Yazar: elif turkoglu• 31 Ocak 2025• 20:14• Bookkeeping

Payroll Fraud: What It Is, How To Detect and Prevent It

Additionally, obtain and retain copies of employee identification and perform background checks of new hires. Require employees to also document their hours worked via payroll fraud timesheets or time clocks, which should be subject to review by a supervisor. Frequent payroll adjustments or corrections may also indicate fraudulent activity. Changes to employee classifications, pay rates, or withholding amounts should be carefully reviewed and supported by documentation, such as timesheets or employment contracts.

Preventing payroll fraud from occurring comes down to having the proper internal controls in place.
The payroll staff will either establish a fictitious employee or keep a terminated employee active in the payroll records.
They also evaluate the effectiveness of internal controls and recommend improvements.

C-Level executives or managers will have a different level of pre-approved spend from other staff. Another critical component of internal controls is the implementation of access controls. Limiting access to payroll systems to only those employees who need it to perform their job functions can help prevent unauthorized changes to payroll data. Role-based access controls can be particularly effective, as they ensure that employees have access only to the information and functions necessary for their roles.

In August 2024, a payroll officer from Kettering was found guilty of creating false records to steal £14,000 from a food production firm. A year earlier, a payroll clerk set up six accounts in his own name and a family member’s to steal £350,000 from his employer. He believed a computer glitch hid the thefts, but he was exposed after an audit.

These non-existent workers receive paychecks, which are then diverted to the fraudster’s account. This type of fraud can go undetected for extended periods, especially in large organizations with numerous employees. The process often begins with a comprehensive review of payroll records, including employee files, timekeeping systems, and bank statements. Forensic accountants use advanced analytical tools to sift through vast amounts of data, identifying inconsistencies and irregularities that may have gone unnoticed.

In this article, we will help you recognize the signs of payroll fraud, detect discrepancies, and implement preventive measures, which are essential steps every organization must take to safeguard its finances. With each login and activity tracked (and recorded), teams can go back and review suspicious activity to uncover payroll fraud. Having this behavior tracked will not only allow teams to identify the culprit but will also deter employees from attempting payroll fraud in the first place since they know their activity will be monitored. Below, we look at the most common forms of payroll fraud and dig into how teams can prevent them. An individual (or group of individuals) illicitly gains funds from an organization’s payroll processing system.

Best practices for employers to prevent global payroll fraud

Sometimes, employers misclassify workers willingly to save costs like unemployment taxes, staff benefits, and payroll taxes. Payroll fraud occurs when an individual illicitly changes the company’s payroll system to manipulate the calculation of employee compensation to their own benefit. In its simplest form, payroll fraud involves an employee or the employer manipulating the payroll system within the organization to take the money they are not entitled to. For small and medium businesses, payroll fraud can be a significant obstacle. The IRS emphasizes that thorough documentation isn’t just good practice; it’s essential for compliance and fraud prevention. Their guidelines recommend keeping complete employee files, documenting all pay rate changes, and maintaining detailed records of approvals for overtime or bonuses.

This way you will be able to detect if another employee is clocking in for someone who may not have arrived for their shift yet, or possibly not even be working that day. The Professional Conduct Committee shall then hold a hearing and notice will be given to the complainant as well as the person thought to be in violation of the code of professional conduct. The hearing takes place no more than 60 days after the date the committee receives the complaint.

But with the right protection measures in place, employers can protect their organizations from financial loss and reputational damage. To streamline your payroll processes, consider automating it or outsourcing to a reputable provider – the peace of mind is worth it. The employee may take advantage of a lack of financial controls or inefficient internal processes to commit fraud, as it works best when the accounting staff does not record advances as a loan or asset. Instead, the advance is treated as a regular expense, making it difficult to track and recover the money. Effective integration strengthens payroll fraud prevention by ensuring all related information synchronizes and that monitoring occurs in real time. Effective internal controls also streamline payroll processes, making them more efficient and less prone to errors.

They can collect the ghost employee’s paycheck as if it were their own by faking employment documents. Commission SchemesSome staff may receive bonuses or commissions when sales or milestones are met. These bonuses serve as an incentive for employees to work hard and perform well. Employees may occasionally find out how to pay themselves commissions or bonuses they did not earn. This is referred to as a commission scheme and is usually penalized as payroll fraud. Perhaps the most common type of payroll fraud is the padding of time sheets by employees, usually in small enough increments to escape the notice of supervisors.

Employees may collaborate with supervisors to approve exaggerated timesheets, leading to unwarranted payouts. This fraud is particularly challenging in industries with flexible schedules or remote work, where monitoring actual hours worked can be difficult. In large organizations, even minor discrepancies can accumulate into significant financial losses. Another way to prevent payroll fraud is to regulate employee behavior (especially when controlling employee expenses). This means that employees should be required to adhere to a code of conduct that outlines the expected behaviors and consequences for violating the code. This code of conduct should be reviewed regularly and updated to ensure effectiveness.

Make Payroll Information Accessible and Transparent

Next, robust global payroll software can act as your first line of defence.
Advanced analytics platforms can process vast amounts of payroll data, identifying patterns and anomalies that may indicate fraudulent activities.
By understanding how fraud can occur, employees are better equipped to recognize suspicious activities and report them promptly.
That’s before considering intentional misconduct, which can bring criminal fines up to $1,000 per worker and even jail time.
Businesses should investigate these issues immediately to prevent further fraud.
For teams to identify payroll fraud and root it out, it’s crucial that teams know what to look for.

It also deters fraudsters from trying in the first place, as they know they’ll be caught out. Typically, fraudsters committing payroll fraud believe there are weak controls that they can circumvent—allowing them to get away with it. Businesses that pay staff hourly are more susceptible to timesheet payroll fraud, as employees have greater incentive to inflate their hours (and their compensation). Companies with poor internal controls will struggle to effectively combat timesheet fraud and mitigate losses.

Impact of Remote Work on Payroll Fraud

It also eliminates buddy punching and offers advanced features such as leave management, attendance policy, contract worker management, and real-time staff tracking. Employers and employees have legal rights to sue for back pay if their employer has illegally withheld their wages. But it would be best to act quickly when you find out that your employer is committing payroll fraud. A recent report released by the Association of Certified Fraud Examiners (ACFE) revealed that payroll fraud schemes make up 15% of all occupational fraud schemes in the United States and Canada.