How Can You Avoid Payroll Fraud in Your Firm?

There are several ways to steal from someone. When most people think of stealing, they think of bank robberies, chain snatching, shoplifting, etc. Payroll fraud is one of the most common ways that employees steal at work. It is one of the asset misappropriation scams that are tough to identify and is also regarded as one of the persistent frauds in a corporation. It includes large losses since it goes unnoticed for a lengthy time, even though many firms do not devote much importance to discovering these frauds. In most situations, this fraud is committed by employees of the firm who have insider knowledge about how the system works. So read along to know how can you avoid payroll fraud in your firm.

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What is Payroll Fraud?

Payroll fraud is when someone gets compensation from an employer unlawfully by supplying fraudulent information or papers. Payroll fraud may occur in a variety of ways, including the use of fraudulent timesheets, the use of false papers to demonstrate eligibility to work in the nation, or the use of someone else’s identification information.

Payroll fraud is a major problem in the corporate sector. It can take many different forms, and the methods used to commit it are continually developing. Payroll fraud occurs for a variety of reasons. It can be done for personal financial benefit or to falsify accounting reports. The impact is amplified when done in an SMB as compared to large corporations. Payroll fraud can have devastating repercussions in either instance. 

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Types of Payroll Fraud

The most common type of payroll fraud are listed below:

Timesheet fraud

A company that pays employees for their work hours is vulnerable to timesheet fraud. Since the employee is paid as per the timesheet records, manipulating these records for financial benefit is a method of fraud. Employees may find a way to inflate the number of working hours to collect more money than they have rightfully earned. They can also increase the payout beyond their actual due by increasing their hourly payout amount in the system.

Falsifying wages

In big corporations with a vast workforce, not all employees are aware of the precise salaries that should be provided to each employee. As a result, the earnings are computed accurately according to the system records. If an employee acquires knowledge about the wage data and has the ability to manipulate the system, they can falsely boost the wage rate. As a result, when the paycheck is determined, the employee is paid more than he is entitled to. This form of fraud is simple to perpetrate in a firm that uses a manual or digital payroll administration system with no security protections to prevent unauthorized access.

Ghost Employees

In your payroll system, a “ghost employee” can be created for fraudulent purposes of obtaining unethical compensation. This is perhaps one of the most prevalent forms of payroll fraud.  If you have less than 50 people, this will not be an immediate issue, but it is something to keep an eye on as you develop. In this scenario, someone establishes a bogus employee in the system and then steals the funds intended for this non-existent employee. A growing firm might easily have an additional “employee” in its system unless you pay close attention. 

Fake Compensation Claims

A bogus workers’ compensation claim is submitted. Workers in almost any profession can fabricate a workplace-related injury like falling down the ladder or other workplace accidents to obtain paid time off. While you would identify this sort of fraud with warehouse or construction work, an employee might just as well claim to have slid on the floor close to a leaking water cooler in your break room.

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How Can You Avoid Payroll Fraud in Your Firm?

Payroll fraud may sound like the plague on honest work and can demoralize anyone. Instead, employ one of these five payroll fraud prevention measures before it deprives you of your funds. While payroll fraud is difficult to detect, if you are careful, you can identify it sooner rather than later. Here’s how you keep an eye out for probable payroll fraud.

Prepare Periodic Payroll Reports

Preparing the monthly reports that monitor the payroll functions and having them reviewed by an external auditor like A&A Associate can help immensely. The reports could be the following:

Monthly Change Report – indicating new hires, resignations/terminations, salary increments/revisions, changes in grade, etc. Although salary increments happen usually towards the end of a financial year, it is wise to ensure that the same is crosschecked in the payouts.

Monthly Payroll Reconciliation reports – showing the difference in payroll amounts vs the previous month(s) and the reason for the same. This could indicate if there is any discrepancy in the amounts paid out.

Multi-Person System

The chances of payroll fraud increase when the accounts are exclusively handled by a single person or a single team headed by a single person. Implementing robust internal controls within the organization with appropriate segregation of duties will help in preventing payroll fraud more effectively. It would be prudent to have a multi-person system of approvals and authorizations for overtime, bonuses, flight ticket reimbursements, advance leave salary, expenses etc. This way there is two-level security against fraud. On the other hand, hiring an external auditing agency like A&A Associate can ensure impartial and discrete audit procedures. 

Use Payroll Protection Tools

Since payroll fraud is a common problem across geographies, there is plenty of anti-fraud software that can help to identify well ahead and stop the same. One can use software such as Employee Self-Service Programs and Payroll Processing Programs to accept and authorize various requests and establish an audit log to keep track of such requests. Using processes and software like Expensify, Concur, and others to automate, track, and budget for spending, as well as to apply policies within such software. The other simple way would be to hire a professional auditor like A&A Associate who has decades of experience in identifying and stopping payroll fraud.

Perform Audits on Headcount

Employees resign and new ones fill their place. It is imperative to ensure that ex-employees are excluded from payroll promptly and there are checks to ensure Ghost employees don’t appear in the system. It could either be intentional or unintentional, but the impact can come off as dishonest, regardless and contribute to the loss for the company.

Change Personnel handling Payroll

Every company, even an SMB has an accounts team that is responsible for all money-related transactions including payroll. If the person handling the payroll is the same, then chances are they have access to all company records and expense management. Rotate the payroll job at regular intervals and ensure that the payroll accountant takes a vacation. 

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In conclusion, payroll fraud can be curbed if the management is vigilant and on top of all the transactions. But in a real-life scenario, where there are thousands of transactions, keeping track of every single one can be difficult and even impossible when running the company. The majority of our clients hire us because they need a trusted agency that can ensure smooth finance-related operations. Our team has successfully completed 5000+ audits in UAE and still counting. Contact A&A Associate for law-abiding and accurate auditing processes and ensure that you have sufficient controls to prevent fraud and safeguard the company’s assets. 

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