Payroll Services Fraud: A Looming Threat and Preventive Measures

Payroll Services fraud is a significant concern for any payroll director, and it should not be overlooked. According to the Association of Certified Fraud Examiners, payroll fraud is the leading cause of accounting fraud and employee theft. Alarmingly, over 11% of workplace frauds involve payroll, with an average loss of $48,000 per incident. Even more concerning is that the average scheme goes undetected for nearly 36 months

Common Payroll Schemes

The most prevalent forms of payroll services fraud include creating fictitious or ‘ghost’ employees, submitting fraudulent or inflated expense reports, and claiming straight time or overtime hours for work not performed. The creation of ‘ghost’ employees poses the highest risk of substantial financial losses

Payroll services fraud involving ‘ghost’ employees is a common and potentially devastating scheme. An employee with access to payroll data or the ability to create false employee records can initiate this fraud. Payments are then made and deposited into a bank account controlled by the perpetrator or an accomplice. If direct deposit is not used, an employee may intercept checks and cash them for personal gain.

Preventive Controls for Payroll Services Fraud

To mitigate the risk of payroll fraud, companies must implement robust internal controls that segregate payroll responsibilities. Here are some recommended procedures:

  • Employees who create or maintain payroll data should not be allowed to make changes or add new employees without management approval.
  • At least two designated individuals should approve payroll changes.
  • Those computing pay rates and collecting hours should not be permitted to issue payroll checks or submit hours for payment without supervisory approval.
  • Payroll accounts should be reconciled monthly and reviewed by management.
  • Audit payroll information regularly for duplicate direct deposit accounts, repeated Social Security numbers, or repeated addresses.
  • If direct deposit is used, require employees to pick up their paychecks in person with photo ID at least once a year

Many banks offer payroll services where check volumes, amounts, and employee names provided by the company are verified against incoming payroll checks. It is also advisable, especially for smaller businesses, to outsource their payroll to a reputable service provider.

Preventing Inflated Bills and Falsified Time Sheets

Inflated expense reimbursement requests and falsified time sheets are another form of payroll services fraud that necessitates robust internal controls and prevention methods. Companies should implement policies that require:

  • Proof of expense reimbursement requests.
  • Management approval for expenses exceeding a certain threshold.
  • Approval for significant increases in work hours beyond an employee’s regular schedule.

It is essential to conduct regular audits of these trends on a manageable basis. Individuals responsible for processing expense reimbursements or overtime requests should not be permitted to issue payments.

Considerations for Effective Fraud Prevention

Before implementing internal controls to prevent fraud, companies must assess their resources to ensure they have sufficient staff to achieve segregation of duties. If this is not feasible, outsourcing payroll responsibilities should be considered. Payroll services fraud can have severe consequences, and proactive measures are crucial to safeguard against financial losses and maintain organizational integrity.

In conclusion,

Payroll Services Fraud poses a significant threat to organizations of all sizes, with the potential for substantial financial losses and reputational damage. Implementing robust internal controls, segregating duties, conducting regular audits, and considering outsourcing payroll responsibilities are crucial steps in mitigating this risk. By staying vigilant and proactive, companies can protect themselves from the detrimental impacts of payroll fraud and maintain the integrity of their financial operations.

 

 

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