Preventing payroll fraud

8 tips to prevent payroll fraud in your business

From fraudulent expense reimbursement claims, to claiming overtime for hours not worked, to adding "ghost employees" to the system, there are myriad ways in which fraud can infiltrate your payroll.

Payroll fraud is more prevalent than you may realize. According to the Association of Certified Fraud Examiners:

  • Payroll fraud happens in 27% of all businesses, and;
  • Occurs twice as often in small organizations than in large ones.

From fraudulent expense reimbursement claims, to claiming overtime for hours not worked, to adding "ghost employees" to the system, there are myriad ways in which fraud can infiltrate your payroll.

Although you can never entirely eliminate the possibility of payroll fraud, here are some steps you can take to minimize the risk:

Use checks and balances

Incorporate a system of checks and balances by having at least one manager review and approve the payroll register before it's forwarded to the payroll department or processor. The manager should look for names of terminated employees, duplicate names, duplicate mailing addresses, duplicate Social Security numbers or unusual hours worked. In addition, the person managing the payroll should not be the same one signing the payroll checks.

Limit access to payroll information

The only employees who should have access to payroll data are those who absolutely need the information to do their jobs. If reports or any other payroll data are printed or recorded on other media, make sure that all documents are properly destroyed when disposed.

Use a biometric time and attendance system

Friends clocking in and out for one another at work happens everywhere. The simplest way to stop this "buddy punching" is to use a biometric time and attendance system. Rather than using a card, code or chip to identify the user, biometric systems rely on a unique attribute of the user, such as a hand print, finger print or facial recognition.

Review reports every pay period

Having a review process in place is a great way to eliminate fraud. To ensure enough time to do this, you should send your data to the payroll processor at least three days prior to check date.

Use positive pay

Most banks offer a "Positive Pay" service which is an automated fraud detection tool. This service matches the account number, check number and dollar amount against a list issued to the bank by your company. If these components do not exactly match the list, the check becomes an "exception item." The bank will then notify your company representative, who can review the item.

Set up an ACH filter

An Automated Clearing House (ACH) filter ensures that only authorized companies have access to your business' bank account. You send the bank a list of companies authorized to debit your account and the bank only allows debits from vendors on that previously approved list.

Promote direct deposit and pay cards

Using direct deposit and pay card payments for payroll helps eliminate the risk of fraud, since there aren't any checks to steal, alter or replicate.

Don't misclassify

Worker misclassification is a self-inflicted type of fraud. The illegal practice of designating an employee as a "1099 worker" or an independent contractor can cause your organization to be slapped with harsh penalties, not to mention back payroll. In all cases, it is simply not worth it.

Executive summary

The reality is that while payroll fraud is prevalent, it is also preventable. By setting up a system of checks and balances, being safe and secure with payroll information and taking time to review your reports, you can catch fraudulent activity that may slip into the system. Additionally, by taking advantage of automated options such as a biometric time and attendance system, positive pay and ACH filters, you can add an extra layer of protection to your payroll. It's true that anyone can steal at any time. The key is minimizing your risk.

For more information about this, or other HR topics, contact Cindy McSwain using her information below.

Cindy McSwain

Senior Vice President
Outsourcing Services

Cindy McSwain leads AGH’s outsourcing services group. Her team provides payroll, accounting, funds disbursement, controller, and other financial outsourcing services to numerous clients throughout the U.S. Prior to joining the outsourcing group, Cindy served AGH’s audit clients for 10 years, working with a wide range of middle-market, closely held and family-owned organizations.

Her current clients cross many industry sectors, including manufacturing and distribution, restaurants, retailers, medical and not-for-profit. She has participated in numerous SEC filings and public registrations and has experience in mergers and acquisitions. Cindy is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants.

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