Payroll fraud: How to minimize the risk to your business

payroll fraud

Most reputable payroll software have measures in place to protect sensitive data. These include encryption, threat detection, vulnerability scanning and intrusion detection. Catching payroll fraud before it escalates can save your organization time and money. Learn how in our eBook “Conducting Fraud Investigations with Case Management Software”.

payroll fraud

Preventing payroll & timesheet fraud

New and current employees need to know how to properly use your payroll system. As you train your team, make sure they understand all of its security features. Also, clearly explain what they can do to protect sensitive information, such as employee addresses and Social Security numbers.

Ghost Employees

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. A smart — but malefic, to be sure — payroll administrator would give slight pay increases over time to avoid raising the alarm when comparing payroll reports from successive pay periods. We’re not talking about when you see a Volkswagen Beetle and punch your friend in the arm.

Streamline your payroll and reduce your risk of fraud

For example, a best practice is requiring workers that miss their approved window for clocking in or out to request a manual entry from their manager. The manager can review the circumstances surrounding why that employee was early or late and determine if the entry should be allowed or not. Left undetected, payroll fraud can grow from a small dent in the company coffers to a major financial drain. According to the Association for Certified Fraud Examiners (ACFE)[1], the average case of payroll fraud lasts two years and results in losses upwards of $62,400.

payroll fraud

  • In addition to being easy to use, our payroll software is secure, private, and thorough.
  • In its simplest form, payroll fraud involves an employee or the employer manipulating the payroll system within the organization to take the money they are not entitled to.
  • According to the Association of Certified Fraud Examiners, a typical payroll fraud scheme lasts 24 months.
  • Staff require training on understanding and implementing the risk management policy to ensure they maintain compliance and do their part to mitigate payroll fraud.
  • Some employees secretly increase their compensation rate by manipulating the payroll system, which can amount to payroll fraud.

So instead of officially terminating her pay, he diverts the pay to his own pocket. For example, let’s say there is a payroll clerk by the name of John Doe. John has decided that he wants more money from work, so he makes a “new” employee named John Doe-Lynn.

Time and Attendance

An employee’s pay is altered so they receive a higher hourly rate than they should. However, this typically requires the help of someone with access to the payroll system. Timesheet fraud can be committed internally, where the payroll clerk is involved. They could alter hours worked for another employee—themselves receiving a kickback for helping the employee. While technology has made payroll fraud easier in some ways, technology may also be used to prevent fraud.

It means no single individual controls more than one aspect of the payroll process. This type of fraud is generally restricted to departments that have access to your payroll system, such as payroll, finance, or HR. It occurs when employees raise their own pay, or work with someone in one of those departments to do so. Timesheet fraud — often known as “buddy punching” — occurs when an employee manipulates timekeeping records to alter payment amounts.

  • Timesheet fraud occurs when an employee is paid for hours they didn’t actually work.
  • If this is what you do, make sure the timesheets are completed and reviewed on schedule so that the manager doesn’t forget how many hours a certain employee worked for the shift.
  • Payroll fraud is a severe problem that can hurt businesses of all sizes.
  • Perhaps most importantly, we’ll give you tips for how to prevent payroll fraud in the first place.
  • The ACFE found the average check tampering scheme results in losses upwards of $110,400.

If you decide to go this route, do your research and shop around to hone in on the right provider. Make sure you choose a company that takes security issues seriously through comprehensive security measures. Even though routine password changes may not protect against every payroll security threat, this strategy can help minimize the risk of breaches and unwanted access. In addition, encourage your employees to use strong passwords, which are made up of a combination of uppercase letters, lowercase letters, numbers and special characters. Asking them to set up multifactor authentication can also be worthwhile.

Consistently Update Your Payroll Software

Without proper internal controls, this type of fraud can go unchecked—make sure staff need to provide a doctor’s note and validate the need for their time off. Monitor employee behavior for abnormal use of sick leave to try to catch these fraudsters in the act. Employer payroll fraud often comes from paying workers as independent contractors and treating them like employees. While hiring contractors is legal and can help businesses get necessary work done, business owners need to play by the rules.

Timesheet fraud involves paying employees incorrectly for the hours they work. In some cases, companies overpay employees based on falsified timesheet submissions; employees might even have a co-worker clock in and out for them when they aren’t even scheduled to work. In one common timesheet scheme, an employee will “forget” to clock in or out, thus requiring a manual entry, to which they then add extra hours.