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Originally Posted On: Causes of Payroll Fraud and How to Fight it – PayTech (pay-tech.com)

Payroll fraud affects over 50 percent of businesses in the United States to the tune of hundreds of millions of dollars. No matter what size organization you are, there is no reason to have your money stolen from you via wage theft and other forms of payroll fraud.

In order to best combat this ongoing problem, you need to know what causes it most often. We’ve compiled a guide to what types of scenarios can lead to payroll fraud and what you should do about it. Pay attention, because we’re going to save you a lot of money in the long run!

How is Payroll Fraud Detected?

Without proper safeguards in place, payroll fraud is often detected because a business will finally see a deficiency in profit for inexplicable reasons. In order to properly assess activity that might damage your business before it is too late, you should look for the following red flags:

• Employees in accounting who don’t take days off: This is very specific and might even sound a bit ridiculous, but it is extremely common in ghost-employee schemes or other forms of payroll fraud. If there is someone at your company who is the sole gatekeeper to financial information and they never take time off, it may be an indicator that they are trying to prevent other people from seeing payroll records.
• Budgets not matching projections: If payroll is your biggest day-to-day cost, especially in project-based industries, you might see a distinct difference in your payroll budget projections versus payout. If this is a problem that manifests multiple times, it can be an indicator that someone is perpetrating payroll fraud.
• Un-cashed or Uncanceled checks: This can be a sign that someone in your payroll department is making sure that legitimate checks are being issued to create a draw, but then not having them reach the ‘person’ they are issued to. From there, they can embezzle an equal amount of money without it looking suspicious on the bottom line of a balance sheet.
• Consistent Flaws in Payroll Records: Payroll is inherently tricky and mistakes happen. However, if your payroll department is making repeated mistakes that only get caught when audited, or issuing multiple checks to an employee during the same period consistently, it can be a sign that there is some foul play.

As every business is unique and there are a variety of payroll processing structures, we advise creating consistent audits and not having one person be the sole gatekeeper to your system. No one will feel as though you are overstepping boundaries; the consequences of payroll fraud are too dire to take lightly.

What are Common Mistakes that Happen During the Payroll Process?

Payroll fraud is typically a malicious act that exploits holes in a payroll processing system. There are instances of inadvertent fraud that do happen, but the damage and likelihood of those are far lower than an employee seeing errors and leveraging them. Thus, look out for these common pitfalls and eliminate them from your payroll processing protocols:

1. Not Having Secure Data: From new-hire paperwork to a paycheck, there are many forms such as w-9’s and pay stubs that contain highly personal data. For any sensitive information, it needs to be password protected with a select group of individuals having access, and forms should only be dispersed to the person to who it pertains to. The passwords for your systems should be stored securely, and changed often. Additionally, always make sure to shred and dispose of any physical documents containing sensitive information.
2. Single-Party Oversight: Payroll is difficult and tedious, which often leaves business owners and executives to delegate or outsource it. No matter what size business you have, it is still vital to make sure that your accounting department or third-party payroll processor is being audited by someone not associated with that unit. Ultimately, if one person or team is in charge, they can be susceptible to multiple types of payroll fraud. A simple check-in or audit periodically can save you a lot of money and headaches.
3. Not Canceling Uncashed Checks: Even in an honest payroll system, errors are bound to occur. Uncashed checks can already cause problems even if no one is looking to take advantage of the system, but if there is an employee who can see the monetary amount of checks that were processed, not cancelled, but not cashed, they can extract this amount without being caught easily. Thus, any time there is a mistake that alters the status of a check, make sure to have it documented and followed up on.
4. Static Payroll Protocols: Unless your business has no physical job site, or labor is a small part of your product, it is likely that you will go through expansion, and growth in payroll size. A big mistake we often see is a company not thinking through their next steps as they adopt contractors, different departments, or job sites to an already existent routine. This opens the door for on-the-fly decisions to be made that can expose your information and let malicious fraud occur if you’re not careful.

If you work to keep these mistakes from harming your payroll process, you will be much less susceptible to malicious payroll fraud. Additionally, these are great practices to keep for positive workplace growth, so there’s no downside!

How to Fight Payroll Fraud

Now that we’ve covered fraud detection and mistakes that can lead to it, here are some tips for practices to combat payroll fraud:

1. Consistent Payroll Audits: These can be monthly, quarterly, or even every payroll. What is important is that a third-party is conducting them and reviewing their results with management. This way, there cannot be any confusion about why numbers are not adding up without an explanation from your payroll processor.
2. Employee Action Program: This can constitute a sign-in sheet, a digital interface such as a zoom-check-in, or even a phone call. What is important is that your payroll department verifies that all members of your staff are active at your company.
3. Work with a Reputable Provider: In-house payroll is much more susceptible to fraud, as it is a much smaller pool of information being tracked. Similarly, if a payroll provider is well-known and has many clients, the likelihood of them risking their entire business to defraud yours is unlikely.
4. Separate Payroll Duties: We recommend having at least two components of your payroll process that require separate people doing them. Additionally, having a different approval for each of these processes creates a matrix of oversight that should provide security against fraud.

If you implement these tips along with eliminating some of the common errors in your system, you should feel confident that malicious payroll fraud is unlikely to happen. It is well worth the stress relief, financial benefits, and reducing the risk of legal issues.

Payroll Protection at PayTech

At PayTech, we have a dedicated team of professionals whose sole mission is to make payroll easier for your business. With decades of experience in creating protocols and safeguards that have led to millions of dollars saved, our goal is to supply the best resources for employers in need.

If you are looking to shore up your financial security in order to give your business the best chance to succeed, reach out today – a brighter future is just one conversation away.