Payroll fraud is a serious problem for organizations. Here's what you need to know to help prevent it.

Fraud is a serious problem for organizations. According to the 2016 Global Fraud Study by the Association of Certified Fraud Examiners, businesses lose five percent of total revenue to fraud every year, with smaller firms at greater risk because they tend to lack dedicated fraud controls. More worrisome is the fact that 27 percent of all businesses experience payroll fraud, which helps explain how U.S. enterprises lose $50 billion to employee theft each year.

How do financial leaders determine the sources of fraud and take steps to stop it?

Common Causes

Who's committing payroll fraud? As noted by Intuit, 87 percent of occupational fraud incidents are committed by first-time offenders with no current or historical employment issues. There are several types of payroll fraud including:

  • Time Fraud: Employees might log extra hours worked or have other staff members clock their time cards in/out so as to leave an inaccurate record. Employees may also claim extra overtime worked.
  • Benefit Fraud: Staff may leverage sick days or workers' compensation claims inappropriately. According to the Journal of Accountancy, in some extreme cases, workers have taken on other full-time jobs while still on paid leave from their original employers.
  • Ghosts in the Machine: In these cases, staff create fake employee profiles or use the information of workers who have recently left the organization to keep collecting checks.
  • False Expenses: Inflated or falsified travel and expense claims can add up over time, especially if individual amounts aren't large enough to catch the attention of finance leaders.

Error Issues

While it's tempting to attribute all payroll losses to fraud, watch out for payroll errors. For example, if employees are misclassified as exempt under the Fair Labor Standards Act, you may not be paying them overtime, or for time spent training.

The lesson here? Make sure payroll solutions are working properly before you go looking for fraud.

Mitigating Factors

So how can you help limit the chance of payroll fraud? It starts with employee training. Be up-front about the causes and outcomes of fraud and encourage staff to speak freely about their concerns. The goal is to create a corporate culture of integrity and respect.

Careful oversight is also essential. This means conducting a regular, thorough evaluation of current payroll procedures, which can help spot possible "ghost" payments, catch time-card fraud and reduce the chance of expense-claim fraud.

It's also a good idea to have a third party perform regular audits. This offers a dual benefit: In the event that payroll staff are committing fraud, outside evaluation may help detect irregularities, and having a fresh set of eyes examining time-card, overtime and benefit claims can help identify issues that might otherwise go unnoticed.

The bottom line? When it comes to payroll fraud, be both proactive and reactive in order to create a system where malicious theft is easy to detect and a culture where employees are unlikely to want to attempt it.

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This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice. As with all matters of a legal or human resources nature, you should consult with your own legal counsel and human resources professionals.

Tags: strategic planning Payroll