Top 10 Ways to Prevent Payroll Fraud

Crises can bring out the best and worst in people. During COVID-19, the heroic stories have been both heartening and heartbreaking.

Essential workers risking personal safety and working endless hours to save lives.

Grassroots movements popping up all over the country to support people in need.

Corporations converting production to create PPE, hand sanitizer and other critical supplies.

These stories unite us in a common battle against this deadly invader. There are other untold stories, however, that are lurking.

Research shows that fraud proliferates during economic instability ¹ and it typically lasts 14 months before detection. ² Why would employees steal from an employer? “In times of economic crisis, employees’ personal financial pressures tend to rise, which is often where the decision to steal from an employer begins.” ³ Given the current state of the economy, fraud will increase. Learn how to protect your company against payroll fraud.

First of all, experts believe there’s still time to bolster internal control measures before companies start to experience fraud fallout from COVID-19. Payroll fraud may not seem like a top priority given the trust you have in your team, but it should be.

What is payroll fraud?

Payroll fraud uses a company’s payroll system to receive unauthorized wages, commission, reimbursements or benefits. It is typically carried out by an employee who has been entrusted with access. Common payroll scams include:

• Timesheet fraud – Logging time and getting paid for hours not worked
• Falsifying wages – Asking a co-worker to clock you “in” when you’re not working
• Ghost employees – Paying someone who doesn’t work for your company
• Excess PTO – Taking time-off without properly imputing it into the system
• Commission fraud – Falsifying sales numbers to receive a higher commission
• Expense reimbursement fraud – Claiming personal expenses as work-related

How can employers protect against payroll fraud?

Small businesses implement anti-fraud measures at a much lower rate than larger companies. Potential reasons include fewer resources, reduced awareness and placing too much trust in employees. The good news is there are protections you can put in place, some of which require minimal investment.

1. Limit access to payroll information – Only give access to protected personal information (PPI), wage and deduction information to select staff members who need it to perform essential functions. Proactively manage permissions by role.
2. Fraud awareness training – This teaches employees about the various fraud schemes, negative impact on the company and provides directions on how to report them. With training, 47% of cases in companies with less than 100 employees are detected by a tip. ⁴
3. Culture of integrity – This tone needs to be conveyed in words and actions from the top and reinforced in internal communications. Fraud prevention goals can also be included in performance evaluations.
4. Always review payroll reports – Especially when you’re busy, it’s easy to trust that payroll will be the same every month. Resist this assumption. Review variance reports that flag anomalies and audit reports that show who initiated changes. Then verify employees, pay rates, hours worked, and any approved overtime pay.
5. Mandatory vacation/PTO – Employees engaged in fraud may horde work duties to guard against being discovered. By communicating and enforcing a mandatory vacation/PTO policy, employees know other team members will cover their duties and this makes it harder to commit fraud.
6. Positive pay for checks & ACH – This fraud mitigation service verifies that checks/ACH withdraws pulled from your account match a file listing all approved transactions. This helps to stop unauthorized transactions and altered payments from clearing.
7. IP whitelisting – This technology adds another layer of protection whereby payroll changes are only accepted from IP addresses on file.
8. Time & attendance geofencing – A geofence is a virtual perimeter that an employer can set up for specific locations or remote field work sites. This technology ensures that employees are within the geofence when clocking in/out.
9. Encourage direct deposit – This convenient payment method reduces the risk of stolen or manipulated paper checks. If paper checks are used, they should be sent directly to the employee. Do not use pre-printed check stock.
10. Clear policies – Employee handbooks should convey zero tolerance for incorrectly logging time, taking more PTO than allotted, inflating commissionable sales, fraudulent expenses and more.

 
For over 20 years, clients have entrusted MidwestHR with secure payroll processing. As a leading CPEO (certified professional employer organization), it is our responsibility to review payroll data for 100% accuracy. By outsourcing payroll to us, you create an important separation of duties that lowers the risk for fraud. Our payroll platform is SOC-2 certified which verifies best practices are being utilized to keep sensitive client data secure. In addition to the payroll protections listed above, we use cutting edge technology, offer customized training and proven HR practices so you can focus on getting back on track after COVID-19. Give us a call at 630-836-3000 to learn more about our HR outsourcing services.

^{1, 3} Bruce Dorris, J.D., CFE, CPA. “Coronavirus Pandemic Is a Perfect Storm for Fraud” ACFE Insights. Association of Certified Fraud Examiners. 10 April 2020. acfeinsights.squarespace.com/acfe-insights/coronavirus-pandemic-is-a-perfect-storm-for-fraud

² Association of Certified Fraud Examiners, “Report to the Nations on Occupational Fraud and Abuse,” 2020 Global Fraud Study, page 14.

⁴ Association of Certified Fraud Examiners, “Report to the Nations on Occupational Fraud and Abuse,” 2020 Global Fraud Study, page 21.