Payroll Fraud: What It Is, How To Detect and Prevent It

To prevent these schemes, educate your staff about common phishing scams. You might also upgrade to a secure payroll system like QuickBooks Payroll. With our payroll processing software, you can easily manage payroll while keeping your staff’s information safe from malicious third parties.

According to the Association of Certified Fraud Examiners, a typical payroll fraud scheme lasts 24 months. There is no definite indicator of payroll fraud, but some red flags that can help you with payroll fraud prevention. In this article, we’ll take an in-depth look at what payroll fraud is and explain different payroll fraud schemes. Perhaps most importantly, we’ll give you tips for how to prevent payroll fraud in the first place. Read on to learn more about the causes of payroll fraud and how it’s detected, or use the links below to navigate the post. An expense reimbursement fraud scheme occurs when an employee submits either exaggerated or falsified reimbursement receipts or submits the same receipt multiple times.

Use time-tracking software with geofencing

Preventing payroll fraud from occurring comes down to having the proper internal controls in place. These measures inhibit fraudsters and their ability to commit payroll fraud and deters them from even attempting it. An individual (or group of individuals) illicitly gains funds from an organization’s payroll processing system. Most commonly, this is done by employees who manipulate the payroll system to their advantage to earn more money than they are entitled to or inflate their hours—and then cover their tracks. Payroll administrators are most often the puppeteers of ghost employee schemes. They’ll set up fake employees or continue to use a former employee’s name to pay themselves or a spouse by direct deposit.

However, sometimes employees may figure out how to award themselves commissions or bonuses they didn’t earn. This is known as a commission scheme and is typically punishable as payroll fraud. Timesheet fraud, also called buddy punching, is when employees manipulate their timesheet to make it appear as if they worked more hours than they actually did. First, employees may pad their hours on the timesheet by clocking extra hours they didn’t work.

Tax and accounting regions

The rest of the business simply trusts the payroll staff and doesn’t treat it as a potential risk, putting controls and oversight in place. Payroll starts being treated at arm’s length, and that’s where problems arise. With each login and activity tracked (and recorded), teams can go back and review suspicious activity to uncover payroll fraud. Having this behavior tracked will not only allow teams to identify the culprit but will also deter employees from attempting payroll fraud in the first place since they know their activity will be monitored.

Organizations will prevent payroll fraud or reduce its impact when they audit records regularly. The auditor should be a different team member (or members) than those who typically run payroll. If organizations use payroll software, this audit shouldn’t be time-consuming or costly. A customized report can be pulled for every audit with just a few clicks. As an added benefit, the audit may reveal any payroll errors that need to be corrected. However, organizations in high-payroll fraud-prone industries, such as healthcare and manufacturing, may want to conduct audits more frequently.