroll fraud schemes and methods and how to prevent them:

 

Payroll Schemes

The most common methods of payroll fraud are the creation of fictitious employees (‘ghost’ employees), submission of fraudulent or inflated expense reports and claiming straight time or overtime hours for work not performed. The most significant risk of major loss are thought to be these ‘ghost’ employees.

 

Ghost Employees

Also common and potentially devastating to business, the scheme is usually set up by an employee with access to payroll records or someone with the ability to create false employee records. Payments are set up for deposit into a designated account the perpetrator or a confederate has access to. If direct deposit is not used, an employee intercepts cheques and has them cashed and deposited.

 

Preventative Controls

You must establish internal controls that require separation of payroll duties. Here is a list of measures to take:

  • Personnel who create or maintain payroll data and lists should not be allowed to make changes or add employees without management approval.
  • Two designated individuals should approve payroll changes.
  • People who compute pay rates and accumulated hours for payroll should not be allowed to write payroll cheques or submit the hours for payment by a payroll service without supervisory approval.
  • Have payroll accounts reconciled monthly and reviewed by management.
  • Audit payroll information for duplicate deposit account information and repeated Social Security numbers or addresses.
  • If direct deposit is used exclusively, require employees to pick up their paycheques in person with photo ID at least once per year at human resources or another designated department.

Please note that most banks provide a positive pay service where cheque numbers, amounts and employee names provided by the company are checked against any incoming payroll check.

It’s also a great idea to outsource their payroll to a contractor, especially small businesses.

 

Inflated Expenses and Falsified Time Sheets

This is another type of payroll fraud that requires quality internal controls and prevention methods. Have policies that require:

  • Proof of expense reimbursement requests,
  • Expenses over a certain amount to have management approval pre-purchase,
  • Approval for significant increases in work hours exceeding an employee’s normal schedule.

Be sure to audit these trends on a regular but manageable basis. Don’t allow the people who process requests for expense reimbursement or overtime to issue payments.

 

Considerations

Before using internal control to prevent fraud, you must assess resources to ensure you have enough employees to achieve separation of duties. If this is not the case, you should consider outsourcing your payroll duties.

According to the Australian Payroll Association executive director, Tracy Angwin, “Payroll fraud is a very serious matter and there are payroll managers in Australia who have gone to jail for payroll fraud”. Its effects can be devastating to a business and the individual if and when caught, but with these handy tips you can be aware of these risks and sleep easy at night with the knowledge that you’re safe from audit.

If you have further questions regarding this matter, please give us a call on 1300 725 647 or fill an enquiry form on our webpage

11 Apr, 16

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