Payroll fraud is a type of scheme where an employee steals money from their employer by manipulating the payroll system. This can be done by adding false records, altering time sheets, or taking advantage of other weaknesses in the system.
Unfortunately, when payroll fraud occurs, it can be difficult to detect since it often involves legitimate employees and small amounts of money. Over time, however, the losses can add up to large sums of money.
You might think it won’t happen to you, but it’s more common than you may realise. In fact, every year, businesses suffer billions of dollars in losses due to weak internal controls, manual payroll systems, and a lack of employee background checks.
This can have devastating financial consequences for businesses if left undetected.
So, here are a few ways you can ensure that you’re not a subject of payroll threats like this.
How are Employees Able to Commit Payroll Fraud?
As a business owner, it's important to be aware of the various ways employees can commit payroll fraud. By understanding how it’s committed, you can take steps to prevent it from happening in your business.
So, before we address how to prevent payroll fraud, here are four of the most common ways employees commit it.
1. Lack of a Payroll Audit Trail
One way employees can commit payroll fraud is by manipulating the records so that there is no audit trail. This can be done by changing the dates on timesheets or by creating false entries in the payroll processing system. Without an audit trail, it can be difficult to detect instances of fraud.
2. Wage Theft and Timesheet Fraud
Another way employees can commit payroll fraud is by not reporting all of the hours they've worked or by misrepresenting their hours on their timesheets. This type of fraud is known as wage theft or time theft and is probably the most common way employees commit payroll fraud.
Other examples of wage theft include hourly rate manipulations and inflated expense reimbursements.
Wage theft costs businesses billions of dollars each year, and it can be difficult to detect if you don't have a robust time tracking system in place.
You may be interested in reading our Guide on the Payroll Metrics You Should be Tracking.
3. Lack of Internal Security Measures
The third way employees can commit payroll fraud is by taking advantage of lax internal security measures. If your payroll system doesn't have proper protocols in place, such as password protection and encryption, employees may be able to access sensitive information and change it for their own benefit.
4. Ghost Employee Fraud
Finally, another common way employees can commit payroll fraud is by adding ghost employees to the payroll system.
Ghost employees are typically friends or family members who don't actually work for the company but who are added to the payroll so that they can receive payments from the business. This type of fake employee payroll fraud is often difficult to detect because the ghost employees may not show up on employee lists or in time tracking systems.
Reduce Single Point of Contact with Payroll Processing System
One of the best ways to reduce the risk of payroll fraud is to segregate payroll duties among multiple employees. This ensures that no single employee has access to all the information and controls needed to commit fraud.
For example, one employee could be responsible for maintaining employee records, another could process payroll, and a third could issue payments. By dividing these responsibilities among payroll staff, you make it much harder for anyone to engage in fraud schemes.
If your business doesn’t have the capacity to segregate duties amongst staff, you might want to consider outsourced payroll as an alternative.
Payroll outsourcing is the process of hiring a third-party service provider to handle all aspects of your payroll process, from calculation and payment of employee salaries to compliance with tax regulations.
This can free up considerable time and resources for your business, amongst other benefits, allowing you to focus on other areas of operation.
Implement Policies for Solid Audit Trails
Another step you can take is to implement policies and procedures that create a solid audit trail within the payroll department. This will give you a paper trail (or digital trail) that you can follow if you suspect an employee has committed fraud.
Be sure to keep records of all changes made to employee data and details of who made those changes. This will make it easier to track down any unauthorised changes and determine who is responsible for them.
Secure Your Payroll System
You should also take steps to secure your system against unauthorised access, which includes making sure that only authorised employees have access, setting up strong passwords, and using two-factor authentication (if available).
Conduct Regular Audits
Finally, you should conduct regular audits of your payroll system. During these audits, be sure to review all aspects of the payroll process, including employee records, timekeeping records, and payment processes.
If you’re regularly auditing your payroll system, you’ll be in a better position to identify suspected fraudulent payroll activity and prevent it from turning into larger issues down the road.
You may be interested in reading our Guide on the How to Do a Payroll Audit
Have You Considered Cloud Payroll Software?
While taking these steps could potentially help prevent it, you might want to consider adding an extra layer of protection – cloud payroll software.
We find that businesses are usually most vulnerable to potential payroll fraud when they have inefficient manual payroll processes. Automating your payroll can streamline operations and minimise the opportunity for fraudsters to slip through the cracks.
Beyond that, cloud payroll software can improve efficiency and productivity, create better workforce management systems, and ensure compliance with payroll legislation.
At Pay Cat, we know that payroll can be a time-consuming and complex task for any business, which is why we're dedicated to providing Australian businesses with the best possible outsourced payroll services.
Our experience has taught us that efficient payroll processes are essential for any business, no matter what size. That's why we're proud to offer our clients a range of digital cloud solutions that can optimise their payroll processes and save them time and money.
So, if you would like to know more about how you can adopt cloud payroll software, such as Employment Hero Payroll, to mitigate the risk of payroll fraud and enhance your operations, get in touch with us today.
