Finding and fighting payroll fraud

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Detecting payroll fraud

One of the biggest tips for small business owners is to become suspicious if a member of your payroll department never goes on leave, arrives early and leaves late. This should raise a red flag, as this person may be taking steps to ensure that nobody else does their job and cannot discover their crime. There are three main types of payroll fraud to look out for:

1. Ghost employees

   The hardest type of payroll fraud to orchestrate and detect, but also potentially the most lucrative, is the engineering of a ghost employee. The employee that is created is either fictional or could be a real person who does not work for the company he or she is being paid by.

   The payroll administrator will add the ghost employee to the payroll and then the monthly salary will be paid. If it is a wage employee, then this is more difficult to prove, but with electronic payments, a payment trail is left and can be spotted.

   I recently worked on one of my biggest fraud cases, where an HR manager defrauded the company by creating ghost employees by making changes to 11 bank accounts. This went unnoticed by the company for four years and it cost them R6.8 million. This has had a massive impact on their business.

   False wage claims

   For employees who want to increase their monthly income, false wage claims are filed. Incidentally, it is also one of the types of payroll fraud where the employees experience less guilt. They could be adding extra hours to their timesheets for hours not worked, getting colleagues to clock in and out for them, or if they are sales executives, to exaggerate their sales figures to get paid extra commission.

   False expense claims

   The most prevalent type of payroll fraud is the submission of false expense claims. This type of fraud comes with an ‘everyone does it’ mindset, where employees can see it is as being acceptable and not fraudulent. These include personal expenses being submitted as business expenses, expenses submitted for events or purchases that never happened, submitting duplicate claims and inflating claims.

   In addition to the financial loss experienced by the business, this type of fraud has tax implications where a company may be unable to deduct tax or be liable for penalties if they do not have the correct paperwork for the expenses.

Fighting payroll fraud

For business owners, identifying payroll fraud and then being able to collect the necessary evidence to be able to stop this from continuing is about putting checks and measures in place:

1. Proper separation of duties

   One effective way to mitigate the risk of payroll fraud in your business is to assign responsibility for different payroll duties to different people. For example, different employee members should ideally be responsible for capturing payroll data; for adding and removing employees; and for verifying the pay run and signing off the payroll. This gives you a clear audit trail, ensures a clear line of accountability and puts strong checks and balances in place. In this sort of environment, someone should quickly pick it up when there is something unexpected happening in the payroll.

2. Invest in automated solutions

   A robust payroll solution will reduce the possibility of human error in or tampering with your payroll - reducing opportunities for payroll fraud and enabling you to provide accurate and timely information to SARS more easily. Given the complex nature of payroll calculations today even in a small business, an automated payroll solution is essential if you want to make sure that the figures are correct.

3. Bank account and ID number verification

   In order to identify ghost employees, you need to follow a few steps when you pay a person on your payroll – to ensure that the person exists, that he/she is the person you wish to pay, that the bank account you will pay exists, and finally, that the bank account belongs to the person you intend to pay. A good payroll solution will feature online ID number and bank account verification to enable you to do just that.

   When payments made do not match the budget, this can immediately raise a red flag, an investigation can take place and the fraud can be stopped – before more financial harm is done to the business.

Conclusion

A reluctance to prosecute someone for payroll fraud will mean that fraudsters get away with moving from company to company to commit the same crimes. This is why it is vital for such cases to be reported in order to reduce the growing risk.

Since payroll is one of the biggest expenses in any business, payroll fraud or errors in capturing your payroll data can be costly. Integrated accounting, payroll and payment systems enable millions of businesses to track the movement of money through their business.