Payroll fraud: How to prevent payroll & timesheet fraud


payroll fraud

Like pay alteration fraud, this is most common in HR, payroll, and finance departments, since they have access to these functions. Institute a policy with your employees that requires a receipt for reimbursement, with no exceptions. If you’re willing to bend a little, do your research to corroborate the item’s approximate cost before granting reimbursement. Your payroll clerk, Chloe, has been paying herself unapproved bonuses for the past six months.

payroll fraud

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Simply put, payroll fraud is a mechanism that one of the parties utilizes to enrich themselves by deceitfully stealing from the other. You must ensure that production is always at optimum level and that workers are satisfied with the company culture. Another critical aspect of managing a company is safeguarding against defrauding activities like payroll fraud. If you suspect fraud (or have discovered it and want to report it), start by keeping or gathering your evidence, as successful prosecution depends on accurate notes. Record dates and times, activities, and locations as applicable, and note the amount of money involved. If you can download the reports from the payroll software, store them in a separate file.

Six different types of payroll fraud

Many small businesses choose to collaborate with a payroll service provider when it comes to addressing fraud. By outsourcing this critical process to a reputable third-party provider, you can benefit from their technology and flexible service options. These forms of payroll fraud depend upon lax accounting and oversight procedures. Businesses should maintain and strictly adhere to thorough accounting and anti-fraud policies at all times. As we mentioned above, payroll fraud presents itself in a variety of forms. Unfortunately, this type of fraud is often difficult to detect, as it requires a close inspection of the timesheets.

  • These bonuses act as an incentive for employees to work hard and excel at their jobs.
  • Also, investing in a payroll service that has anti-fraud tools will be beneficial—check our guide to the best payroll services for some options.
  • As we mentioned before, our online time clock will detect if an employee has not clocked in or out before or after a shift.
  • Workers provide different classifications depending on the number of hours they work, their job role, their relationship with the company, and other details.
  • In some locations, you may face legal and compliance problems for failing to already have the proper fraud prevention measures in place.
  • Monitor employee behavior for abnormal use of sick leave to try to catch these fraudsters in the act.

Time and Attendance

payroll fraud

Below, we’ll look at five common types of payroll fraud and detail ways that you can use software and policy in tandem to prevent it from taking place in your small or midsize business (SMB). It’s a good practice to have policies in place that require two or more managers to complete employee onboarding to help prevent payroll fraud. For example, a human resources manager and payroll professional both work with the employee in the onboarding process, one setting up the employee file and another setting up their direct deposit. Essentially, the fraudster will create a fake employee file, log hours for this employee, sign off on their fake time card, and eventually deposit the wages into a bank account to which they have access. Also, watch out for more than one employee using the same direct deposit information.

  • Install security cameras at work sites so that any potential workplace injuries are recorded as evidence.
  • The employee doesn’t know about the fraud, even while unknowingly participating.
  • An employee arranges with his fellow employees to have them punch his hours into the company time clock while he takes the day off, which is known as buddy punching.
  • By falsifying employment records, they can collect the ghost employee’s paycheck as if it were their own.
  • Hold additional training sessions any time you update your software or change a procedure.
  • This can be done in collusion with the other employee, who then shares the extra pay with the payroll employee, but it is also sometimes committed alone.

payroll fraud

The perpetrators use this information, including employee ID, income records, and other sensitive data, to file fraudulent tax returns. If you have payroll software, ask about tools that can automate this tedious process. Some will allow you to upload documentation of the expense so that you have a backup handy when you decide to do a thorough review.

Ouriel Lemmel, CEO & Founder of Winit, says, “Having a clear process in place with multiple people involved helps ensure that all payments are properly authorized and reduces the chances of fraud.” This process will help payroll fraud to ensure that no one person has too much control over the process and that all payments are properly authorized. In short, there are many ways in which the amount of payroll paid out can be fraudulently expanded.

They’ll set up fake employees or continue to use a former employee’s name to pay themselves or a spouse by direct deposit. So, now that you’re aware of a few of the most common types of, you can be better prepared to prevent it from occurring. Here are a few tips that we recommend to set your company up for success by using these payroll fraud prevention tactics. These are some of the warning signs that must be acted upon immediately. Remember, there are several types of payroll fraud, and it is essential to regularly review your company’s payroll and accounting records for discrepancies.

There are several ways in which employees can commit payroll fraud, as noted below. Among the more common types of payroll fraud are not paying back an advance, buddy punching, and time sheet padding. Payroll fraud occurs when an employee or employer manipulates a payroll system to take money they’re not entitled to.

Paycheck Diversion Fraud

  • Most reputable payroll software have measures in place to protect sensitive data.
  • If you’d like some personalized guidance on the best payroll solution for your business, chat with one of our advisors.
  • Even though routine password changes may not protect against every payroll security threat, this strategy can help minimize the risk of breaches and unwanted access.
  • Without proper internal controls, this type of fraud can go unchecked—make sure staff need to provide a doctor’s note and validate the need for their time off.
  • If you’re still having trouble classifying workers on the fence, consult your legal counsel.