How to prevent Payroll Fraud

Unfortunately, payroll fraud is a reality for many businesses across Australia. There are many small cases that can go unnoticed and undetected so it’s important to create robust systems and processes to ensure that your business does not get stung and staff activity is closely monitored.

How can an employee commit Payroll Fraud?

Payroll fraud is a term that refers to a range of ways that employees modify the payroll or benefits scheme, in order to gain an unauthorised financial advantage. The recipient of the funds is usually the employee or known associate of the employee.

There’s a range of ways that payroll fraud can take place:

Time Theft – This is when an employee accepts pay for work that they’ve not done. This can include lying about what hours they’ve done or whether they’ve actually turned up for their shift, overextending breaks and taking excessive personal time (including phone calls and breaks). This can also include internet theft, when an employee spends excessive time online rather than the duty they’ve been employed to do.

Hourly Rate Manipulation – When employees (often those who have access to the administration systems or are at manager level) change pay rates to receive more than that agreed upon.

Leave Theft – This occurs when employees are not honest about the amount of leave that they have taken, resulting in them receiving extra hours in paid leave.

Inflated Expense Reimbursements – When employees are entitled to be reimbursed for work related items, they are able to commit fraud by inflating prices for their claims or making claims for non-approved or personal expenses.

‘Ghost’ employees – The aim of this payroll fraud is for an employee to gain an additional wage paid to a ‘ghost’, who they have created falsely. This often happens in larger companies, when employees are spread over different locations and payroll is in one centralised location. To commit this type of fraud, the employee often needs to be in a position to have some access to the payroll system in order to add the ghost.  

With so many payroll fraud types, unfortunately it can be easy to get caught out – particularly as your business grows in size. Here are some suggestions as to how you can safeguard your business to prevent instances of payroll fraud.

Reduce any chance of a single point of failure

Relying on a single person to conduct payroll activities can increase instances of payroll fraud. A solution is to segregate duties across a number of employees. This includes implementing approval processes across timesheets, payroll, bank details, salary changes and new employees. Making sure that there is another employee checking on these things will reduce the chance of payroll fraud.

Implement policies

Document the policies and procedures in place to leave a solid audit trail. Eliminating paper based processes and moving to a cloud based platform to place all information into a single platform can reduce the chance of payroll fraud. Systems such as Xero and MYOB are both capable of this function.

Keep the system secure

Make sure that the master data in your system remains secure by regularly updating logins, passwords and by deleting any out-dated information. If your company uses an in-house system, limit access to the database. For example, does your IT department need access to the payroll database beyond a read only file? Make sure that there are limits on who can edit what, and keep tight control over these elements. Monitor the use and keep track of any out of hours or unusual access.

Importantly, ensure the ABA file (that holds instructions to the bank for payroll disbursements and can be edited) is only accessible to authorised signatories and that at least two authorisations are required.

Regular audits

Make sure that you conduct regular checks and audits. Checking monthly variance reports, keeping track of hours worked versus hours paid and changes such as bank details and rate increases will all help uncover potential fraud.

One option that suits many businesses is using the services of an outsource payroll provider. Introducing a third party provider significantly reduces the risk of payroll fraud and may have other  benefits such as reducing time spent on administration and enabling your employees to focus on what you do best.

At Fortunity we are happy to work with you and point you in the right direction. Contact us today on 02 4304 8888.