Payroll fraud is when there is a breach in the payroll system that enables an individual or group of individuals to steal money from a company for unethical purposes. Payroll fraud is done by both business owners and employees. An employee may fabricate a payroll record to claim pay he/she did not earn. In order to avoid paying taxes or withhold wages that should be paid to an employee, a company may alter the payroll records. If left unchecked, payroll fraud can drain the business of a significant amount of money over time. If not discovered in time, it may also land the business in legal difficulties.
TYPES OF PAYROLL FRAUD
Some typical payroll frauds include:
Ghost Employee Fraud
It alludes to the addition of false or nonexistent employees to the payroll records. These employees’ pay is fraudulently transferred to other employee accounts or stolen in various ways. Large firms with many employees and inadequate internal controls often have a higher prevalence of it.
Wage Falsification
This kind of payroll fraud typically involves a double-cross between an employee and a member of the payroll team. The employee receives a pay raise and distributes the extra money with their payroll-based accomplice. This one is particularly challenging to detect because the offending payroll employee can later change the employee’s pay back to normal after they’ve received the inflated amount.
Timesheet Fraud
When an employee falsely claims hours on their timesheet and receives payment even if they are not working, this is called timesheet fraud. In industries where employees are paid by the hour, timesheet fraud can take several forms, including clocking in and out at erroneous times, inflating the number of hours worked, and having someone else punch in and out for them.
Payscale Alterations
Employees’ grades or hourly rates are manipulated in this payroll fraud in order to qualify them for a larger salary than they are legally entitled to. The cooperation between the payroll and human resources (HR) departments and the employees is the reason behind this fraud.
Excess PTO
Employees that require time off for emergencies, vacations, or other reasons are granted PTO or paid time off. The usage of PTO is typically closely regulated by corporate policy. An employee has the ability to falsify payroll records in order to show excess PTO that has been sanctioned and effectively collect pay for days they were not working. When the payroll is monitored and audited, this fraud is simple to detect, but when there is no payroll surveillance, it may go undetected. The employee’s compensation is comparable to that of other employees, therefore it won’t be apparent unless the payroll and timesheets for attendance are meticulously checked.
HOW TO PREVENT PAYROLL FRAUD
Segregation of Duties
There is a significant risk involved in giving one individual complete control over any component of the payroll process. One of the most crucial steps you can take to prevent payroll fraud is the segregation of roles, which is having various personnel handle crucial payroll tasks. For example, you might assign separate personnel the tasks of authorising, distributing, and reconciling payroll.
Modern Timesheet System
Use a complex timekeeping system. Consider using a clock-in system that requires a passcode or other two-step authentication in place of having employees self-report their hours. This will stop false reporting. To prevent companion punching, make sure the system has a biometric or two-step authentication procedure.
Outsource Payroll Processing
To help you reduce the risk of payroll fraud, you can seek the assistance of trustworthy payroll services in Dubai. Their technological solutions, which make use of artificial intelligence (AI) and machine learning (ML), can help your firm avoid financial loss by quickly detecting fraud.
Check for Ghost Employees
An individual who is paid by an employer but does not work for the company is known as a “ghost employee.” A payroll staff member creates a ghost employee and steals money meant for this person. Check your employee records for any duplicate names, addresses, dates of birth, tax file numbers, or other information. The possibility of ghost employees can be reduced by segregating payroll responsibilities. It’s also crucial to guarantee that multiple departments verify new personnel records.
Restricted Access to Payroll Data
Only certain personnel who carry out crucial tasks for processing payroll should have access to payroll information. You may safeguard the confidentiality of payroll information and guarantee data privacy and security by using role-based access. You can find anomalies in payroll systems enhanced with AI and machine learning capabilities. Employee data is protected from unauthorised access thanks to the security features.
Internal Audit of Payroll Taxes
To prevent fraud, payroll records must be subjected to internal review and audit. Payroll account reconciliation should not be done by the same person who prepares the payroll or who authorises payments in the accounting department. Independent people are less likely to assist the fraudster.Prior to filing payroll taxes, the classification of workers and tax preparation should be internally audited. This guarantees that there will be no misclassifications, even as a result of company negligence. The payroll auditor should also conduct ad hoc, random checks to confirm the payroll records.
Install CCTV Systems
CCTV systems are a covert approach for employees to be aware of monitoring and accountability. If any timesheet inconsistencies are found, the shop floor or punch-in area video recordings can be compared to attendance records to determine if an employee was present or not. When their actions and attempts are recorded on video, employees are less likely to attempt to breach the payroll management system. Information on any modifications to the data will also be provided via a business management system with a clear audit trail function.
Payroll fraud has the potential to financially destabilise a company, particularly those with large human resource costs. For an organisation to reduce incidences of employee theft through manipulating payroll, it is critical to foster a culture of integrity and values.
