What is Payroll Fraud?

There are numerous methods for stealing from a person or an organization. When you think of stealing, you generally think of shoplifting, bank robberies, and home invasions. However, these are hardly a few examples of how someone can steal. Payroll fraud is one of the most popular ways for employees to steal in the workplace. So, what exactly is payroll fraud?

What is Payroll Fraud?

Theft of monies from a company's payroll system is payroll fraud. It's most commonly carried out by payroll department managers and senior workers who have access to the systems that pay employees and can use that access to make fake payments. Employees who submit false claims for payment and businesses that categorize full-time employees as independent contractors to avoid paying payroll taxes and insurance can all be involved.

Payroll fraud is a type of asset theft that is one of the most common types of company fraud. Long-term, trusted personnel frequently carry out these frauds, and organizations with low or non-existent safeguards are the most common targets.

Types of Payroll Fraud That You Might Encounter

Everyone in a company is responsible for preventing payroll fraud, but to do so, you must first understand the types of fraud that could occur. The following three most typical payroll frauds should be known by both your HR and payroll teams −

Ghost Employee Fraud

When 'workers' listed on your company's payroll are paid even if they aren't working for you, this is known as ghost employee fraud. If an employee leaves your organization but isn't deleted from the payroll system, it can also happen.

Fraud is more common in larger firms than in smaller ones, and it is more often when personnel is dispersed over multiple physical locations, but the payroll function is managed from a single site.

Fraudulent Timesheets

Timesheet fraud is when an employee incorrectly claims hours on their timesheet and is paid for those hours even though they are not working. Clocking in and out at wrong times, making false claims about the number of hours worked, and having someone else punch in and out for them are all examples of timesheet fraud that can occur in sectors where employees are paid by the hour.

Schemes of the Commission

When employees make sales or reach certain milestones, they may be eligible for incentives or commissions. These bonuses serve as a motivator for people to work hard and achieve success in their careers. Employees may, however, find a way to award themselves commissions or incentives that they did not earn. This is referred to as a commission scheme, usually considered payroll fraud.

Sick Leave Fraud

Sick Leave Fraud is when an employee falsely claims sick pay from their employer while not sick or working at another employment.

False Expenses Fraud

A false expense claim occurs when a staff member is reimbursed for expenses that either did not happen, were personal expenses, or were less expensive than the employee reported, with the employee pocketing the difference.

Scams Perpetrated by Third Parties

Payroll fraud is frequently performed internally, although third parties can also perpetuate it. Third-party perpetrators target individual employees or company records in W-2 scams and payment diversion schemes.

A cybercriminal uses a W-2 fraud to mislead employees or HR workers into turning over sensitive employee information like income and Social Security numbers. The data is then used to prepare false tax returns.

On the other hand, in a payroll diversion scheme, cybercriminals deceive employees into changing their direct deposit information. Scammers can use this method to redirect employee paychecks into their accounts. They may carry out this scam by sending phishing emails or directly hacking into a company's payroll system.

How to Detect Payroll Fraud?

Some of the most classic symptoms of payroll fraud are as follows −

  • Receiving a "preview" email for a payroll you did not submit indicates that payroll has been sent or delivered to you unexpectedly.

  • Employees reporting "extra deposit" payroll transactions and unexpected or excessive amounts in their bank accounts

  • Changes to your payroll that you did not make, such as a change in an employee's status.

Prevention of Payroll Fraud

You can take the following actions to stop Payroll Fraud −

  • Pay attention to payroll reports. Managers and staff should never sign off on payroll reports without conducting a thorough assessment. Employee requests for time off are subject to the same scrutiny. Fraud thrives only in an environment where safeguards are loose.

  • Separate specific responsibilities. When various employees are in charge of different aspects of the payroll process, the risk of fraud is considerably minimized. As previously stated, never assign the same person to process payroll and make reporting adjustments or payroll report amendments.

  • Ensure that all workplace policies are up to date. Ensure that all employees know payroll procedures, such as changing spending or personal information. You might also wish to include a description of what constitutes payroll fraud and the consequences of being found guilty of it.

  • Enforce password management. Ensure all employees have access to a password policy and understand what constitutes a strong password. Make sure any software you use has two-factor authentication for added security. Natural HR has free materials on creating a secure password, which you can read here.

  • Have at least two individuals in the top-level payroll team. You can take proactive efforts like ensuring that no single individual can oversee, create, or pay the company payroll by providing that your top-level payroll team (those who have access to sensitive data) comprises of at least two people. Similarly, you might want to think at the entire payroll process and make sure you're taking more rigorous efforts to reduce risks, such as having all expense claims countersigned to give extra supervision.

  • Review your payroll data regularly. It is critical to ensure that your payroll is thoroughly evaluated throughout the year to guarantee that no errors or concerns arise.

Updated on: 16-Feb-2022


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