Businesses often lose a lot of money because of accounting fraud, and Payroll fraud is one of the most common ones to affect small businesses. Almost 27% of businesses that have less than 100 employees are affected by Payroll fraud. Businesses need to ensure that their internal audit department keeps auditing the accounts. An average of $63,000 has been lost by dishonest employees committing payroll fraud. Let us understand what payroll fraud is and how it has become one of the most common business frauds ever by understanding how it is done.

What is payroll fraud?

When the payroll processing system is tampered with, a business is scammed out of cash by processes such as buddy-punching, unpaid advances, and time-sheet padding. Employees have often been reported to be carrying out misconducts like misclassifying other employees and using ghost employees to pad hours, and scamming businesses out of money. Only employees are not responsible for all payroll frauds, as employers also commit fraud by withholding their employees' salaries and the benefits they are entitled to. There have been cases when employees on the management level have issued payments to themselves or family members from businesses by using fake names and credentials for fictitious employees. Payroll frauds have caused businesses to lose money at the hands of dishonest employees, leading to employees losing out on their rightfully deserved benefits. We can look at some common payroll frauds to find out how they are committed and how they can be avoided.

Types of payroll frauds

Some common payroll frauds include Timesheet fraud, misclassification, commission schemes, and Workers’ compensation fraud. Ghost payrolls also prove to be menacing for small businesses. Let us discuss these fraud categories in detail.

• Timesheet fraud:

Employees often falsify the submissions on their timesheets to receive payments for the hours of work they did not put in. This process is referred to as padding work hours. Some employees have also been observed making arrangements for other employees to appear as if they are at work while they’re not, which allows them to get paid for work they did not do. This is a timesheet fraud as well. In organisations with an enormous number of employees working for them, the organisation can't keep track of every employee appearing on the timesheet. 

• Ghost employees:

Various employees have exploited this issue, as they have been caught adding names of employees who have never worked for the organisation to receive their payments. These fictitious employees are referred to as ghost employees. It is important for businesses to keep an eye on the credentials of members that are being paid for their service to ensure that no ghost employees are being marked present on the timesheets.

• Commission Schemes:

Commission frauds become frequent when commissions are decided based on sales facilitated by employees rather than credits. The number of sales is often manipulated by employees, therefore manipulating the aggregated commission of employees. Sales/accounting department employees often carry out commission frauds.

• Misclassification:

In the frauds mentioned above, employers were the victims and scammed out of money by dishonest employees. However, misclassification is the exact opposite of that, as it is facilitated by the employer to scam employees out of the salaries/wages they are entitled. Different employees fall under different classifications, and employers have often been observed to misclassify employees intentionally to save on employee benefits, unemployment taxes, payroll taxes and many other liabilities the employer is subjected to. These practices have been deemed illegal and can have legal repercussions if caught within an organisation.

• Workers’ compensation:

Employees have been observed to fake injuries at their workplace to claim insurance money. This is deemed a fraudulent activity and can also lead to severe legal repercussions. Such dishonest employees have been observed to scam insurance and self-insured companies out of millions. Therefore, insurance companies need to conduct an in-depth inspection of the nature and cause of injuries before they approve a large sum of money in favour of an employee claiming insurance money.

• Advance-retention frauds:

Advance retention frauds are carried out by employees who avail an advance against their salary and fail to return the same if the accounting group fails to record these advances as assets or monitor their employees' repayments. If the accounting and auditing groups are very lax with their overseeing procedures, and these advances are marked as expenses, the chances of these advances being looked over amplify significantly! Therefore, businesses must stick to strict accounting procedures to ensure that all advances are appropriately accounted for, and the anti-fraud policies must be strictly adhered to.

How to detect these payroll frauds:

Payroll frauds are usually detected because of inconsistent payment and employee records. However, it has been identified that some payroll frauds can take up a lot of time to detect. The Association of Certified Fraud Examiners has identified that these fraud schemes often last more than 24 months. It is the assimilation of several indicators, such as:

1. Errors in the payroll record are present in the form of gaps.
2. Unauthorized changes in the payroll records.
3. Multiple employees with similar bank details and addresses.
4. Spending on human resources is inconsistent with the work hours consumed in a project under progress.

What are the controls to prevent payroll fraud
Various frauds can be mitigated by following different steps, such as:

1. Advanced Time clocks with biometric scanners allow unique employees to be verified and authorized before their day gets started on the payroll records.
2. The manager must also approve the overtime and all time sheets to avoid fraud, such as buddy punching and ghosting employees.
3. All employees should not have access to the payroll system. This entails that only a few limited people must be granted access to make changes such as the modification of wage rates, hiring of new employees, etc.
4. It is essential to ensure that the commission guidelines change along with the changing environment within the company. If the profits are going down, but the commissions are still increasing, there’s some fishy business going on, which must be monitored.
5. The commissions overpaid to an employee must be recovered. It is also essential for the business to audit its trends. Are the sales commission rising while sales are going down? There is a high chance of that happening if fraud is under process.
6. To avoid worker’s compensation fraud, employers can install cameras to capture accidents as they occur. Conducting a thorough investigation of the statements made by the concerned employee is essential for businesses to avoid loss at the hands of dishonest employees.
7. One must conduct periodic payroll audits that require every individual to be present in one place. This will allow you to avoid ghost employees.

Our team at NSKT Global is well-acquainted with practices such as payroll fraud and has helped several clients to identify the same and eliminate losses. We perform internal audits to find out what can be improved. The experts at NSKT Global can check out the records for the company under consideration and identify if human or monetary resources are being drained. Therefore, the services offered by NSKT Global have high value for money. Head over to NSKT Global’s official page, and find out how the services offered by the experienced workforce allow you to save more and make your life hassle-free!

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