Preventing Payroll Fraud: Strategies and Best Practices

Payroll fraud is a type of embezzlement or "inverse wage theft" that originates from within the organization, where staff steal from company funds under the guise of regular compensation.

According to the Association of Certified Fraud Examiners (ACFE), payroll fraud comprises 15% of all workplace fraud schemes throughout North America. While multi-million dollar embezzlement cases get the most media attention, payroll fraud usually happens on a smaller scale, with discovery and resolution attempts occurring quietly. The ACFE found that the average payroll fraud scheme creates a $2,800 loss per month and takes about 18 months to detect.

Because payroll fraud can go unnoticed for long periods, smaller organizations are particularly vulnerable, as the financial impact can quickly snowball. Here’s how your organization can prevent payroll fraud by implementing best practices that support employee fraud detection.

Understanding Payroll Fraud: What It Is and Why It Happens

Payroll fraud can appear in various forms: unauthorized pay rate changes, inconsistent timesheets, and ghost jobs, among others. Payroll fraud often occurs due to poor oversight in payroll management, inadequate payroll data security, or misplaced trust in long-time employees who may feel disgruntled over management changes or stagnant pay.

Signs That Your Business Might Be a Victim of Payroll Fraud

• Unexplained changes in payroll records. If payroll records change without a clear organizational cause—such as a merger, acquisition, or new management—payroll fraud could be at play.
• Frequent paycheck adjustments. While paychecks may adjust for transfers, raises, or promotions, frequent, unjustified changes could signal fraud.
• Irregularities in hours worked or overtime. Irregular hours may reflect personal circumstances or operational needs, but if no clear pattern exists, an employee might be claiming more overtime than earned.
• Inconsistencies in employee addresses or bank account numbers. Frequent changes in these details, beyond typical relocation or account updates, can be suspect.
• Delayed payroll audits and reconciliations. When managers are involved in fraud, payroll reconciliations are often delayed, and audits may be irregular or absent entirely. This could signal an attempt to cover up fraudulent activity.

Effective Strategies to Prevent Payroll Fraud

Implement Strong Internal Controls

Organizations of all sizes need robust internal controls to prevent fraud. Payroll processing workflows should be regularly reviewed for security and compliance, and segregating duties in payroll can cut down on fraud by limiting access to sensitive data.

Conduct Regular Audits

Payroll audits assess both payroll data and management processes and should be performed internally and externally by an impartial third party. Payroll audits can address:

• Deficiencies in tax and benefits calculations
• Alignment of tax deductions with employee residences
• Compliance with wage and hour regulations
• Timesheet and overtime discrepancies
• Worker classification accuracy
• Payroll software and recordkeeping efficiency

Utilize Secure Payroll Software

Cloud-based payroll software with real-time reporting, access controls, and encryption provides valuable fraud prevention tools, enabling prompt payroll processing and audit trails to catch fraud before it escalates.

Employee Training and Awareness

Payroll security training helps employees recognize suspicious behavior and understand payroll data security. Training should include current procedures and protocols for payroll management and data protection.

Perform Background Checks

Background checks on new hires can help prevent hiring individuals with a history of fraud. Financial positions and other sensitive roles can include pre-employment screenings.

What To Do If You Suspect Payroll Fraud

1. Gather evidence, including payroll records, emails, communications, and employee testimony, to conduct an informed investigation.
2. Consult legal counsel, as suspicious activity may not constitute fraud, and a legal opinion can clarify the situation.
3. Report the fraud if local statutes require it.
4. Assess and strengthen internal controls to prevent future payroll fraud.

How Affiliated Payroll Can Help Protect Your Business

Affiliated Payroll offers secure, cloud-based payroll solutions with access control and real-time reporting features to help prevent payroll fraud. Our dedicated support team will help you find the ideal solution with advanced fraud prevention tools.

Preventing payroll fraud is proactive; by regularly reviewing internal controls and payroll processes, you ensure accurate, secure payroll data. Update processes as needed to maintain a secure payroll environment.

Secure your payroll today with Affiliated Payroll’s fraud prevention solutions—contact us for a consultation.