How to Detect and Prevent Payroll Fraud

Payroll fraud is when the staff in the company manipulate the payroll to either receive payment that they have not earned or retain the payment of wages or taxes on those wages. The latter is usually done by employees. Businesses should be cautious and diligent to eradicate payroll fraud and theft. Outsourced business payroll services minimize the rate of payroll fraud immensely. 

Types of Payroll Fraud

  1. Timesheet Fraud: Timesheets record an employees attendance and hours and they will be paid accordingly. Some employees can manipulate the timesheets and get paid for the hours they don’t work in. This can cause businesses to lose money.
  2. False Wages: Employees can work with a payroll department employee and manipulate the base computation of the payroll. The deception can take place days before payday and then changed back to the original rate to evade detection.
  3. Commission and Bonus Fraud: Similar to falsifying wages but commission and bonus fraud includes the inflation of sales records as well. This will make it appear that the employee deserves the bonus. This not only affects payroll records but also sales records.
  4. Expense Reimbursement Fraud: This type of fraud is harder to identify as it can be easily a mistake. However, repeated repeated misfiling of reimbursements such as manipulated records, unaccounted expenses or double-filing may actually be fraud.
  5. Misclassification of Employees: Company staff must be classified as an employee or as contractual. It is a fraud to file your employees as contractual when they are a full time staff who deserve full time pay and benefits. Some employers may intentionally do this to avoid paying unemployment tax, payroll tax and/or workers’ compensation insurance.
  6. Ghost Employees: Some staff can perform payroll fraud by filing for an employee that does not exist also known as a ghost employee. Ghost employees have addresses or they may be actual people who were once working with the company but still receive the salaries.

Detecting Payroll Fraud 

1. When an employee makes a huge purchase such as an expensive car, a house or a trip abroad. It could be sign of fraud especially if they have no prior history of those activities.

2. Any flaws in payroll records

3. Employees who doesn’t take paid time off (PTO). They usually fear that their fraud will be discovered by someone who is covering for them.

Preventing Payroll Fraud

Payroll fraud can lead to major losses for businesses and is especially smaller businesses. These are some ways to prevent fraud from occurring in your company:

  • Monitor your payroll reports You should never blindly sign on payroll reports without making a thorough review. Managers should note when employees request for time off. 
  • Separate various duties It is not wise to assign one person to process payroll and make amendments to payroll reports. The rate of fraud can be decreased when various employees are assigned to the various processes of reporting.
  • Take note of canceled checks  Review all canceled checks to ensure that they were really. Never sign your name on a blank check as well.
  • Audit payroll  Arrange for ongoing audits designed to reconcile payroll and have the process overseen by someone who does not process the payroll regularly.
  • Outsource your payroll and HR services When a business grows, payroll and HR tasks become more complex. It is advisable to outsource your payroll and HR needs to a professional service provider. Outsource your business payroll services now!


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