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Fighting Small Business Payroll Fraud

June 23, 2015 | posted by Ren Cicalese III, CPA, MST
Payroll Fraud

 
Even the smallest acts of internal theft can add up to a big problem for your business. Be aware of the most common approaches to fraud so you can put a plan in place to combat it and safeguard your company’s finances.
 
 

One of the largest expenses a company will incur is payroll. With all the time and money invested in the payroll process, it’s important to protect your company from potential payroll fraud. Simply put, payroll fraud is the theft of cash by using the company’s payroll system. There are many ways to commit payroll fraud, but here are some of the most common methods:

Ghost Employees

A ghost or phantom employee is someone who is recorded on the company payroll system, but does not actually work for the business. The aim of this scheme is to have checks paid to this fictitious employee and collected by the fraudster. Depending on how the payroll system is set up, creating a ghost employee could take a few people or take only one person with access to the necessary systems. Companies with a large number of employees and a small payroll department are more susceptible to this type of fraud.

Buddy Punching

They say it takes two to tango, and that’s the case for this type of fraud. In this scheme, two employees will work together and log hours when the other isn’t working that day. For example, John and Jane work together at ABC Company. On days that John is off, Jane will log his time sheet for a full day’s work. On days that Jane is off, John will log her time sheet for a full day’s work. Again, companies with a large number of employees and a low number of payroll managers are more susceptible to this type of fraud.

Pay Rate Alteration

This fraud occurs when an unauthorized pay raise is made in the payroll system. Someone with authority over pay rate increases will either act alone or in collusion with other employees. Often, the payroll manager committing the fraud will change the pay rates back to the authorized amounts periodically in order to avoid detection.

How to Combat Payroll Fraud

Having to endure a payroll fraud situation can be an expensive, stressful, and havoc-wreaking event on your business’s finances and reputation, but it is preventable. One of the most effective things you can do to fight payroll fraud and safeguard your company’s assets is to have sufficient segregation of duties in the payroll process. No one person should be performing too many key processes. For example, the payroll staff member responsible for processing payroll should never have the authority to add, delete, or change employee information in the system; a separate manager should have this authority. Implementing these internal controls also helps prevent unauthorized processing of inflated expenses and falsified time sheets that embellish over time since it is not one person processing and approving requests alongside issuing the checks.

Other effective methods for reducing the risk of payroll fraud include periodically hand-delivering paychecks to employees and requiring them to sign for their checks, limiting physical access to the payroll system and payroll records through computer logins, and auditing or reviewing differences in payroll totals after each pay period. Educate all of your employees about the warning signs and consider allowing them access to an anonymous tip line or email so they can alert management about suspicious activity without feeling uncomfortable.

Consider Outsourcing Payroll Functions

Alternatively, outsourcing your payroll department to a third party can be an effective way to protect against payroll fraud and eliminate potential fraud hidden in plain sight at the organization. Most small business owners do not have the extra time to closely monitor and supervise their payroll department for evidence of payroll fraud. A payroll provider, like Abacus Payroll, has the technology and expertise to watch for signs like ghost employees or unauthorized pay rate modifications.


Be proactive in protecting your company’s funds. Abacus Payroll can help you put measures in place for an added layer of security to your payroll department and keep your business on the path to success. Contact us today for a quote at (856) 667-6225.


About the Author: Ren Cicalese III, CPA, MST

Ren is a Manager at Alloy Silverstein with a special interest in advising small businesses and high net worth individuals. He is a member of NJCPA (New Jersey Society of CPAs), AICPA (American Institute of CPAs), and PICPA (Pennsylvania Institute of CPAs). Ren was recently named a “30 Under 30” by the NJCPA and one of the “40 Under 40” by Southern New Jersey Business People. Follow Ren on Twitter at @R3CPA or if you’d like to know more about how Abacus Payroll, Inc. or Alloy Silverstein can help your business, please call us at 856-667-6225 or Email us.