Preventing Payroll Fraud: Key Risks and Effective Control Measures for Your Business
A. What is Payroll Fraud?
Payroll fraud occurs when employees use false information, documents, or various schemes to unlawfully receive payments from the company. Without proper control measures, payroll fraud can go unnoticed for extended periods, leading to significant financial losses for companies. According to the Association of Certified Fraud Examiners (ACFE), payroll fraud accounts for 7% of all internal fraud cases, with median losses of $63,000 over an average duration of 30 months. Detecting payroll fraud can be challenging and cause substantial financial damage.
B. Common Payroll Frauds in Companies
1. Ghost Employees
What is it?
Paying salaries to employees listed in the payroll system who do not actually work for the company.
How to Prevent?
Compare employee identification numbers and IBAN details with biometric data such as fingerprint or facial recognition using a Personnel Attendance Tracking System (PACS). Use GPS and NFC technology to verify employees' physical presence.
2. Salary Coefficient Changes
What is it?
Unlawfully changing an employee’s salary or bonus coefficient without proper authorization.
How to Prevent?
Ensure your payroll software is password-protected and access to sensitive features is restricted. Regularly review log records of salary coefficient changes to detect unusual activity.
3. Timesheet Fraud
What is it?
Employees falsify timesheets by adding extra hours or another employee clocks in or out on behalf of someone who is absent or late.
How to Prevent?
Establish clear policies for clock-in/out times, synchronize payroll software with PACS, and require overtime approvals from authorized managers.
4. Advance Payment Fraud
What is it?
Employees request an advance payment that is not deducted from their salary or receive an overpayment that is not repaid.
How to Prevent?
Ensure advances are properly tracked in payroll systems and make it clear in company policies that any advances must be repaid.
5. Reactivated Employees Fraud
What is it?
Reactivating a former or inactive employee and continuing to pay them after their final dues have been settled.
How to Prevent?
Set up alerts in payroll or PACS to notify management of any reactivated employees. Use automatic reminders through digital calendars for such changes.
6. Third-Party Fraud
What is it?
Fraud perpetrated by an external party, either in collaboration with an insider or independently, targeting payroll records or individual employee data.
How to Prevent?
Use secure VPN connections for all banking transactions and protect payroll system access. Implement spam filters and anti-phishing software to guard against malicious emails.
C. Conduct Regular Audits for Secure Payroll Processes
Ghost Employees: Cross-check employees listed in payroll against those recorded in the PACS.
Irregular Salary Payments: Review irregular salary payments and investigate their cause.
Base Salary and Coefficient Changes: Monitor changes in employees' base salaries and coefficients.
Benefits: Ensure that terminated employees are no longer receiving benefits and verify that current employees receive benefits according to company policies.
Overtime Fraud: Compare overtime lists with PACS data and examine abnormal overtime percentages.
By implementing these preventive measures and periodic checks, you can minimize the risk of payroll fraud and safeguard your company's financial health.
