Payroll fraud is when an employee manipulates the system so that they get paid more than they earned. It’s a subtle technique resulting in large amounts of theft over time. While it’s not the same as physically taking another’s belongings, it’s just as illegal.
The most common ways employees commit payroll fraud is using timesheet fraud and ghost employees. Timesheet fraud involves changing the timesheet to reflect extra hours worked. Employees and payroll clerks are common offenders perpetrating payroll fraud. The employee can do this by ‘forgetting’ to clock out and then manually entering the end of the shift in such a way that reflects extra time. Ghost employees are people made up by payroll clerks to funnel an additional salary into their bank account.
Payroll fraud is frustrating, but you can prevent it. You can reduce or eliminate the costs of payroll fraud in a number of ways. Here is a list of the five easiest things you can do to ensure this problem doesn’t affect you.
Conduct Employee Background Checks
Background checks provide valuable insight into the character of an individual. People who have broken the law before are more likely to do it again. In some cases, people change, but rehabilitated criminals may not be the right choice for your business if you struggle with payroll fraud already.
Running background checks helps prevent this problem before it starts by giving you indicators that people are apt to break the law. Make smart choices with the information you receive from these reports. Implement policies surrounding hiring people with criminal records and stick to them.
Review All Payroll Reports
A trusted member of the team should review the payroll reports every payday to check for misconduct. This employee should be someone in a supervisory role or above. This person needs to have a vested interest in making sure the payroll is correct to ensure that it is accurate.
Requiring this of the employees who are the most likely to commit fraud is not the best way to circumvent the issue. Verifying the payroll may seem like a lowly task, but if the money isn’t coming directly out of this person’s pocket, they don’t care enough about payroll for you to entrust them with it.
Verify All Listed Employees
You can avoid ghost employees on the payroll by enlisting the help of a service. Actively verify the name of the payee against several different records, including their bank account. If the name on your payroll doesn’t match the name on the bank account, it’s likely a ghost employee.
Every employee should have a direct deposit set up. People can too easily compromise cheques. If someone insists on being paid by cheque, this is a red flag for you. Managing your payroll with a web-based application can reduce costs, increase your efficiency, and protect you against payroll fraud.
Separation of Powers
A dividing and conquering technique isn’t just efficient. It protects your assets as well. You’ve heard the phrase, “Don’t put all your eggs in one basket.” It requires collaboration, accountability, and a set of checks and balances to ensure everyone is doing their job correctly. Dividing tasks across multiple people makes payroll fraud much more difficult to commit.
Anyone who doesn’t have to have access to payroll shouldn’t. Keep the group of people with access small. Should payroll fraud occur, your list of possible offenders is small, and your risk is small as well.
Random employee audits are a great way to catch timesheet fraud. An increase in manual entries should tip you off to foul play. Two employees always checking in at the same time could indicate buddy punching.
Buddy punching is a system in which employees clock in for each other. It may start out innocently with someone asking a friend to punch in for them if they are running late and don’t want to get in trouble. These offences add up to big money over time.
Some applications can audit these records for you. They spot trends or anomalies that are difficult for the human eye to see. Investing in a biometric time clock system is another great way to prevent buddy punching.
Use these tips to reduce your risk of payroll fraud. There are so many ways employees can circumvent the system, and it is worth investing in tools to help you find it when it happens. Web-based applications that manage your payroll for you, time clock systems built to prevent fraud, and tools to help monitor reports all can help.
Be prepared, stay watchful, and automate the procedures where you can. Every time you prevent payroll fraud, you increase your earnings, not only monetarily, but for peace of mind.