The most common yet expensive fraud that organizations face is payroll fraud. Statistics suggests that it can remain undetected for years, costing a company hundreds of thousands of dollars. Payroll fraud is defined as any scheme in which employees make false claims for compensation to receive a payment from the employer. Organizations also face payroll fraud where the payroll managers or bookkeepers in the accounting department manipulate the financial statements. Payroll fraud has several forms. The most common one involves workers that are paid on hourly basis, fraudulently boosting the amount they are entitled to, by altering the number of hours they have worked for. Commission workers in manufacturing get paid on the basis of the number of units they produce. Such workers sometimes manipulate records for the number of sales or units produced. Another common form includes false claims for expenses such as taking personal trips and labelling them as business trips.
Forms of payroll fraud differ depending on the type and size of organizations. However, there are some frauds which can crop up in every type of organization and it’s important to find ways to defraud the organization and save it from losses. There are signs which you must be looking for. Also, you need to tighten your internal controls and take necessary precautions to keep the fraudulent schemes at bay. Take a look at the ways you can prevent payroll fraud in your organization.
- Conduct Thorough Background Checks
Conduct a thorough background check for people that would have access to your company bank accounts or those who would manage your payroll processing. Such screening can help you hire trustworthy and qualified people. Also include federal and state criminal checks, education and employment verifications, credit checks and other important verifications in your pre-employment screening.
- Segregate Duties and Responsibilities
Divide your payroll processing in a series of methodical procedures and assign responsibilities to different people for different parts of the job. For instance, if one person prepares the payroll, make another employee review it. Also, the person running the payroll and the one signing the checks shouldn’t be the same. Segregation of duties and responsibilities helps curb payroll fraud.
- Limit Information Access
Make information regarding payroll accessible only to those who actually need to access it for payroll processing. Each employee can access their own payroll data through their exclusive login information and also, there should be a policy for sharing the login details. In case you need to print or record payroll information on any media, make sure that the documents are safely stored and destroyed before disposal.
- Review Reports
As an employer you need to ensure that the employees are receiving the compensation they are entitled to. Thoroughly review the reports. Also, review the addresses and bank account numbers of your employees to make sure that the same employee is not receiving multiple payments. You also need to keep an eye on the extra hours some employees are working for during busy season to ensure that the overtime payments are correctly made.
- Rotate Job Duties
It’s a good practice to rotate job duties for employees that are handling the payroll processing. In this way, one or a specific set of corrupt employees won’t get a chance to commit payroll fraud for long. For this, you need to cross train your employees to help them learn how to handle the payroll processing and then assign duties in rotation.
- Clearly Define Organization Policies and Culture
It’s the responsibility of the management to promote the culture of honestly in the workplace. This, of course, requires embracing ethical ways of conducting business and developing an open-door policy for employees. Communicate that whistleblowers can report fraud without fearing any retribution.
- Take Strict Action Against Fraudsters
It’s important to punish the fraudsters even if it means termination of employment. If you don’t take a strict action against fraudsters, it may temp others to commit similar frauds or may set a bad example for honest employees.
Payroll frauds are expensive and could be devastating for your business as well as clients. By staying vigilant and having all the internal controls in place you can save your organization from huge losses caused by payroll fraud.