Payroll Fraud: What it Is and How to Avoid It

Payroll fraud is one of the most common and costly crimes. According to recent data, payroll fraud occurs in 27% of all businesses and happens more often in small organizations with less than 100 employees. Rampant payroll fraud is to blame for a medium loss of $212,000 a year.

What is Payroll Fraud?

Payroll fraud is when a person steals funds from a company using the organization’s payroll system. There are multiple ways a person can steal funds that they aren’t entitled to, but some payroll schemes are more common than others. Many of them are difficult to spot.

You’re more likely to fall victim to the following payroll fraud schemes: 

  • Falsified Wages

An employee is committing this payroll scheme if they knowingly manipulated their time cards to pay themselves more than they actually earned.

  • Benefits Fraud

An employee commits benefits fraud when they provide themselves with more paid vacation days, better health benefits, or excess PTO (paid time off) days. 

  • Fake Employees

An unknown entity or past employee could defraud companies by pretending to be a current employee. They receive a salary as a result.

Companies can get ahead of payroll fraud by staying compliant. For example, some states require you to give pay stubs to employees. You can make a check stub online with templates.

How to Prevent Payroll Fraud

There’s no way to truly prevent payroll fraud, but you can discourage it and make sure whoever does it gets caught. To keep your small business financially healthy, try the following things.

1. Regularly Review Payroll Reports

Employers should manually review payroll reports after they’re processed, but not every week. Pick a random pay period and perform an audit to catch fraudsters in the act. Check employee addresses and bank account numbers to determine if multiple payments were issued. 

2. Require Mandatory Vacations

Mandatory vacations are never a bad thing, and they could frighten fraudsters. Oftentimes, payroll fraud is caught after the primary accountant leaves, as someone else has to fill their position. Instruct the new accountant to look over payroll documents for pay discrepancies.

3. Regularly Rotate Job Duties

Don’t wait until your payroll staff takes a vacation to cut down on fraud. Instead, cross-train your employees, so they can jump in and out of different roles. Most of your employees will jump at the chance to learn a new skill, and they’ll appreciate that you invested in their own futures.

4. Approve Employee Timesheets

A supervisor should always approve timesheets before they’re sent to payroll. That way, they can monitor overtime payments and PTO accruals. If they notice a discrepancy, don’t assume they did it on purpose. Simply issue a warning and review your records for potential fraud.

5. Review Statements and Checks

Even if you own a multinational corporation, it pays to review your statements and checkbook every month. To do this quickly, print out a sheet of everyone’s biweekly salary and see if they match up with your numbers. Take a look at your checkbook and look for evidence of fraud.

6. Only Allow Direct Deposits

It’s not that difficult to forge a check. If you’re not regularly reviewing your checkbook, your staff could manipulate the numbers. Instead of wasting time reviewing your checks, only allow direct deposits for payments. This way, you only have to check your bank statements every month.

7. Prosecute Payroll Fraudsters

If you ever catch a payroll fraudster, you must prosecute them to the fullest extent of the law. It doesn’t matter if it costs you a large amount of money or time because you’re doing this to send a message. You’ll want your other honest employees to know that payroll fraud isn’t tolerated.

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