[Global] 8 tips to prevent common payroll frauds in 2021

Payroll fraud most commonly occurs when a worker defrauds the system to receive funds they are not entitled to. Payroll fraud can present a long-term significant and expensive challenge for companies without proper procedures in place. HR News breaks down the eight most common fraud techniques and essential tips to safeguard against them.

Small businesses can be more vulnerable to fraud because they put more faith in the individual accountability of employees and frequently have fewer protections in place. Eight of the most frequently occurring payroll frauds are detailed below together with ways to prevent them and reduce future exposure:

1. Buddy punching 

What is it: Also known as “buddy clocking,” buddy punching occurs when a worker has someone else punch in and out for them, whether punching in early, punching out late, or punching them when they are not even present.

How to avoid it: The most straightforward way to prevent buddy punching is to use time tracking software that includes quality inspection such as a fingerprint, an ID badge, password or facial recognition.

2. Ghost employees

What is it: A person who is present on the corporation’s payroll but does not actually work there. This occurs when someone with access to the payroll software either creates a fictitious employee in the records or fails to delete a terminated employee and alters documentation to receive a direct deposit or cheque.

How to avoid it: Regular audits of employee lists can detect this; look for ghost names, duplicate addresses, fake National Insurance numbers etc. Also, undertake routine searches for non-contractor pay cheques with no deductions. 

3. Changes in pay rates

What it is: This occurs when someone changes an employee’s pay rate in the payroll system and requires the involvement of someone familiar with the system, though they could be acting on behalf of another employee or hacking into the system.

Clever fraudsters will change the rate well in advance of payday and change it back or continuously make alterations to reduce the risk of detection.

How to avoid it: Begin by ensuring that your payroll software is password protected and that access to the features required by each employee is limited. Next, ensure that the pay rate authorisation documents are in sync with the payroll register.

4. Extending work hours

What it is: One of the most prevalent types of payroll fraud involves padding timesheets in small increments.

How to avoid it: Establish a clear policy for punching in and out so that employees understand the rules. Then sync your payroll software with your time tracking software, which will immediately feed the data.

Some software requires configuration with predefined rules that prevent employees from punching in or out of a specific time window. Finally, requiring manual approval of overtime and scheduling payroll audits can help detect problems.

5. Fraudulent expense reimbursement

What it is: A worker is reimbursed for expenses that did not occur, for personal expenses or at a lower figure than the employee reported with the employee keeping the difference.

How to avoid it: Have clear spending policies in place by defining deductible expenses and establishing limits. Put in place security checks such as micro checks to ensure receipts match the pre-approved charges and macro checks to regularly review reimbursements for any individuals or departments tracking above average.

6. Fraudulent commissions

What it is: A worker inflates their sales report or has a payroll employee overpay their commission.

How to avoid it: In addition to having clear policies and double-checking numbers and pay vs sales, search for suspicious activity like a rise in commissions when sales are declining. And monitor top performers or those who have a sudden increase in commissions.

7. Diversion of pay cheque

What it is: This type of fraud occurs when an employee steals and cashes another employee’s cheque.

How to avoid it: Where possible pay employees via direct deposit or pay card. If you pay by a physical pay cheque, maintain tight control over them by requiring employees to be positively identified before receiving their cheque (with ID if necessary) and securing any unclaimed cheques.

8. Failure to repay overpayments

What it is: In these cases, an employee requests an advance or is overpaid by mistake and does not repay it. These payments are sometimes classified as “expenses” by the accounting department and can pass unnoticed.

How to avoid it: If you give an advance or discover an overpayment, make sure the employee understands that it must be repaid. Make this clear in the company handbook too.

Source: HR News

Payroll fraud most commonly occurs when a worker defrauds the system to receive funds they are not entitled to. Payroll fraud can present a long-term significant and expensive challenge for companies without proper procedures in place. HR News breaks down the eight most common fraud techniques and essential tips to safeguard against them.

Small businesses can be more vulnerable to fraud because they put more faith in the individual accountability of employees and frequently have fewer protections in place. Eight of the most frequently occurring payroll frauds are detailed below together with ways to prevent them and reduce future exposure:

1. Buddy punching 

What is it: Also known as “buddy clocking,” buddy punching occurs when a worker has someone else punch in and out for them, whether punching in early, punching out late, or punching them when they are not even present.

How to avoid it: The most straightforward way to prevent buddy punching is to use time tracking software that includes quality inspection such as a fingerprint, an ID badge, password or facial recognition.

2. Ghost employees

What is it: A person who is present on the corporation’s payroll but does not actually work there. This occurs when someone with access to the payroll software either creates a fictitious employee in the records or fails to delete a terminated employee and alters documentation to receive a direct deposit or cheque.

How to avoid it: Regular audits of employee lists can detect this; look for ghost names, duplicate addresses, fake National Insurance numbers etc. Also, undertake routine searches for non-contractor pay cheques with no deductions. 

3. Changes in pay rates

What it is: This occurs when someone changes an employee’s pay rate in the payroll system and requires the involvement of someone familiar with the system, though they could be acting on behalf of another employee or hacking into the system.

Clever fraudsters will change the rate well in advance of payday and change it back or continuously make alterations to reduce the risk of detection.

How to avoid it: Begin by ensuring that your payroll software is password protected and that access to the features required by each employee is limited. Next, ensure that the pay rate authorisation documents are in sync with the payroll register.

4. Extending work hours

What it is: One of the most prevalent types of payroll fraud involves padding timesheets in small increments.

How to avoid it: Establish a clear policy for punching in and out so that employees understand the rules. Then sync your payroll software with your time tracking software, which will immediately feed the data.

Some software requires configuration with predefined rules that prevent employees from punching in or out of a specific time window. Finally, requiring manual approval of overtime and scheduling payroll audits can help detect problems.

5. Fraudulent expense reimbursement

What it is: A worker is reimbursed for expenses that did not occur, for personal expenses or at a lower figure than the employee reported with the employee keeping the difference.

How to avoid it: Have clear spending policies in place by defining deductible expenses and establishing limits. Put in place security checks such as micro checks to ensure receipts match the pre-approved charges and macro checks to regularly review reimbursements for any individuals or departments tracking above average.

6. Fraudulent commissions

What it is: A worker inflates their sales report or has a payroll employee overpay their commission.

How to avoid it: In addition to having clear policies and double-checking numbers and pay vs sales, search for suspicious activity like a rise in commissions when sales are declining. And monitor top performers or those who have a sudden increase in commissions.

7. Diversion of pay cheque

What it is: This type of fraud occurs when an employee steals and cashes another employee’s cheque.

How to avoid it: Where possible pay employees via direct deposit or pay card. If you pay by a physical pay cheque, maintain tight control over them by requiring employees to be positively identified before receiving their cheque (with ID if necessary) and securing any unclaimed cheques.

8. Failure to repay overpayments

What it is: In these cases, an employee requests an advance or is overpaid by mistake and does not repay it. These payments are sometimes classified as “expenses” by the accounting department and can pass unnoticed.

How to avoid it: If you give an advance or discover an overpayment, make sure the employee understands that it must be repaid. Make this clear in the company handbook too.

Source: HR News