Payroll fraud is like a slow leak from a leaking pipe. Initially, the damage may be difficult to detect or appear insignificant. However, the extent to which fraudsters can steal from a company through international payroll schemes can be substantial over time. For instance, a female employee was able to steal close to $300,000 from her employer over the course of her employment. Although the paper trail showed losses of $300,000, prosecutors believed that the woman may have taken more than three-quarters of a million dollars from her employer, starting from when she was first hired in 2010 and continuing until her termination in 2013.
Payroll fraud poses a particular risk for small businesses, even for companies of any size. In their 2018 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) that companies with fewer than 100 employees are over twice as likely to fall victim to payroll fraud compared to larger businesses. The issue of payroll fraud is global in scope and has been reported at companies around the world. Understanding the risks and mechanisms of payroll fraud can help your global business to take proactive measures to prevent such malfeasance.
How Serious Is Payroll Fraud? 💰🚫🤔
Payroll fraud has the potential to yield staggering sums of money for the perpetrators. For instance, the president of a payroll processing company that serviced other businesses was able to steal a whopping $26 million. Another instance of payroll fraud cost New York City a staggering $600 million.
The Association of Certified Fraud Examiners reports that payroll fraud accounts for about 7% of all fraud cases,and the average company loses around $63,000. Typically, payroll fraud schemes are lengthy in duration, with the median length lasting about 30 months.
Given that payroll fraud can go undetected for extended periods, recovering lost funds can prove to be a significant challenge for affected companies. In the case of the woman who stole around $300,000, the amount she is required to repay her former employer represents nearly one-third of the total amount she is suspected to have taken during the scheme.
Payroll fraud can also have a ripple effect on innocent parties. When the president of a payroll processing company stole millions of dollars from clients, the immediate impact was felt by the employees of the affected companies. Thousands of employees awoke to discover that their paychecks had been withdrawn from their accounts, leading to overdrafts and associated fees. Additionally, the fraud caused the payroll company's employees to lose their jobs and source of income.
The impact of payroll fraud on a company and its workforce should not be underestimated. A single bad actor can seriously damage a company's reputation and ability to meet its financial obligations.
How Payroll Fraud Happens 🤝💰👀
International payroll fraud can stem from various causes, such as employee misconduct or company malfeasance. The ACFE study found that when payroll fraud is committed by an employee, it is usually someone in the accounting or administrative support department. While payroll fraud can be carried out by multiple individuals working together, it is usually the work of a single individual.
There are various types of international payroll schemes available, including:
- Ghost employees: Individuals who receive a paycheck from a company without actually working there. Often, these employees don't exist and never worked for the business. Identifying ghost employees can be straightforward in some cases, as fraudsters may use a derivation of their name, a placeholder like "John Doe," or even a letter like "X."
- Timesheet fraud: One of the most common forms of payroll fraud, this involves employees falsifying their hours worked to receive more pay. Often, these falsifications are small enough to avoid detection at first, such as an employee adding an extra 15 minutes to their reported hours each day.
- Buddy punch-ins: This type of fraud occurs when an employee asks a co-worker to punch their timecard for them, even if they aren't at work yet. Although seemingly innocuous, it is still a form of fraud.
- Misclassification of workers: Employers sometimes classify employees as independent contractors to avoid paying payroll taxes or benefits, even if they don't meet the requirements of the definition.
- Payroll advances that aren't repaid: When employees receive an advance on their pay and fail to repay it, it is considered fraud.
- Fraudulent pay rates: Payroll staff may adjust an employee's hourly wage to give them more money.
- Unauthorized bonuses: Issuing a bonus check to an employee or oneself without approval is a form of payroll fraud.
- Falsified leave or paid time off: Employees who claim paid time off when they aren't eligible or take paid leave when they shouldn't commit fraud.
- Falsified withholding: When amounts that should be deducted from a person's paycheck, such as taxes, retirement contributions, and insurance benefits, aren't, it is considered fraud.
- Falsified expenses: Employees with expense accounts can commit payroll fraud by claiming expenses that aren't work-related, such as taking their family out to dinner. They may also create a fake receipt for a purchase that never happened.
How to Identify and Correct Payroll Fraud 🔍✅💻
Identifying some types of payroll fraud can be challenging, especially when dealing with international branches. For example, it can be difficult to identify ghost employees if your business operates globally. One solution is to work with a third-party organization that has people in the country where your business operates. A third-party ghost hunter can ensure that anyone receiving a paycheck from your business is a legitimate employee.
In addition to working with a third-party organization, you can implement measures to verify the existence of your employees. Verifying the authenticity of new hires through reference checks and background screenings is a useful method. Requiring direct deposit for employees can also help reduce the risk of paying ghost employees. By implementing these measures, you can mitigate the risk of payroll fraud and protect your business's financial interests.
It's important to audit and review payroll to detect other types of payroll fraud, such as falsified wages, time sheets, and expenses. To do this, the person responsible for reviewing and approving the payroll should be different from the person who processes it. The person reviewing payroll should ensure that:
1. Hours worked should match the expected number of hours an employee should work: If an employee works more than 40 hours or more than the number of hours they were hired for, the person reviewing payroll should follow up with the individual's supervisor to confirm that everything is legitimate. Alternatively, you can require approval before any employee can submit a time sheet with more than 40 hours worked in one week.
2. Hourly wage is accurate: The person reviewing payroll should compare employees' expected hourly wage to the wage they are actually receiving to detect discrepancies.
3. Appropriate amounts are withheld: The person reviewing payroll should ensure that taxes and other withholdings are deducted from employees' paychecks.
4. Expenses are appropriate: The person responsible for auditing or reviewing payroll should also examine any expenses claimed by employees to ensure that they are legitimate and work-related. This review involves scrutinizing receipts to check that the expenses claimed match the receipts.
By implementing these measures, you can minimize the risk of payroll fraud and protect your business's financial interests.
How to Prevent Payroll Fraud 🚫💰🛡️
Preventing payroll fraud can save your business from significant financial losses. Here are some steps you can take to prevent payroll fraud from occurring.
These are all excellent additional steps to prevent payroll fraud. Here's a summary:
1. Thoroughly screen new hires: Check their criminal background, verify their references, and confirm their education and previous employment. When hiring employees internationally, consider outsourcing the screening process.
2. Use electronic time sheets and approval: Electric time sheets make it more difficult for employees to falsify hours worked. Requiring supervisor approval of time submitted can also help prevent fraud.
3. Use biometrics to eliminate buddy punch-ins: Use fingerprints or other biometric data to verify an employee's identity before they clock in to prevent buddy punches.
4. Limit payroll data access: Limiting payroll data access to only necessary personnel reduces the risk of fraudulent adjustments or changes.
5. Require a second set of eyes on payroll reports: All payroll reports should be reviewed and approved before payments are issued. Have a process in place to pause payments and issue corrections for inaccuracies.
6. Know what to look for when reviewing payroll: Be vigilant for payments to similar names and identical addresses, payments to people at the same address, or payments to the same bank account for different employees.
7. Have a system to identify and remove terminated employees: flag records or files after an employee leaves the company to prevent payments to ghost employees.
8. Eliminate paper checks: Direct deposit allows verification of bank account information and reduces the risk of fraud.
9. Establish a zero-tolerance policy: Communicate clear rules and consequences for committing payroll fraud to deter employees from attempting it.
By taking these steps, you significantly reduce the risk of payroll fraud and protect your business's financial interests.
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