Businesses lose hundreds of millions of dollars each year because of payroll fraud committed by their employees. Taking measures to address payroll fraud and ensure employees with access to payroll systems are above suspicion is crucial.
Payroll Fraud: An Overview
Payroll fraud is a broad term that covers a range of deceptive activities mainly committed by employees. It involves the illicit manipulation of a payroll system or processes—directly or indirectly—for financial gain. The practice can range from minor infractions to large-scale schemes costing companies millions of dollars.
Real-World Examples of Payroll Fraud
At its zenith in 2008, the Australian computer and electrical goods retailer Clive Peeters operated a national chain of 48 stores, had an annual turnover of over A$600 million, and employed more than 1,000 people. In 2010, Clive Peeters collapsed, unable to cover the repayments on its A$160 million in debts. A key reason for this was internal fraud. It was discovered through an external audit that the payroll manager, a former senior accountant, had embezzled more than A$19 million from the company over a two-year period. This case is one of the largest examples of payroll fraud committed in Australia to date.
Types of Payroll Fraud
Ghost Employees
Ghost employees are by far the most common type of payroll fraud. This occurs when someone on the payroll does not actually work for the company. The fraudster, usually someone with payroll access, creates a fictitious employee and collects their salary.
Timesheet Fraud
This involves employees falsifying their timesheets to claim pay for hours not worked. It’s prevalent in industries with large casual workforces.
Pay Rate Alterations
This type of fraud occurs when employees alter their pay rates to higher amounts or manipulate bonuses and commissions.
Detecting Payroll Fraud
Payroll fraud is generally undertaken by internal offenders, but it can also be committed via cybersecurity breaches by external hackers. Research conducted in 2023 by payroll services and workforce management software provider Automatic Data Processing (ADP) found that protecting payroll systems from cybersecurity breaches is among the biggest priorities for payroll senior leaders.
Common Red Flags
- Multiple employees having the same bank details.
- Multiple employees having the same or similar addresses.
- Consistent overtime claims that are unusual.
- Frequent changes to bank account details.
Detection Methods
- Regular, random, and surprise payroll audits.
- Cross-referencing payroll expenses with bank statements.
- Using advanced payroll software with built-in fraud detection tools.
Preventing Payroll Fraud
Segregate Duties
Ensure no individual employee has control over all parts of any critical financial transaction. This means permission must be double-approved at a minimum.
Regular Training
Staff should undertake regular training on ethical conduct within the workplace. Discuss case studies of payroll fraud during training sessions. Employees should know the repercussions of engaging in fraud.
Whistleblower Programs
Implement a whistleblower program as it is one of the most effective methods to identify potential fraud within the workplace.
Thorough Employee Checks
Conduct thorough due diligence checks on all employees, including police checks, especially for those with financial responsibilities within the company.
Implement Advanced Systems
Use advanced payroll and human resources management systems with built-in controls to prevent unauthorised changes and manipulations. Technologies such as fingerprint access, activation of entry using an employee card, use of CCTV, and independent verification of activities can be highly effective.
Steps to Take When Payroll Fraud is Detected
Secure Evidence
When payroll fraud is detected, businesses should secure all evidence before confronting the offender. Evidence may include timesheets, payroll records, bank statements, communication logs, and mobile phone records for company-issued phones.
Consult Experts
You may need the assistance of computer forensic experts and legal advisers to determine the best course of action. Investigate with procedural fairness, as your actions may be subject to scrutiny by an external agency.
Reporting to Authorities
Although some employers choose to negotiate directly with fraudsters, it is often more effective to report the fraud to the police. This ensures the matter is handled legally and may prevent the fraudster from repeating their actions elsewhere.
Conclusion
Payroll fraud can have devastating effects on a business, from financial losses to damaged reputations. It’s crucial to have robust systems and processes in place to prevent, detect, and respond to payroll fraud effectively. Regular training, thorough checks, advanced systems, and clear communication across departments are key components of a comprehensive fraud prevention strategy.
At Cyberlux, we specialise in helping businesses safeguard against payroll fraud with our comprehensive accounting and payroll services. Contact us today to learn how we can help you protect your business and ensure financial integrity.
Additional Resources:
- Explore our blog for more insights on financial reporting and communication.
- Learn more about our team of experienced accountants.
