In today’s world, payroll fraud is serious, yet frequently underestimated, a threat to businesses and their workforce. In accordance with the FBI’s statistics, the average financial loss recorded per complaint was $7,904, on average. However, it should be noted that these figures only reflect losses that have been recorded; they do not include losses that have not been reported or have not yet been identified.
But what precisely is payroll fraud or a payroll diversion scam, and how can you identify them? And what exactly are the different forms of payroll fraud?
Payroll fraud may occur in every type of firm that issues payroll checks to its employees, and it can happen in any industry. Payroll scams may be performed in a variety of methods, each one unique. Payroll fraud, according to the Association of Certified Fraud Examiners’ 2006 Report to the Nation on Occupational Fraud and Abuse, is defined as “any plan in which an employee induces his or her employer to issue a payment by filing fraudulent claims for remuneration.” Finance or payroll professionals who have access to the payroll system can alter the rates of pay or the number of hours worked by their employees. They may even reward themselves with bonuses when the situation merits none. Employees who misrepresent their income can potentially steal from a company and profit individually as a result. However, there are safeguards in place to prevent it.
Wages that have been falsified: how it’s done
Falsified wages are earned by employees who claim pay for hours that they have not worked or who falsify their timesheets or timecards in some manner. Accounting or payroll professionals who have access to the payroll system have the ability to alter the rates of pay or the number of hours worked by their employees. They may even be given a chance to award themselves bonuses even when none are merited by the situation. When employees fake their pay, they have the chance to steal from a company and individually profit from their actions.
Preventative Measures to Avoid It
- Time clocks or systems that are complex in nature and need the use of a unique employee passcode to be used while clocking in.
- All timecards or timesheets, including all overtime, must have the permission of a manager or supervisor.
- All bonus-type remuneration must be approved by the executive team.
- For individuals who have payroll duties, mandatory vacations are required, with another employee filling in for them while they are absent.
- All paychecks must be approved by the executive.
- Ability to change wage rates, add personnel, and so on inside the system should be limited to those who are absolutely required to do so. Individuals who fall under this category should have their records checked on a regular basis.
Commission scheme: How it is committed
Sales representatives are most likely to be involved in commission programs. They have the ability to take advantage of flaws in your commission policies. It is possible that sales with later credits will show if commissions on sales are paid without taking credit into consideration. It is possible that commissions will be paid at the moment of sale rather than when payment is received. It is possible that your receivables and bad debts will increase. Similarly to the practice of falsifying pay, commission programs directly benefit employees by boosting their compensation in an unjustified manner.
Measures to Avoiding It
- Examine your commission policy regularly to see if it has been updated to reflect changes in your company’s operations. When your gross profit has declined, do you, for example, continue to compensate a proportion of your revenue?
- Are you recouping commissions that were owed to workers or monies that were paid for transactions that were canceled?
- Examine the relationships between financial variables. For example, is it true that sales commissions are growing while sales are down?
- Examine some of your best performers in great detail. Are their commissions warranted, or are flaws in the policy being exploited by the commission members?
Work Cover Insurance: How it is done
Workers’ compensation fraud may impact businesses of all sizes and in all sectors. Employees might claim neck, back, or bone/joint issues to defraud their employer and insurance company out of thousands of dollars in compensation. Some companies are self-insured, and as a consequence, this sort of fraud has a direct impact on them, while others have seen their insurance rates rise as a result of this behavior. Employees have been discovered to have acted in concert in order to cause “slip and fall” incidents at their places of employment. They may have an accident at home but fraudulently claim that it occurred at work to qualify for the more lucrative benefits of workers’ compensation. Unfortunately, the employer is the one who bears the brunt of the blame.
How to avoid it
- Maintain surveillance cameras in your workplace to record any accidents that occur.
- Insist that any injuries be reported as soon as possible.
- Receive medical views that are in agreement for specific injuries.
- If you want to keep an eye on your employees while they are on paid leave, you should hire private investigators.
Ghost Employee Fraud: How it works
‘Ghost workers’ are employees who have never been or are no longer employed by the organization but who have been purposefully kept on the payroll by the organization. This form of payroll fraud happens when non-existent employees are added to the payroll, and another employee reaps the advantages by collecting the earnings of the non-existent employees. When it comes to larger businesses with a high number of employees and inadequate internal controls, this type of fraud is more common.
How to prevent it
- Maintain a schedule of periodic payroll audits in which all workers must physically sign and provide appropriate identification in order to get their paycheck or pay stubs.
- Check the payroll roster for duplicate addresses or Social Security numbers by running it through a cross-referencing program.
- Examine all of the W-2 forms that have been returned.
- Make sure your Social Security numbers are correct by contacting the Social Security Administration.
- Examine your payroll database at random for workers who have P.O. boxes or who do not have any deductions (such as healthcare, state/federal withholdings, etc.).