Is your Organization a Victim of Payroll Fraud?

Muhammed Naseer. K.

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There has been a significant rise in the number of businesses falling victim to fraud and turning a blind eye on the issue can only worsen the situation. Fraud by itself can be dangerous to the overall functioning of an enterprise, and if it happens to be related to payroll, the problem escalates.

Payroll fraud is theft of funds using a company’s payroll system, which is the number one source of accounting fraud and employee theft according to the Association of Certified Fraud Examiners. Employees who have access to the systems through which workers are paid can misuse their access to issue false payments.

Fraudsters misuse payroll data in a number of ways, common ones being timesheet fraud, falsifying wages, commission fraud, bonus fraud, expense reimbursement fraud, ghost employees and misclassification.

Timecard falsification and ghost employees are the two common types of payroll fraud. In timecard falsification, an employee provides inaccurate data about hours worked, leading to a miscalculation of wages. Even though it may not look as serious as stealing cash from an organization, it is equally punishable. A ghost employee is someone who is not part of an organization but is recorded on the payroll system. In such cases, the person who has ‘created’ the ghost employee collects their salary.

27 percent of all businesses fall prey to payroll fraud and it is interesting to note that smaller organizations that has an employee strength of less than 100 employees get affected more when compared to larger organizations. The occurrence is nearly double!

A sad truth about payroll fraud is that it is often long-term and many of the times it is the trusted employees of an organization who get involved in payroll fraud. By the time you realize what is going on inside your own firm, the damage would have been done.

Prior to hiring an employee who will be responsible for payroll management or who can access the bank accounts of a company, a background check on the person is mandatory. An individual with history in deceiving a company financially will tend to do so even if they switch companies. Also, reviewing payroll reports regularly to check for errors in calculations and to figure out whether any ‘ghost employee’ has been listed, is equally important.

Preventing payroll fraud is indeed a challenging task but given the massive loss it can cause to a business, employers need to be extra vigilant.

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