Payroll fraud is the theft of cash from a business made through the payroll processing system. There are several ways in which employees can commit payroll fraud. They are:
Setting up ghost employees
The member of staff either creates a fake employee in the payroll records or prolongs the pay of an employee who has just left the company altering records so the salary payment or cheque is made out to them.
This can go unnoticed for longer in large companies where supervisors have many staff and may not have the time to track all records in sufficient detail. When a supervisor has left the company and has not yet been replaced, this could create an opportunity for ghost employee identities to be added to their records until a new supervisor is appointed.
Periodic auditing of the payroll records is required to spot ghost employees. Another giveaway in spotting ghost employees is when there are no deductions from a pay cheque as the perpetrator wants to receive the maximum amount of cash.
At Miracle Dynamics we have had the very real experience through one of our clients where a member of their payroll staff set up a series of ghost employees which only came to light during a payroll security audit we carried out. The perpetrator paid for her recent wedding with her ill-gotten gains.
An employee arranges with his fellow employees to have them punch his hours into the company time clock while he takes the day off. Supervisory reviews and the threat of termination are the best ways to avoid this risk. A more expensive alternative is to use biometric time clocks, which uniquely identify each person who is signing into the time keeping system.
Advances not paid back
The most passive type of fraud is when an employee requests an advance on his payroll and doesn’t pay it back. This can happen if the accounting staff do not record advances as assets (instead charging them directly to expense), or do not monitor repayment. Thus, the non-payment of advances requires inactivity by the recipient and inadequate transaction recordation and follow-up by the accounting staff. A monthly procedure to review advances will eliminate this issue.
Salary cheque diversion
Employees could steal the salary of an absent employee and cash the cheque for themselves. This can be avoided by having the pay clerk retain all unclaimed cheques in a locked safe, and by showing that everyone receiving a pay cheque can prove their identity with an official document.
Pay rate alteration
Employees collude with the payroll clerk to increase the amount of their hourly pay in the payroll system. A diligent clerk will then return the pay rate to its original level after committing this fraud for just a few payment periods making the fraud less easy to spot. This can be detected by matching pay rate authorisation documents to the payroll register.
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. This is a particular problem when supervisors are known to make only cursory reviews of time sheets. The best control over this type of fraud is a supervisory review.
In short, there are many ways in which the amount of payroll paid out can be fraudulently expanded. This is difficult to spot when the amounts involved are small, so businesses must consider the cost of prevention activities in relation to the amount of savings that will be generated.
Payroll Fraud Investigation with Miracle Dynamics
Miracle can provide a detailed Payroll fraud investigation service which can include audits, a detailed review of payroll data and business processes giving you peace of mind. HMRC approved payroll packages for the Miracle Dynamics NAV or AX user. Our Miracle Pay P11D captures sensitive employee benefits and expense data in a secure way.
Miracle Pay P11D add-on records company cars, mileage allowances, living accommodation, company loans and medical care with the data sent to HMRC via paper format or electronically via e-government gateway.
We have a range of Payroll, HR, workforce, umbrella and self-service solutions plus add-ons allowing a secure means of sending electronic payslips. Solutions for complex payroll requirements, the online storage and access of payslips, P60s and much more.
Miracle Portal provides a smart way to record and manage absences having been designed to enable HR departments to reduce their admin by empowering employees to take control of their own holiday and sick leave in a secure way.
If you are looking for a payroll fraud investigation service or have any questions on how we can help you please contact us here.