In the Occupational Fraud 2022: A Report to the Nations recently published by the Association of Certified Fraud Examiners [ACFE], ACFE highlighted that payroll fraud is among the most common frauds that occur in small businesses. Over the years, the corporate sector has seen an increase in payroll fraud perpetrated by employees altering the payroll system to increase employee compensation. Payroll fraud can also be conducted by employers in cases where they want to reduce the company’s tax liability and evade tax. According to the report, payroll fraud typically lasts for a period of 18 months before it is uncovered.
Below are the various forms of payroll fraud schemes and how to prevent them: –
This occurs when employers create fictitious employees or extend the employment period for an employee who already left the organization on the payroll system. This is done by the payroll accountants or Human Resources personnel and is highly common in organizations with large personnel or where supervision is not detailed. Employers participate in such fraud to increase their allowable deductions when calculating the taxable profit.
This form of fraud can be prevented through: –
- Periodically auditing the payroll system against employee lists;
- Checks for specter names, identification numbers as well as statutory deductions numbers to chaff out fake employee details; or
- Randomly inspecting employee payments that are not subject to statutory deductions.
This is also known as timesheet fraud and occurs when employees falsify the timesheet to make it appear as if they worked for more hours or they ought to be compensated more for hours worked. The Timesheet fraud is conducted in two ways: –
- Padding of hours – this refers to increasing the number of hours worked to reflect more than the actual number of hours worked, and
- Manipulation of the hourly pay rate – this is aimed at increasing the amount of compensation for each hour worked.
Timesheet manipulation only occurs in companies that have hourly pay rates or that pay for overtime. This form of fraud can be prevented through various ways, such as: –
- Having a clocking in and out system integrated with the payroll system will help in transmitting data automatically;
- Having a compensation policy that clearly outlines the standard billable overtime hours as well as a clock-in and out policy; and
- Regular payroll audits to monitor adherence to the policies.
Pay rate alterations.
This occurs when the pay rate of an employee is altered in the payroll system to increase the individual’s pay rate. Just like the previous schemes, this can only be conducted by a payroll accountant or a Human Resource personnel in collusion with the employee in question. An acute fraudster will alter the pay rate during payroll processing and change it back to the actual rate once payments are initiated. This form of fraud can be prevented in the following ways: –
- Having a password-protected payroll scheme and limiting access to some features to each person’s essentials;
- Ensuring that there is a comprehensive authorization protocol in place for pay rates and any other payroll changes; and
- Doing payroll reconciliations for each payment period i.e., Monthly.
This is more likely to be committed by a salesperson or in manufacturing companies where employee bonuses/ commissions are measured by the number of units produced. The schemes are aimed at increasing employee compensation unjustly. Some of the ways through which an organization can prevent this form of fraud include, but are not limited to: –
- Reviewing financial correlation, whereby an increase in sales commission should be a result of sales revenue;
- Regular audit of the company’s top performers, or employees that take home high commissions; and
- Have a commission policy that guides the allocation of commissions and bonus payments, as well as the approval process for the same.
In an effort to prevent payroll fraud, the management should pay close attention to some of the indications of payroll fraud which include employees who have identical information, such as identification numbers, bank details, addresses, etc. in the payroll system, constant unfamiliar changes in the payroll records, errors in the payroll records as well as unaccounted transactions in the company accounts.
Lastly, in addition to having a human resource policy, it is always advisable for a company to have in place a compensation policy that guides any changes in compensation practices such as payment of salaries, bonuses, and commissions. Periodic payroll audits and reconciliations are also key in curbing payroll fraud.
How can we help?
Payroll fraud investigations are very critical in uncovering fraud. Such investigations involve interrogating employment contracts, a company’s human resource or compensation policy, the payroll system, company bank accounts, and manual employee lists.
At Riskhouse international, we have a team of Forensic Accountants and Fraud investigators who have hands-on experience in conducting investigations on various forms of fraud such as; fraudulent financial statements and other accounting frauds; potentially fraudulent payments; revenue-related irregularities such as revenue overstatement or understatement; matters involving fraudulent disbursements, cash larceny, and skimming; and inventory frauds.
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