Different Types of Payroll Fraud

Payroll fraud is a very real issue no matter what type of organization you are. So, it is important to be prepared, defended, and educated on the different types of payroll fraud you may encounter.

Here is what you should know: 

Types of Payroll Fraud

According to the Association of Certified Fraud Examiners, payroll fraud is the top source of
accounting fraud and employee theft.

Here are some staggering payroll fraud statistics:

• It happens in 27% of all businesses
• Lasts about 3 years before a person is caught
• Occurs 2x more often at organizations with less than 100 employees

So, how do you stop it from happening? Aside from using direct deposit and modern payroll software, you should be aware of the different methods of payroll fraud so that you can try to identify them early. 

Paying for Unauthorized Work Hours and Overtime

One of the most often committed acts of payroll fraud is the padding of timesheets by an employee, usually in small enough blocks of time to avoid being detected by their manager.

This problem happens when managers become robotic with their staff’s timesheets.

One of the best ways to limit this issue is for all overtime to be approved by a manager or by having a third party review the payroll records once per month or pay period (a great way to spot trends). Employers should also ensure that all employees are classified properly under the Fair Labor Standards Act (FLSA). 

Most payroll and timekeeping software also comes equipped with tools to help avoid such things, such as geofencing, facial recognition punching, and more.

Paying a Ghost Employee or Contractor

This happens when a member of the payroll staff creates a fake employee or contractor in the payroll records or prolongs the pay of someone who has just left the company.

What they do next is change the direct deposit account number or make the check out to themselves. This payroll fraud technique works best when a manager has left the company and a ghost employee can be placed into their department until a new manager is hired.

How to solve a “ghost employee or contractor” issue: Periodic auditing of the payroll records is needed to spot ghost employees or contractors. And if you see a check with no deductions, this should alert you that something is wrong.

Buddy Punching For A Coworker

An employee gets the help of a coworker to “buddy punch” his or her hours into the company’s time clock (while taking the day off). A way to stop this from happening is by installing a biometric time clock at your business.

Stealing a Coworker's Paycheck

This happens when an employee takes a paycheck (and then cashes it) that was placed on an absent employee’s desk. By the way, this can be avoided by having every manager return all undistributed checks to the payroll manager.

Another way to avoid this is by using payroll software that offers direct deposit. 

Changing Rate of Pay

This happens when a payroll manager and a co-worker conspire to increase the amount of their hourly rate in the payroll system – and then the payroll manager returns the pay rate so that the issue is harder to spot-check. This can be identified by auditing the pay rate documents to the payroll register.

Payroll Advances Are Not Paid Back

The most passive type of fraud is when an employee requests an advance on his or her payroll and never pays it back. This works best when the accounting staff does not record advances as assets (instead charging them directly to expense), or never monitors repayment.

Payroll Scams and Direct Deposit Fraud

In this digital age, businesses face a growing threat known as employee spoofing, where someone hacks into employee information to deceive a company into making an unauthorized payment or changing a direct deposit "address".

Employers should: 

• Educate employees on the dangers of fake payroll direct deposit and other direct deposit scams
• Use multi-factor authentication
• Use strict prevention protocols
• Use robust cybersecurity measures
  • Learn about why cybersecurity is important
  • Learn about the highest cybersecurity risks
•  Regularly review and update policies

Preventing Payroll Fraud

Payroll fraud comprises 9% of occupational fraud worldwide and  costs businesses an average of $45,000 per payroll fraud case, according to a study by the Association of Certified Fraud Examiners.

The best way an organization can avoid being a victim is to install anti-fraud controls. This can be done by conducting background checks, limiting access to payroll information, or segmenting payroll duties. It can also be accomplished by leveraging the right payroll software. 

To learn more about our secure payroll platform, and how we are helping countless businesses avoid payroll fraud, contact us today.