Payroll fraud can happen in a number of ways. Here are some red flags and how to overcome them
Payroll fraud costs businesses millions each year. For electrical retailer Clive Peeters, the fraud tab racked up by their former payroll manager came to $19 million.
While cases of such magnitude are rare, it is easy for fraud on a smaller scale to fly under the radar.
Having the right systems in place with appropriate checks can be crucial to preventing the unlawful siphoning of funds.
Types of Fraud
Payroll fraud can happen in a number of ways.
Ghost employees – Refers to the creation of fictitious employees on the company’s payroll, often perpetrated by personnel who have administrative access to payroll records. This tends to occur in large companies spread across a number of locations, where it is difficult to keep track of who’s who. Funds ore often directed to bank accounts that the fraudster has access to.
Inflating timesheets – Also known as ‘time theft’, this mode of fraud refers to instances when an employee has recorded more hours worked than in reality, taken overextended breaks during work hours, or has spent excessive amounts of time surfing the Internet instead of doing the work they were hired to do.
Increasing rate amounts – Increasing the rates of pay to be higher than what was contractually agreed upon. This tends to be perpetrated by employees with administrative or managerial powers.
Misdirection of funds – Funds due to be paid to employees or suppliers are put into the “wrong” bank account, which are changed in the system by an employee with administrative rights to the system.
Protection mechanisms
Segregation of duties
First of all, it is clear that one person should not be in charge of initiating, entering and confirming staff payroll information. The creation of an automated workflow containing a series of online authorisations puts key security checks in place to minimise the risk of fraudulent activity.
To do so, ensure that your payroll system can enforce a specific approval process where a manager has to send a request to add new staff to be approved by HR before a new employee record can be created.
Rotation of staff
For organisations with larger payroll teams or even payroll outsourcing companies, it is generally a good idea to rotate tasks among staff at least once every year. At Affinity, payroll staff are even rotated among teams every 18 months.
Push notifications
Another tip for incorporating more checks and balances into your workflow is to set up push notifications to relevant managers whenever an employee record is created or updated. That way, the setup of ghost or falsified employee records cannot occur in secret.
Human auditing
The adherence to processes and controls is a crucial weapon in overcoming payroll fraud and minimising risk to businesses. If you’re outsourcing your payroll, be sure to check if your provider has a payroll audit officer who is able to independently and randomly conduct checks to identify areas of potential risk.
System auditing
Ensure that your payroll system stores a log of all changes, date/time, user, function/application and other information such as IP address to create an audit trail. Flexible reporting enables auditors to filter out key changes in any pay period and also compare history of changes over time at field level and user level.
More sophisticated systems, such as Affinity’s Zero, can automatically detect anomalies on timesheets or variations to your organisation’s unique payroll trends.
Constant effort
Ultimately, factors surrounding people, process and technology need to be looked at to safeguard against the risk of fraud. One of the easiest ways of overcoming such risks is to partner with a payroll outsourcing provider that already has strict mechanisms in place to minimise risk.
Whether your payroll is in-house or outsourced, it is important to be ever vigilant and keep informed on new risks, and the ways to counter them.
Bruce Sullivan is the Technology Director at Affinity HR and Payroll. Founded in 1987, Affinity has developed clever software that streamlines complex payroll and HR processes through technology and automation. Designed for businesses employing 150+ staff, Affinity provides a suite of cloud-enabled tools to manage payroll and HR tasks from any device.
While cases of such magnitude are rare, it is easy for fraud on a smaller scale to fly under the radar.
Having the right systems in place with appropriate checks can be crucial to preventing the unlawful siphoning of funds.
Types of Fraud
Payroll fraud can happen in a number of ways.
Ghost employees – Refers to the creation of fictitious employees on the company’s payroll, often perpetrated by personnel who have administrative access to payroll records. This tends to occur in large companies spread across a number of locations, where it is difficult to keep track of who’s who. Funds ore often directed to bank accounts that the fraudster has access to.
Inflating timesheets – Also known as ‘time theft’, this mode of fraud refers to instances when an employee has recorded more hours worked than in reality, taken overextended breaks during work hours, or has spent excessive amounts of time surfing the Internet instead of doing the work they were hired to do.
Increasing rate amounts – Increasing the rates of pay to be higher than what was contractually agreed upon. This tends to be perpetrated by employees with administrative or managerial powers.
Misdirection of funds – Funds due to be paid to employees or suppliers are put into the “wrong” bank account, which are changed in the system by an employee with administrative rights to the system.
Protection mechanisms
Segregation of duties
First of all, it is clear that one person should not be in charge of initiating, entering and confirming staff payroll information. The creation of an automated workflow containing a series of online authorisations puts key security checks in place to minimise the risk of fraudulent activity.
To do so, ensure that your payroll system can enforce a specific approval process where a manager has to send a request to add new staff to be approved by HR before a new employee record can be created.
Rotation of staff
For organisations with larger payroll teams or even payroll outsourcing companies, it is generally a good idea to rotate tasks among staff at least once every year. At Affinity, payroll staff are even rotated among teams every 18 months.
Push notifications
Another tip for incorporating more checks and balances into your workflow is to set up push notifications to relevant managers whenever an employee record is created or updated. That way, the setup of ghost or falsified employee records cannot occur in secret.
Human auditing
The adherence to processes and controls is a crucial weapon in overcoming payroll fraud and minimising risk to businesses. If you’re outsourcing your payroll, be sure to check if your provider has a payroll audit officer who is able to independently and randomly conduct checks to identify areas of potential risk.
System auditing
Ensure that your payroll system stores a log of all changes, date/time, user, function/application and other information such as IP address to create an audit trail. Flexible reporting enables auditors to filter out key changes in any pay period and also compare history of changes over time at field level and user level.
More sophisticated systems, such as Affinity’s Zero, can automatically detect anomalies on timesheets or variations to your organisation’s unique payroll trends.
Constant effort
Ultimately, factors surrounding people, process and technology need to be looked at to safeguard against the risk of fraud. One of the easiest ways of overcoming such risks is to partner with a payroll outsourcing provider that already has strict mechanisms in place to minimise risk.
Whether your payroll is in-house or outsourced, it is important to be ever vigilant and keep informed on new risks, and the ways to counter them.
Bruce Sullivan is the Technology Director at Affinity HR and Payroll. Founded in 1987, Affinity has developed clever software that streamlines complex payroll and HR processes through technology and automation. Designed for businesses employing 150+ staff, Affinity provides a suite of cloud-enabled tools to manage payroll and HR tasks from any device.
Follow Affinity HR & Payroll on LinkedIn, Twitter , visit us at www.affinityteam.com or learn more about author Bruce Sullivan.