Every payroll team understands the importance of proper audits and data validation when running payroll. Without the proper controls and internal audit procedures in place, a business can open itself up to a higher risk of payroll fraud. Payroll fraud can be committed by employees who find gaps in a company’s payroll practices and use them to their advantage. This can lead to significant monetary losses for the organization, as well as a loss of trust and morale among its employees – not to mention a dreadful external audit from the IRS or Department of Labor.
Falsifying Time
One of the most common types of payroll fraud can happen when an employee falsifies time records to report additional or longer shifts, shorter breaks, extra overtime hours, or a combination of the above, which leads to the employee receiving more pay than is actually earned. In a business that uses a timeclock system that requires employees to physically clock in and out for shifts, this can be done by employees who ask a coworker to punch in on their behalf (also known as buddy punching) even when they are not actually working.
Buddy Punching
Buddy punching can be difficult to catch in an environment where there is a lot of staff working multiple shifts or locations. Even on smaller teams, these punches can be easily missed if there are multiple supervisors who might not all be aware of the daily schedule, or in a setting that allows employees to easily trade shifts with one another.
Ghost Employee
Another common form of payroll fraud is the ghost employee. Ghost employees are fictitious employees that are entered into the company’s HR and/or payroll system that get paid along with all of the valid employees on payroll. Ghost employees can also take the form of terminated or inactive employees who are either purposely or accidentally kept on the payroll. If it is accidental and the employee is nice enough to bring it to the company’s attention, this can be quickly addressed and corrected. However, if it is something that is done on purpose or the terminated or inactive employee chooses to stay quiet about the issue and keep the extra pay, this can go undetected for several pay periods or longer.
Having adequate controls in place to identify these situations can save the business from undue expenses and other consequences that may stem from fraudulent transactions. Many timekeeping systems have biometric clock options, which makes buddy punching virtually impossible to do. Modern HR and payroll software can be used to easily identify non-active employees who are receiving pay, and most programs are able to produce audit reports that show what changes are made in the system, and by whom. In larger organizations, having a good line of communication between the HR and payroll teams can reduce accidental payments to inactive employees.
