Preventing payroll fraud requires businesses to rethink the processes they follow to pay employees.

Salaries and benefits consume a huge portion of an organization's budget, yet, for most organizations, little changes from pay period to pay period. Therefore, business owners don't review their payroll records on a regular basis. Unfortunately, payroll fraud, which involves the theft of money via an organization's payroll processing system, happens with alarming frequency and comes with impressive price tags.

According to the Association of Certified Fraud Examiners (ACFE), payroll generates a median loss of $90,000 and typically takes 24 months to detect. Furthermore, the ACFE also found that it takes place more frequently at businesses with 100 employees or less than those with larger payrolls.

So how can your organization detect and prevent fraud involving its payroll?

Ghosts on the Payroll

One of the most common payroll fraud schemes involves the use of fictitious or "ghost" employees. Typically, a ghost exists in name only, however, in some schemes, the employee committing fraud may use a former employee's information to trigger the payment to a bank account they control.

Here are some countermeasures to combat the use of ghost employees that can also help businesses stamp out other forms of payroll fraud.

  1. Ensure that the employee tasked with hiring new employees isn't responsible for updating the organization's payroll records.
  2. Review employee payroll data for duplicate or missing Social Security Numbers, addresses, phone numbers, bank information or the lack of withholding or insurance deductions typical of a legitimate employee's activity.
  3. Ensure a process is in place to remove former employees from the payroll. Track the removal and additions of employees on a month-to-month basis and reconcile to new employee hiring and departures.
  4. Develop periodic reporting to capture changes to each employee's compensation, such as increases in their hourly or monthly rate of pay. Further, before an employee receives an increase in their compensation ensure that a document trail exists to justify and approve the change.
  5. For hourly workers require at least supervisory approval for overtime. For employees that earn sales commission, verify the rate paid agrees with the organization's commission rates, and that the orders generating the commission correspond to legitimate orders.
  6. If payroll depends on the issuance of paper checks, store the checks in a secure location with limited employee access, and rotate the duty of distributing the checks to employees.
  7. Dedicate a bank account to process the organization's payroll payments. Assign the reconciliation of the account to an individual not involved in the day-to-day administration of payroll-related records.

For the most part, stopping payroll fraud doesn't require major changes in how your company pays its employees. However, it does require a willingness to adopt countermeasures designed to make theft by payroll harder for employees to conduct.

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