Payroll Frauds that Could Ruin Your Business

Friday, 16 November, 2018

Payroll fraud can bombard your business if not maintained appropriately. Many enterprises suffer because they either failed to keep a check on payroll fraud or they did not expect and paid no heed to such frauds.

Frauds related to payroll can be a serious threat to your business and neglecting such issues can lead to devastating results. You can prevent your business from possible payroll frauds by educating yourself on such matters.

According to the Association of Fraud Examiners (ACFE), it takes almost two years to detect a payroll fraud. This much time is more than enough to widely damage your business processes. And there is an estimate by experts that every year approx, a quarter (3 months) of companies are affected by payroll fraud.

What is payroll fraud?

Any money theft committed using the company’s payroll system binds to payroll frauds. Payroll frauds are usually done by the trusted employees of the company who have access to the company’s payroll system or is a senior in the company. Payroll frauds are one of the most common types of frauds that a company faces.

Types of payroll frauds occur in businesses:

1. Time Swindle

Time fraud or timesheet fraud is committed when an employee notifies that his/her working hours are more than the actual working hours.

This type of fraud is prevalent as it is easy to execute. In a survey conducted on time theft, nearly 43% of employees admitted that they had committed time fraud.

Timesheet fraud results in expanding the paycheck then its original amount. Time fraud is becoming a major concern for companies as more and more employees are indulging in committing it, hampering the overall business performance.

Ways to prevent it:

You can stop time fraud from affecting your company by installing cameras in your office. Use of biometric machines will also help in avoiding any timesheet frauds. Reviewing timesheet of your employees before they are processed for payroll can be an effective way of checking any payroll forgery.

2. Forging salaries

This type of forgery is committed when employees conspire and misinterpret their wages. This act of “lying about one’s salaries” can be performed by a single employee or with the help of other employees.

It results in the addition of extra salary in the account of the swindler employee. Although every fraud can hurt a company badly, and if this stealing of money goes on frequently, then it can become a serious matter.

Ways to prevent it:

A company can prevent this, by keeping a check on the payroll register regularly on a monthly basis. They can also try to involve more people in the process of payroll generation to reduce the chances of any conspiracy among employees.

Involving more employees will make it difficult to formulate a plot for payroll fraudsters. Using AI in the process of payroll generation can also assist in spotting any irregularity in payroll generation.

Another way to detect any deviations in payroll generation process is by comparing your pay data with your payroll budget. This will help you in identifying any discrepancies.

3. Commission and bonus fraud

Check your funds monthly that you pay as commissions and bonuses. If there is any variation, then there might be possibilities that your company is a victim of commission and bonus fraud.

These types of frauds occur when an employee whose pay is partly or fully based on commissions. They increase their sales by unfair means to collect undeserving commissions and bonuses. This kind of scam involves the posting of higher sales, to get bonuses, which are later reversed.

Ways to prevent it:

Conducting unplanned examination of payroll records can avoid these types of frauds. Regular checking of your revenue percentage paid as commissions and bonuses and comparing your budgeted payroll with your actual payroll will also help in keeping a check on such frauds.

Comparing the check register with payroll records is another way of averting such frauds.

4. Expense reimbursement frauds

Expense reimbursement frauds or compensation frauds are committed when an employee demands reimbursement for fabricated expenditures. An employee usually does this kind of scams to cover their expenses which are not related to business.

Presenting bogus invoices for reimbursement, demanding compensation for travel trips and for receipts that were already paid are some of the tricks that an employee uses to earn more money.

Ways to prevent it:

A strict expense reimbursement policy will help a company in shunning such frauds. Scanning receipts to guarantee their authenticity is an efficient way of avoiding any illegal transactions. Taking strict action against any employee found guilty of cheating will help in averting any future frauds.

5. Ghost employees

This type of fraud involves issuing the paycheck to an employee who is non-existent. Ghost employee is a result of a fake profile which is created by an employee of the organization to dupe and make extra money.

An employee can create multiple ghost profile that can take your organization in a grave situation. Ghost employee can also be a former employee who is no longer a part of the organization, but checks are still issued under his name. Both types of ghost employee are detrimental for your company’s growth if left undetected.

Ways to prevent it:

To detect and stop ghost employees from harming the business, you should maintain a proper check on the documentation and authorization of all employees. Using biometrics on office floor can assist in detecting any fake employee profile. Annual checking of employee profile can also decrease such fraud.

6. Misclassification of employee

Until now, we have been dealing with the situation where the employee steals from the employer. Employee misclassification is quite the contrary to that situation.

Employee misclassification occurs when an organization deliberately or incidentally mislabels employees as independent workers, which saves them from paying for employment taxes, overtime, and other compensations.

Misclassifying an employee can create trouble for your small business and can force IRS to carry a tax audit. And if your organization is found guilty, then you may face a hefty fine or land in prison. It is the biggest IRS red flag. IRS uses 20 factors to differentiate between an independent contractor and an employee.

Ways to prevent it:

If you are not sure of your worker, whether it’s an employee or an independent contractor then you should consult your legal adviser for inspection, or you can go through the IRS guidelines for the classification of the employees.

If you are not paying enough attention, then payroll frauds can hurt your business very badly. The best way is to stay alert. Install biometrics and cameras this will prevent any unauthorized person from gaining access, make maximum use of technology in curbing frauds related to payroll.

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