Payroll fraud is one of the major sources of accounting fraud and employee theft. The fraud happens in approximately 27% of all businesses. Occupational fraud or fraud committed by a worker on an organization causes more financial loss to companies than the one committed by third parties.
Payroll fraud is the thievery of cash from a business through the payroll processing system. Oftentimes, schemes committed by unscrupulous workers last an extended period as they try to hide their thievery while continuing to serve the organization. According to the Association of Certified Fraud Examiners (ACFE), payroll fraud practices tend to last up to thirty months with occurred losses touching $63,000. Regrettably, the losses from payroll fraud have a twofold impact on companies, from the initial theft and then as penalties from the Internal Revenue Service (IRS).
There are numerous ways in which workers can commit payroll fraud. Given below are some of them:
Advances Not Paid Back
The most enduring type of theft is when a worker requests an advance on the payment and then never pays it back. It works adequately when the accounting staff doesn’t record advances as assets or never monitors repayment. Therefore, the non-payment of advances needs inactivity by the recipient and incompetent execution record and follow-up by the accounting team. A monthly procedure to analyze advances will eradicate this problem.
Buddy Punching
A worker arranges with fellow workers to punch the hours into the organization’s time clock while the worker is on a leave. Supervisory inspections and the menace of termination are the best methods to avoid this type of risk. Using biometric time clocks is an expensive alternative for this, but it uniquely identifies each worker who is punching in the timekeeping system.
Paycheck Diversion
Workers could take the paycheck of another absent employee, and then redeem the check for themselves. This type of fraud can be avoided by possessing an accountant, who can retain all unclaimed paychecks in a secured way. Also, the accountant needs to check that the correct employee has received the paycheck. This can be done by identifying the person with the help of a driver’s license or some similar document.
Ghost Employees
The payroll assistant either creates a false worker in the payroll documents or prolongs the payment of a worker who has left the organization, and modifies the payment report so that the direct deposit paycheck or payment is made out to them. Normally, this type of stuff happens in large-scale organizations where there are a large number of workers and the supervisors are unable to track payment in sufficient detail. Also, it happens when a supervisor has left the organization and has not been yet replaced. In this case, ghost employees can be implanted in the departments until a new supervisor is elected. Periodical auditing of the payroll reports is required to recognize ghost employees. Another way to locate a ghost employee is when there are no reductions from a paycheck as the perpetrator desires to obtain the maximum amount of cash.
Final Words
There are numerous ways in which payroll fraud can happen. It is quite difficult to detect when the amounts involved are small.
To know more about different types of payroll frauds, attend the Compliance Prime webinar.
