Detecting and Preventing Payroll Fraud

Payroll fraud, or schemes in which employees use means to deceive employers into issuing undue payments, represents one of the most common forms of employee theft. Payroll fraud is always a possibility for any business that issues paychecks to its employees. Because of the many methods of perpetrating payroll fraud, a well-educated business is a well-prepared business. To protect against losses due to payroll fraud, employers should know how employees commit payroll fraud and, in turn, how to limit opportunities for theft.

Misrepresented Wages

Organizations with simple timesheets and reliance on an “honor system” are particularly vulnerable to falsified wages. In these circumstances, employees have ample opportunity to report hours they did not actually work for personal profit at the company’s expense. Timeclocks and timekeeping software with unique logins may be costly prevention measures but have the potential to recoup their price with the payroll fraud they deter.

Remote Work Fraud

With the limited oversight that comes with remote work, remote employees can easily misrepresent hours and claim idle time as work time. Options for mitigating this risk include installing activity-tracking software on company computers and requiring remote employees to log the work they complete.

Overtime Schemes

Misrepresented wages can also include overtime schemes such as employees working unapproved overtime or deliberately delaying a project to create opportunities for overtime. To prevent overtime schemes, employers may require prior authorization for overtime and implement clearly-communicated disciplinary measures for unapproved overtime.

Manipulating Payroll

Employees who have the access necessary to manipulate payroll present a distinct risk for payroll fraud. They may pay themselves undue bonuses, give themselves raises, and use payroll for personal gain at the company’s expense. Several standard safeguards include executive approval of paychecks and bonuses, limited access to payroll, and mandatory vacations for payroll-authorized employees.

Payroll fraud is a multi-faceted, wide-ranging risk factor for businesses. Even the most protected, well-prepared businesses can fall victim to one of the forms of payroll fraud. If a company falls victim to a payroll fraud scheme, forensic accounting firms, such as SDC CPAs, are often retained to help quantify the claimed loss and determine stronger internal controls that can potentially prevent or mitigate future similar losses.


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