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Strategies for Safeguarding Your Business Against Payroll Fraud

Posted by Jerry Murray, CPA, CFE on Nov 19, 2018 11:25:00 AM

Most people imagine theft to be a criminal activity that’s rooted in shrewd and sinister behavior. Yet, in the business sector, theft can occur in subtle ways—such as the common occurrence of payroll theft. According to the Association of Certified Fraud Examiners (ACFE), payroll fraud is the top source of loss for U.S. businesses and occurs in 27 percent of all businesses.

There are numerous types of payroll fraud, but the two most common are ghost employees and timesheet fraud. Ghost employees occur when the clerks funnel an extra salary into their personal bank accounts by contriving a record of a person who doesn’t actually work for the company. Timesheet fraud occurs when the payroll clerk or an employee manipulates the records of hours worked, thus adjusting an individual’s pay to reflect more time than they actually worked.

The ACFE reports that payroll fraud occurs nearly twice as often (14.2 percent) in organizations with less than 100 employees than in larger ones (7.6 percent). Still, all businesses must make an effort to minimize the risk of payroll fraud.

Payroll fraud is particularly frustrating for business owners because it is so preventable. Though it’s impossible to eliminate the potential for payroll fraud totally, there are several ways to safeguard your business from this type of internal theft. 

Complete Monthly Bank Reconciliations

Bank reconciliation is a critical practice for accountants or payroll clerks, ensuring that the financial balance on a company’s balance sheet is accurate. Carrying out bank reconciliations every month enables business owners to recognize and explain any disparities. While differences may result from errors the bank made or from the timing of posted activities, they may be a consequence of fraudulent activities, so it’s vital to check.   

Outsource Payroll to an External Provider

Another strategy that will ensure that your process your payroll properly is to utilize an outsourced service provider. This will eradicate the risk of payroll fraud happening in-house; business owners will feel secure in the provider’s hi-tech systems that quickly catch payroll mishandlings. Plus, external service providers stay up-to-date on all local, state and federal regulations, giving owners extra peace of mind that all of their payroll activities are compliant.

Expose Discrepancies with Surprise Audits

To reduce both financial and regulatory risks, business owners can conduct surprise audits of payroll to address problems proactively. Payroll clerks and other employees will anticipate regular audits, but surprise audits may catch them off guard and expose hidden discrepancies. According to the ACFE, 12 percent of small businesses detect fraud by conducting internal surprise audits. Employees will be less likely to engage in fraudulent behavior if they know there is a risk for unplanned audits.

Other Foolproof Strategies for Preventing Payroll Fraud

In addition to the aforementioned strategies, business owners can take the protection process one step further by implementing the following:

  • Run background checks on your employees. This will help you determine which of your employees might be most likely to commit a crime.
  • Audit individual employee records to assess whether their payroll entries make sense.
  • Limit access to payroll information only to employees who absolutely need the reports to do their jobs.
  • Promote the use of direct deposit by employees, which eliminates the use of checks and, as a result, the opportunity to easily alter, replicate or steal money. 

The reality of payroll fraud is that while it is widespread, it is also avoidable. Doing monthly reconciliations, outsourcing payroll to an outside service and performing surprise audits will prove to be useful strategies in safeguarding against fraudulent activity. The key, in all strategies, is to mitigate risk.

Do you have questions about fraud prevention? Learn more about our Fraud Prevention Services or contact our Forensics and Litigation Support Principal Jerry Murray, 972-818-5300 or fill out the form below.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

Topics: Fraud, Payroll