Fraud is difficult for any company, and has far-reaching consequences beyond financial impact. For one, it threatens the sense of trust that your organization needs in order to operate smoothly. Second, fraud within your ranks can land your company in hot water with the authorities even if you as the business owner are not necessarily the one at fault.
Payroll fraud is one of the most prevalent and insidious kinds of company fraud, mostly because it can exist under the radar for a long period of time. It is the theft of funds from a business’ budgeted payroll, and it can be perpetrated by senior managers who have access to manipulate payroll records or by employees who make false claims for payment. Here are some of the kinds of payroll fraud that you should look out for:
Kinds of Payroll Fraud
- Timesheet Fraud
Timesheets are used to measure how much an employee should be paid according to their attendance and hours to be paid, which makes it susceptible to being one of the avenues in which to commit payroll fraud. Inflation of work hours rendered or logging in to work through a proxy are both examples of timesheet fraud.
- Falsifying Wages
Wage falsification is when an employee, by themselves or by colluding with another employee, does not disburse the right salary to those who have earned it. It can be done through manipulating the base computation of the payroll or withholding salary increases, tax refunds or other manipulations that result in an unreconciled record between the computed salary supposedly given to the employee and the actual wages received. This is usually committed at a managerial level, where the managers have access to the payroll records and disbursement of payments.
- Commission and Bonus Fraud
Much like falsifying wages, commission and bonus fraud is done by manipulating the records of how much they should be paid, but this time, it also involves inflation of sales records in order to make it appear that an agent or employee is deserving of the commission or bonus. This type of fraud can wreak havoc not only on your payroll records but also on your sales records as well.
- Expense Reimbursement Fraud
This type of fraud is hard to pin down because it’s easy to pass off as a mistake or an accident. However, repeated misfiling of reimbursements, either through misrepresented receipts, manipulated records, unaccounted-for expenses, or double-filing, may prove malice and intentional fraud.
- Misclassification of Employees
Many companies tend to take this as a shortcut, but it is considered fraud to file your employees as contractual when they are actually full-time workers deserving of full-time pay and benefits. Make sure that you are fully compliant with giving employees their due, not only because it is the right thing to do -- it also results in a more engaged, loyal workforce.
- Ghost Employees
Insidious payroll staff or managers can manipulate the records by filing for an employee that does not exist, hence a “ghost”. Ghost employees tend to appear with addresses or accounts redundant with another employee or may be real people no longer connected to the company but are still receiving salaries.
How To Prevent Payroll Fraud
Fraud does not exist in a vacuum. It is not always carried out maliciously by inherent evil-doers: more often, it is a product of opportunity, external pressures and justification. External pressures and justifications can be mitigated by a good management program, but the most important thing is to do is to remove the opportunity for fraud and eliminate the temptation.
Making sure that your records are organized is one way to prevent payroll fraud. Electronic timesheets make it harder for employees to falsify their log times, while online applications for reimbursements and commission filing can mitigate redundancies. At the same time, having a regular audit of your payroll records lets you know of any anomalies early on, so you can correct any mistake in your process or spot fraudulent activities.
Stringent auditing can take precious time from your busy workday, especially if you are a small business owner. It’s best to hire professionals to do it, and SCS Accounting has expertise in statutory audit services. Aside from analysing your business health and risks, we also deliver high-quality solutions from our team of professionals.
Find out more about how we can help your business combat payroll fraud. Visit scs-cpa.com/ today!