According to recent information published by the Association of Certified Fraud Examiners (ACFE), payroll fraud occurs in approximately 30 percent of American businesses each year. Around half of the payroll fraud victims are small businesses that cannot afford such a loss. ACFE also states that the typical business in the United States loses five percent of its annual revenue to payroll fraud. It describes fraudulent payroll as any activity where an employee or someone outside the company steals money from the business through its payroll system.
Time theft, the most typical form of fraudulent payroll, is also the easiest one to commit. It occurs when an employee pads their timecard to show hours he or she never worked. When employees use a time clock to punch in, time theft can happen when several employees with staggering starting and quitting times agree to punch in and out for each other to add more hours to their next paycheck.
You are probably familiar with phishing scams via email but may not have heard of people engaging in this style of scam to promote fraudulent payroll activities. With this type of phishing scam, the person committing fraud calls or emails a business and impersonates one of the company’s top executives. He or she immediately requests to speak to someone in the payroll department with access to highly sensitive data. The purpose is to get the payroll department employee to wire money to the fraudster or to give out private data on other employees. When phishing by email, these impersonators use a real company logo and email address.
Cheating on Commission
Salespeople paid on commission may attempt to turn in an altered contract to meet their sales quota or qualify for a bonus. After changing the paperwork to make the sale appear larger, the dishonest salesperson later attempts to put a credit memo through the system to offset it. Businesses with a weak system of checks and balances or that use complicated commission formulas are especially vulnerable to this type of fraud.
The Invisible Employee
In this complex scheme, one employee creates another fictitious employee and then collects all his or her earnings. Known as the ghost employee scheme, the perpetrators of this type of fraud usually have access to inside payroll information and account numbers. The fraudster sets up the ghost employee with a direct deposit and then transfers the money out of that account into his or her own.
How to Avoid Becoming a Victim of Fraudulent Payroll
It’s important not to assign all payroll duties to one person and to implement a formal approval process to help reduce the opportunities for payroll fraud. Performing unannounced internal audits is another good way to reduce fraud opportunities as is training all employees to report their suspicions. The ability to make an anonymous report can greatly increase legitimate reports of potential payroll fraud.
Need more advice on payroll fraud prevention or business financial strategy in general? Contact Chicagoland CPAs today to request your initial consultation.