Payroll fraud affects more businesses than we care to admit, but you can take some simple precautions with good payroll management to ensure your company doesn’t lose to dishonest employees.
Unfortunately, payroll fraud is most commonly committed by trusted staff over a long period. Often, a person starts honest but notices weaknesses in the system over time and decides to take advantage. You may never know what causes a staff member to change their behaviour and embezzle funds.
What’s more, those staff are often in finance-related roles, and many cases of payroll fraud have taken years to be discovered. With the right systems in place, even if an employee attempted fraud, they would not get away with it for long before internal audit processes would pick up the fraud.
Payroll has significant privacy and security issues. If details are not stored securely, it is easy for other staff to access and steal personal details. The use of an employee’s personally identifying information can have devastating consequences for the employee if misused by someone else in identity theft. However, small business payroll fraud happens more commonly because of weak internal systems that can easily be exploited by dishonest staff.
The larger a business, the higher the risk of internal fraud and the more crucial it becomes for workplace policies and control systems. At On The Money Bookkeepers Melbourne, we specialise in looking after large and complex payrolls. If your payroll system has discrepancies, loopholes, inconsistencies, or mystery payments, we can sort it out for you. We’ll also advise on systems you can implement to minimise the chance of anything going wrong in future.
Common Types of Payroll Fraud
There are several areas of payroll fraud you need to be aware of.
- Ghost employees –there could be fake employees in the payroll records (possibly with the same bank account as another employee) or extra or continuing payments to an employee who has left the company. The payments could be to that individual or an existing staff member.
- Timesheet fraud –actual hours worked can be inflated, overtime added, or ghost employees included. Employees may also take hours or days away from work but submit timesheets as if they worked as usual.
- Leave fraud –the most common scenario is that employees will take personal or sick leave when not actually ill, which is commonly accepted but nevertheless is a type of fraud. Less common is that employees will take annual leave and then later falsify records to show they have more leave accrued or take unauthorised leave without submitting records.
- False expense claims – if the business doesn’t have good controls, then it could be easy for employees to submit claims for fraudulent expense reimbursement, either by submitting false documents or over-inflating valid claims or ‘accidentally’ losing receipts and invoices but relying on the trust of the business owner or manager to approve the costs.
- Commission fraud –commission calculations should always be verified by a senior staff member and approved for payment. In some commission or payroll systems, employees can generate false sales upon which to base a fraudulent commission.
Things to Check in Your Payroll System
Create a policy of regular reviews of payroll personnel and systems. For example, this could be quarterly, six-monthly, or seasonally, depending on your business. At the review, check all the points listed below. Committing to a schedule of payroll auditing could save you in the long run!
- Are all employees verified with photo identification upon starting employment?
- Keep all employee records secure and confidential.
- Ensure only senior staff (or your payroll consultants like OTM) can add new staff or terminate employees.
- Check who has payroll administration access and payments authority in your payroll software system. Do any of these people access systems or premises outside of ordinary hours?
- Check for any duplicate details. These could be name, address, tax file number, bank account or date of birth. Also, check the details of related employees, for example, siblings or spouses.
- Do you know everyone in your business and what their role is? It’s easy for owners to become distanced from a company’s operations and to be unfamiliar with staff, especially if there’s a high turnover of casual staff or seasonal fluctuations.
- Is your timesheet system secure, with little or no chance of timesheets being altered once approved?
- Review detailed payroll reports and employee payments regularly. This could be a formal process of every employee’s records or random checks of various employees’ payments.
- Check the bank for extra or unauthorised payments to employees not processed through payroll.
- For reimbursements, make sure there are documents and tax invoices to prove the expense was paid by the employee and was valid and authorised by the business.
- Be wary of making advance salary or wage payments and allowing employees to take paid leave before accruing enough. Whilst it may not be intentional, it’s another area of payroll where owners can get caught out when employees leave without recovering the advance payments.
- Segregate payroll processing tasks. It’s best to have the timesheet processing and banking performed by separate people with an approval process so that more than one person verifies pay runs.
- A trusted senior staff member or the business owner should authorise all payroll payments.
- Are any staff (particularly senior managers or payroll administrators) in personal relationships with other staff? If so, keep a close eye on anything beyond regular salary or wage payments and consider not allowing either one to authorise anything related to timesheets, payroll or expenses for the other.
Payroll Management Made Easy with On The Money
Proactive payroll management is so much easier with professionals to help you. As our commitment is first to the business owner, we are efficient and impartial operators of your payroll system. We don’t have emotional connections to your staff that would influence our work on your behalf.
Talk to us today if you’d like to learn more about our dedicated, efficient and secure payroll services, including accurate costings and reporting, Single Touch Payroll lodgements and professional handling of all payroll-related information.
OTM Book keepers Melbourne is a specialised team of professionals dedicated to helping you manage the cost and compliance of payroll, giving you the confidence your payroll is secure.
We are affiliated with Employment Hero and the Australian Payroll Association, which support our knowledge with expert and legally reliable advice for complex or unusual situations.