In 2017, the Association of Fraud Examiners stated that the average time from when an employee engages in payroll fraud schemes until someone detects their actions is 24 months. The organization also reports that nearly 25 percent of American businesses experience some degree of payroll fraud every year. Even if your small business has never been part of this statistic, it’s crucial to understand it and take proactive steps to prevent it. After all, 30 percent of all payroll fraud schemes occur in companies with fewer than 100 employees.
What is Payroll Fraud and Who Commits It?
Most often carried out by senior managers and high-ranking employees of a payroll department, payroll fraud can take many forms. For example, those with high-level access may issue bogus payments to themselves. Employers can also commit payroll fraud by deliberately misclassifying employees as independent contractors. Sadly, it’s especially common for long-term employees who have gained trust to commit payroll fraud schemes. Small businesses without a payroll fraud prevention plan in place or that have lax policies can easily become victims. Here are several other forms of common payroll fraud:
- Bonus and/or commission fraud
- Falsifying wages
- Ghost employees, which means the fraud perpetrator creates a fictitious employee and then collects his or her wages
- Reimbursement request fraud
- Timesheet fraud
Once an organization catches on to payroll fraud, it takes an average of 36 months from the first episode to taking sanctions against the employee and attempting to recover the funds. The tips below can help your small business avoid this huge waste of time and resources.
Tips for Stopping Payroll Fraud Schemes Before They Start
No hiring manager ever expects the person who interviewed so well and had such an impressive background to turn into a payroll thief. That’s why it’s so important to conduct several interviews, contact references, and try to uncover the real reason why the candidate left past positions. Running a detailed criminal background check is critical as well.
Developing a system of checks and balances is a simple yet effective way to guard against payroll fraud. For example, don’t hand all payroll processing, accounting duties, or new hire onboarding responsibilities to a single employee. It’s especially important to monitor employees who have access to payroll checks and company account numbers to ensure they don’t issue any improper payments.
Conducting periodic internal audits is also a good idea. These audits should be unannounced and at varied times to avoid having employees stop their illegal activities ahead of time. The purpose of an internal audit is to review all financial audits to determine where the money is going. Employees in charge of handling finances should have to account for any gaps right away before they can create a plausible story to explain it.
Finally, make sure all employees understand that fighting payroll fraud is everyone’s job. This means giving them confidential resources to report suspicions without fear of reprisal.