Is There a Thief Hiding in Your Company?

Payroll fraud is simply stealing money using the payroll system. In most cases it is financially devastating because payroll is a company’s most significant expense, and it happens over an extended period of time. It is also emotionally devastating because it is usually committed by someone you trust, who is a loyal and likable employee. Payroll fraud can occur in any business, in any industry, whether a closely held entity or a publicly-traded company.

Don’t be fooled! The five most widely recognized schemes are:

1. Timesheet fraud: An employee logs time for hours not spent at work to hide an absence, tardiness, or the fact that they left early for the day. Often they will do it to cover up for a coworker who is absent.
2. Unauthorized changes: Employees with access to the payroll system alter check amounts or issue themselves unauthorized checks, or change the status of paid time off accrued. It may involve increases to their rate of pay, unauthorized overtime, or intentionally gives themselves a bonus not actually earned.
3. Ghosting: Occurs when the payroll professional enters a fake employee into the accounting system or continues to issue checks to an employee who no longer works for the company, and then pockets the funds personally. Another red flag is multiple direct deposits to the same banking account, or the issuance of checks to employees at the same address.
4. Commission fraud: Often perpetrated by sales employees who inflate their sales numbers in order to receive higher-than-earned commissions.
5. Lack of deductions: Someone with access to the payroll system alters their checks to avoid paying federal and state withholding taxes and Social Security, or company benefits, effectively leaving the employer to pay for them.

Payroll fraud is preventable. Even small businesses can implement simple internal controls that can reduce the likelihood of this type of theft. The five simple solutions are:

1. Review payroll reports after payroll is processed: Verify employee names, rates of pay, hours worked, deductions, overtime, and paid time off each pay period. Don’t approve the payroll before it’s processed without comparing it to what was actually paid. Implement a direct-deposit system for payroll and bonuses. Conduct periodic audits.
2. Mandate that employees take their paid time off: An employee who never delegates work duties, and never takes paid time off should be a red flag. It indicates a fear to leave because the fraud will be discovered by someone else who assumes their duties while away.
3. Rotate employees with access: Cross train and rotate job responsibilities within the payroll department. Separate payroll set-up, approval, and processing functions.
4. Require approval: Have Supervisors review, approve, and sign timesheets, as well as overtime, expense forms, and paid time off requests.
5. Review bank statements and cancelled check images: Every month check the online statement of account activity by looking at the check images and verifying the payee and the amount. Make sure the payee matches the entry in QuickBooks.

Payroll fraud happens when businesses are distracted from the day-to-day cash flow. Vigilantly monitor cash in and cash out to disrupt fraud before it happens. Employers should be the only one to sign checks, and should never sign a blank check. Establish a zero-tolerance policy against employee theft of any kind and prosecute fraudsters when they commit a crime. Make sure employees are aware systems are being monitored so no one abuses his or her access to company payroll programs.

Special note: If your company offers them, keep an eye on un-repaid payroll advances. Accounting staff can record the advance as an expense rather than charging it as a balance sheet item, or never monitor it for repayment, and eventually it is forgotten the advance was ever issued.

CONTACT US: Internal controls and safeguards can help detect payroll fraud before it snowballs, and prevent it from happening at all. Our solutions to finding and preventing payroll fraud are just the tip of the iceberg. We are more than accountants, we are business advisors. See how else we can help you run your business more profitably and reach your financial goals more quickly! Call toll free 855-534-2727.