Payroll fraud is one of the most common types of fraud committed, costing billions of dollars to businesses every year. In a study published by the Association of Certified Fraud Examiners it was found that the median loss from 1,388 cases of fraud was $140,000 and in 20% of cases the loss was at least $1 million. Half of these organizations do not recover their losses.
Who’s to blame when a company is a victim of a devastating payroll fraud scheme? Aside from the fraudster(s), of course, there are others in the company in positions to ensure this doesn’t occur and finger pointing isn’t going to solve anything. But knowing all the different schemes and how to prevent and detect them might. Payroll fraud schemes are among the most damaging to a company because they tend to take place over a long period of time. According to the Association of Fraud Examiners (ACFE) the median duration between the start of a payroll fraud scheme and its detection is 24 months enough time to do some significant financial damage to a company. And some experts estimate that almost a quarter of businesses are affected by payroll fraud each year. Employee payroll fraud is a challenging issue for small business owners. The process of detecting and preventing this starts with a thorough understanding of the different types of payroll fraud that exist, and mechanisms to implement to keep damage to a minimum.
What is Payroll Fraud?
Payroll fraud is most simply defined as cheating the payroll system at their place of employment to receive funds to which they are not entitled. There are many ways payroll fraud can be committed, including from salary, hourly and commission workers, as well as ways to prevent and detect it. Payroll fraud is when employees or employers wrongfully manipulate the payroll system to either receive payment they haven't earned or, in the case of employers, withhold payment of rightfully earned wages or taxes due on those wages. Fraud takes many forms and is sometimes difficult to detect. If businesses aren't diligent, the toll of this deception and theft can be considerable.
Types of Payroll Fraud
Some common payroll fraud schemes and methods include:
- Timesheet Fraud- Employees who inflate their hours on timesheets are committing timesheet fraud. But this type of fraud is not only committed by employees on their own timesheets. When an employee “punches in” for another employee, they both commit timesheet fraud. A payroll officer or manager can also commit timesheet fraud by inflating the hours on another employee’s timesheet or altering the rate of pay and then transferring the extra money to his or her own account before issuing the employee’s pay.
- Falsifying Wages- A payroll department employee commits fraud when he or she falsifies wages of another employee. This can be done in collusion with the other employee, who then shares the extra pay with the payroll employee, but it is also sometimes committed alone. When done alone, the payroll department employee transfers the extra pay to another account before issuing the employee’s paycheck for the correct amount. The employee doesn’t know about the fraud, even while unknowingly participating.
- Commission Fraud and Bonus Fraud- Commission fraud or bonus fraud occurs when an employee whose pay is partially or fully based on commissions or bonuses inflates sales to collect higher commissions or bonuses or posts non-existent sales which are later reversed.
- Expense Reimbursement Fraud- Employees commit expense reimbursement fraud when they claim reimbursement for fictitious expenses or when they inflate actual expenses when submitting them for reimbursement. are finalized in order to collect commissions or bonuses earlier or even collude with another person to create a sale that is later reversed. Payroll managers also commit commission fraud when they change the rate of commission for an employee, often in collusion with the employee.
- Ghost Employee Schemes- Ghost employee schemes are perpetrated by payroll employees who either create synthetic identities (“ghost employees”), complete with fake SSN, address, phone number, etc, or continue to issue payments to employees who have left the company, diverting the pay to themselves. A ghost employee can also be a real person, such as a family member, who doesn’t work at the company but who collects pay and either shares it with the fraudster or keeps it.
- Misclassification of Employees- This type of fraud is carried out by employers, sometimes accidentally, but often deliberately. It occurs when employers classify a full-time, salaried employee as an independent contractor to avoid paying payroll taxes and workers compensation insurance. This lowers staffing costs and allows the company to submit lower bids than other companies who are classifying employees correctly.
How to Detect Payroll Fraud
While payroll fraud is uncommon, there are plenty of examples where it has happened, and it can potentially lose businesses and employers a significant amount of money. A study in 2011 found that companies in Britain lose around £38 billion a year due to payroll fraud. Five percent of all expenses claims were found to be false, a total of over £150 million. However this figure covers what is detected, so the actual number is likely to be significantly higher. Due to the high financial cost of payroll fraud and the serious nature of such offenses, some methods have been developed to help to detect payroll fraud and provide evidence if it is suspected.
Some of the key things & signs which shows that payroll fraud is taking place are as follows:
Standard anomalies in any payroll system can include:
The standard anomalies that we can find in Payroll system are as follows:
Top 5 Cases of Payroll Related Fraud
- In July 2016, that a former Human Resources executive working for GMC Global committed a series of forgery and cheating offences involving about 1.2 million Singapore dollar. She was jailed for six years and nine months.
- In February 2017, a woman was charged with five charges of embezzlement for money taken from Arrow Heights Baptist Church since 2008 when she was employed as payroll administrator.
- In January 2017, Katrina a former Crown Candy worker tasked with the company’s payroll duties, fraudulently issued payroll cheques totaling nearly USD 300,000 to herself and her family in 2012. The prosecution alleged that the theft went on for much longer and could total more than USD 800,000.
- Between November 2009 and August 2015, Paul Randolph Beeks Jr., who was responsible for accounting, payroll and tax duties at Mid Atlantic Radiology Services, made around 24 fraudulent transfers from the company to his own companies’ accounts. To disguise the thefts, he claimed that some of the wire transfers were for management fees and bonuses.
- In January 2017 that a former senior director of UPMC Health Plan pleaded guilty to embezzling USD 846,000 from UPMC by putting ghost workers on the payroll.
Preventing Payroll Fraud
There are several types of payroll fraud. Organisations of all sizes can suffer from various types of fraud, which can lead to closure of a business, revenue loss, high legal fees and reputation damage. While it is important to detect if fraudulent activities are taking place at a company, it is equally essential to do everything possible to ensure that it does not happen in the first place. As well as frequent checks of the payroll records, this can also be done by making sure employees are aware of the full consequences surrounding payroll fraud. The punishments relating to payroll fraud go far beyond a work disciplinary or having to repay the money, with significant jail sentences frequently being handed out for offenders. Getting an outside body or a member of staff from outside the team to check records every so often increases the likelihood of wrongdoing being discovered.
One of the Strategies to prevent “Payroll Fraud”
There are many strategies that can be used to combat payroll fraud and payroll outsourcing is one of them. Here are some ways that outsourcing your payroll can help to prevent and detect payroll fraud.
- Cheque and balance by third party– Payroll outsourcing vendor can implement financial process controls and segregate duties to eliminate the natural habitat that must exist for fraud to occur. They must process the cheques in efficient way and match the balances time to time.
- HR or payroll analytics reports– a payroll outsourcing vendor can generate audit and analytics reports to assist in spotting fraudulent schemes and ghost employees. For example, analysing monthly overtime pay trends, employees with duplicate Aadhar/voter/driving license numbers, addresses, or bank accounts.
- Cheque management– an outsourced payroll service model traditionally reduces the number of cheques written and has the requirement to establish a cheque issuance procedure.
- Direct deposit of salary through vendor – mitigate risks of unapproved and unauthorised wire transfers.
Mind Game to Curb "Payroll Fraud"
Payroll fraud is a serious offense, with severe punishments for those individuals who are proven to have carried it out. In July 2012 a British man who had carried out serious payroll fraud worth millions of pounds was sentenced to 17 years in prison. While most cases do not involve amounts as large as this, a custodial sentence is a standard punishment for payroll fraudsters. Making employees aware that not only will they lose their job, but potentially their freedom is one sure-fire way to reduce the risk of workers considering payroll fraud. As well as the threat of imprisonment, they will have to repay the money they obtained during their fraudulent activity, as well as facing a further fine. Many legal experts who specialize in fraud believe that payroll fraud is committed as it is seen as a ‘victimless crime’ and that such actions are commonplace anyway. Ensuring employees know that their actions are damaging and will result in significant sanctions is an excellent way to prevent this behavior, and may encourage anyone who has been omitting undetected payroll fraud to cease with their actions.
Many executives find it hard to believe that their employees would steal from them. They find it especially difficult when it comes to payroll fraud. However, numbers don’t lie. According to the Association of Certified Fraud Examiners’ 2006 Report to the Nation, 13.2 percent of all asset misappropriation fraud was payroll fraud. And the dollar amount involved, while not huge, was not insignificant either. The average fraud was for $50,000. This is nothing to sneeze at. As part of your comprehensive fraud prevention and detection procedures, don’t forget to include the safeguards necessary to guard against payroll fraud. No matter how much you trust your employees, the bottom line to me is that it is imperative for organisations, big or small, to have a control system and procedure in place to prevent and detect fraudulent activities.
- Acfe website
- Acfe fraud manual
- Fraud : how to prevent it by Mary s. Schaeffer
- Detecting and preventing fraud | allbusiness.com
- Essential guide to Payroll fraud_ types _ netsuite
Author’s Name: Shobhit Jaiswal
SRN : NRO0416324