Eight steps to prevent payroll fraud Eight steps to prevent payroll fraud

Eight steps to prevent payroll fraud
27 Feb 2018

The issue of payroll fraud is a widespread phenomenon that affects both the public and private sectors of every country around the world.

Research by the US Association of Certified Fraud Examiners, which explored 2,400 instances of such cons in 114 nations, revealed that payroll scams account for 8.5% of all fraud cases and have a median cost of around $90,000. According to the UK’s latest Annual Fraud Indicator report, meanwhile, fraud costs the country’s economy as much as £190 billion (US$266 billion) per year, of which payroll schemes account for £12.7 billion (US$17.8 billion).

So given the scale of the problem, it is clear that employers need to be vigilant in identifying and preventing what can be a serious operational risk. Part of the challenge is that, without the correct procedures in place, payroll fraud may go unnoticed for a considerable period of time. As a result, it is important to minimise the threat.

Types of payroll fraud can be divided into three main categories: Ghost employees, false wage claims and false expense reimbursement.

  1. Ghost employees

Creating ghost employees is a fraudulent technique that is surprisingly effective. Ghost employees may be either real or fictional individuals who are falsely paid through a company’s payroll, after information - often relating to former staff - is entered into the system in order to siphon money away. In some instances, former workers’ details remain on the system once they have left the company, enabling fraudsters to simply input new bank details.

Another common scam using ghost employees involves defrauding company pension schemes. If pensioners’ details are kept on the system even after they have died, it is possible to fraudulently open a new bank account in order to divert funds there.

Although going down this route involves a lot of effort by fraudsters, it is often worthwhile as they fraudulently obtain the entire pension sum on a consistent basis. Moreover, because such transactions appear to be genuine, they are usually much harder to detect if robust mechanisms are not in place.

  1. False wage claims

Employees who make false wage claims by falsifying records can use a variety of techniques to obtain money dishonestly. These techniques include inflating the number of hours worked, boosting pay rates beyond their entitlement and fraudulently increasing benefits earned.

Other methods involve paying themselves or others a normal wage rather than their sick leave entitlement, reducing someone’s withholding tax, inflating sales figures to boost bonuses or commissions and invoicing incorrectly for services.

  1. False expense reimbursement

The most widespread means of abusing the system is to submit inflated or fictitious expense claims for reimbursement. Most often, these claims comprise duplicates, false expenses for items or events that never took place such as a dinner with clients, and inflating or exaggerating the cost of genuine expenses.

Although such fraud occurs in a range of different ways, claiming for travel costs and expenses that were never incurred such as cancelled airline tickets is one of the favourites.

Another popular scam involves manipulating receipts before they are submitted. Some fraudsters present falsified receipts, while others ‘lose’ them in order to submit a false claim that is often not scrutinised.

A different tactic on the same theme entails providing payroll staff with a credit card slip. Doing so prevents them from obtaining any details about the claim, and could lead to the same receipt being submitted again at a later date.

How to prevent payroll fraud

So what is the best way to address these different types of payroll fraud? As so many opportunities exist to con the system, no single prevention strategy can cover all bases. Instead, a multi-layered strategy is required. Here are a few practical suggestions of steps to take:

  1. Ensure that no single individual has operational control over the organisation’s payroll or is authorised to make payments from it without the consent of a third party. Every expense claim should be countersigned to prevent any individual from having sole authority to authorise them. The processes for changing bank account and payment details should also be checked to ensure they are suitably robust;
  1. If it is necessary to preserve hard copy payroll files, they must be kept secure. If it is not necessary, destroy them using a shredder. Sensitive information should only be visible to those who need to see it so use dedicated printers rather than a general access one to avoid payroll information being viewed accidentally;
  1. Random checks can act a strong deterrent. Moreover, if fraudsters are unaware that a check is scheduled, they cannot cover their tracks beforehand. But it is also important to review your payroll thoroughly before processing it, which includes examining a random sample of a few people’s pay and expenses;
  1. When recruiting staff, always ensure that references from previous employers are requested, received and thoroughly reviewed;
  1. Ensure employees are prevented from accessing any databases, systems or information other than what is required to do their job;
  1. Outline clear expenses policies and preferably enforce them with a software tool;
  1. Make certain that all control systems are updated regularly - when employees become overfamiliar with any process, they tend to adopt shortcuts and circumvent procedures;
  1. Introduce a policy that requires passwords to be changed frequently and be complex enough to deter hackers. It is vital to manage these passwords effectively, which includes monitoring the activities of authorised personnel.

As a final point, be careful not to underestimate the value of ‘visibility’ in the battle against payroll fraud. The more visible your actions, the more of a deterrent they will be. Although it is impossible to eliminate fraud risks entirely, you can certainly minimise them, and save time and money in the process.

 Jeffrey Davidson

Jeffrey Davidson is managing director of Honeycomb Forensic Accounting

 

 

The issue of payroll fraud is a widespread phenomenon that affects both the public and private sectors of every country around the world.

Research by the US Association of Certified Fraud Examiners, which explored 2,400 instances of such cons in 114 nations, revealed that payroll scams account for 8.5% of all fraud cases and have a median cost of around $90,000. According to the UK’s latest Annual Fraud Indicator report, meanwhile, fraud costs the country’s economy as much as £190 billion (US$266 billion) per year, of which payroll schemes account for £12.7 billion (US$17.8 billion).

So given the scale of the problem, it is clear that employers need to be vigilant in identifying and preventing what can be a serious operational risk. Part of the challenge is that, without the correct procedures in place, payroll fraud may go unnoticed for a considerable period of time. As a result, it is important to minimise the threat.

Types of payroll fraud can be divided into three main categories: Ghost employees, false wage claims and false expense reimbursement.

  1. Ghost employees

Creating ghost employees is a fraudulent technique that is surprisingly effective. Ghost employees may be either real or fictional individuals who are falsely paid through a company’s payroll, after information - often relating to former staff - is entered into the system in order to siphon money away. In some instances, former workers’ details remain on the system once they have left the company, enabling fraudsters to simply input new bank details.

Another common scam using ghost employees involves defrauding company pension schemes. If pensioners’ details are kept on the system even after they have died, it is possible to fraudulently open a new bank account in order to divert funds there.

Although going down this route involves a lot of effort by fraudsters, it is often worthwhile as they fraudulently obtain the entire pension sum on a consistent basis. Moreover, because such transactions appear to be genuine, they are usually much harder to detect if robust mechanisms are not in place.

  1. False wage claims

Employees who make false wage claims by falsifying records can use a variety of techniques to obtain money dishonestly. These techniques include inflating the number of hours worked, boosting pay rates beyond their entitlement and fraudulently increasing benefits earned.

Other methods involve paying themselves or others a normal wage rather than their sick leave entitlement, reducing someone’s withholding tax, inflating sales figures to boost bonuses or commissions and invoicing incorrectly for services.

  1. False expense reimbursement

The most widespread means of abusing the system is to submit inflated or fictitious expense claims for reimbursement. Most often, these claims comprise duplicates, false expenses for items or events that never took place such as a dinner with clients, and inflating or exaggerating the cost of genuine expenses.

Although such fraud occurs in a range of different ways, claiming for travel costs and expenses that were never incurred such as cancelled airline tickets is one of the favourites.

Another popular scam involves manipulating receipts before they are submitted. Some fraudsters present falsified receipts, while others ‘lose’ them in order to submit a false claim that is often not scrutinised.

A different tactic on the same theme entails providing payroll staff with a credit card slip. Doing so prevents them from obtaining any details about the claim, and could lead to the same receipt being submitted again at a later date.

How to prevent payroll fraud

So what is the best way to address these different types of payroll fraud? As so many opportunities exist to con the system, no single prevention strategy can cover all bases. Instead, a multi-layered strategy is required. Here are a few practical suggestions of steps to take:

  1. Ensure that no single individual has operational control over the organisation’s payroll or is authorised to make payments from it without the consent of a third party. Every expense claim should be countersigned to prevent any individual from having sole authority to authorise them. The processes for changing bank account and payment details should also be checked to ensure they are suitably robust;
  1. If it is necessary to preserve hard copy payroll files, they must be kept secure. If it is not necessary, destroy them using a shredder. Sensitive information should only be visible to those who need to see it so use dedicated printers rather than a general access one to avoid payroll information being viewed accidentally;
  1. Random checks can act a strong deterrent. Moreover, if fraudsters are unaware that a check is scheduled, they cannot cover their tracks beforehand. But it is also important to review your payroll thoroughly before processing it, which includes examining a random sample of a few people’s pay and expenses;
  1. When recruiting staff, always ensure that references from previous employers are requested, received and thoroughly reviewed;
  1. Ensure employees are prevented from accessing any databases, systems or information other than what is required to do their job;
  1. Outline clear expenses policies and preferably enforce them with a software tool;
  1. Make certain that all control systems are updated regularly - when employees become overfamiliar with any process, they tend to adopt shortcuts and circumvent procedures;
  1. Introduce a policy that requires passwords to be changed frequently and be complex enough to deter hackers. It is vital to manage these passwords effectively, which includes monitoring the activities of authorised personnel.

As a final point, be careful not to underestimate the value of ‘visibility’ in the battle against payroll fraud. The more visible your actions, the more of a deterrent they will be. Although it is impossible to eliminate fraud risks entirely, you can certainly minimise them, and save time and money in the process.

 Jeffrey Davidson

Jeffrey Davidson is managing director of Honeycomb Forensic Accounting