Payroll Fraud Schemes Businesses Should Be Aware Of
According to the Association of Certified Fraud Examiners, nearly 30 percent of businesses are victims of payroll fraud. That’s an unsettling percentage, with smaller businesses being twice as likely to be victimized by payroll fraud than larger businesses. Here are four alarming payroll fraud schemes every business owner should be aware of:
Common payroll schemes
- Ghost employee fraud. A ghost employee does not exist anywhere in your business except in your payroll records. Typically, someone with access to your payroll system creates a fictitious employee and assigns direct deposit information to a dummy account so they can secretly transfer the money into their own bank account. You should also note, that it doesn’t necessarily have to be a fictitious employee, and it could be a real ex-employee that used to be on your business’ payroll.
- Time thief fraud. Employees stealing time occurs when employees add more time to their time card than they actually worked. Sometimes multiple employees will team up to clock each other in earlier than when they arrive or later than when they depart for the day. This can also occur if you’re using a manual time entry form where your employees don’t physically clock in and will write in their own hours they worked.
- Shape-shifting commissions. In an attempt to scale up a commission payment or obtain a set quota, dishonest sales employees may alter a sales contract to their benefit. A typical tactic used by a dishonest salesperson is to make a booked sale appear larger than it is and then slide a credit memo through the system in a later period. The most vulnerable companies are those with complicated commission calculations or weak internal controls.
- External swindlers. Phishing, a popular scam, starts with a scammer impersonating a company executive through email or over the phone asking an employee with access to payroll data to wire money or provide sensitive information. These imposters can make the correspondence look very believable by using company logos, signatures and email addresses. You should also be aware that many scammers try to set up entire payroll systems in your company’s name by using ghost employees.
According to Forbes, it’s important to understand that time fraud is not always a one-way street. Both employees and employers are victims and offenders of time fraud.
Employers can steal wages when they fail to pay for overtime, pay below minimum wage, fail to deliver earned benefits, misfiled employees as independent contractors or even just fail to pay earned wages to their employees. Meanwhile, employees will steal wages in response to their employer’s actions. Although not condoned on either end, it’s advised that your business is compliant with paying employee’s honestly and on time. Our payroll services at Gurian CPA can ensure that your business remains compliant and up-to-date with state and federal tax laws at all times.
Tips to fight payroll fraud
Being aware of the threats of payroll fraud schemes is a start, but you also need to know how to fight payroll fraud in the instance that it happens to your business. Here are some tips to reduce your businesses payroll fraud risk:
- Better internal controls. Most of employees are trustworthy, but it’s advised to not give too much control over your payroll to just one person. Separating payroll duties and formalizing an approval process protects both your business and your employees from payroll fraud.
- Review payroll records. Designate someone outside of the payroll-processing department to periodically review the payroll records. Have them review names, pay rates and verify that the total payroll matches what was withdrawn from the business bank account.
- Perform random internal audits. During an internal audit is when you can really get into the details to look for potential payroll fraud. You can do an in-depth review of the whole payroll system or select a random sample of dates and employees. Keep the timing of the audit a secret to prevent the chance of cover-ups.
Managing your business payroll is a daunting task by itself, and actively protecting against payroll fraud schemes adds additional complexity. Contact Gurian CPA if your business is in need of payroll assistance. Our highly qualified payroll team can take this routine task off your hands and can free up your time to focus on other areas of your business!