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Minding your own business: Preventing payroll fraud with internal controls

Payroll Fraud

The ACFE found the average check tampering scheme results in losses upwards of $150,000—the highest among payroll fraud types. Left undetected, payroll fraud can grow from a small dent in the company coffers to a major financial drain.

Payroll Fraud

Manufacturing, healthcare, and construction employers are especially prone to fraudulent billing practices. All of these industries require constant streams of equipment and supplies to stay ahead of demand. That means there is a lot of pressure to order those items quickly and steadily. Failing to do so can lead to expensive delays in production or, in the case of healthcare facilities, physical danger to patients and residents.

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Restrict access to blank check stock and signature stamps to authorized personnel only, and keep these items locked away as much as possible. An employee name on the payroll list that lacks a clearly defined job description or that no one recognizes.

Require direct mailing of checks or have management distribute them physically to employees. Boxes or those with no deductions (i.e., healthcare, state/fed withholdings). We provide a complete suite of accounting and finance staffing & outsourcing services. We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals. Intuit accepts no responsibility for the accuracy, legality, or content on these sites. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business.


It can be difficult for the employer to verify expenses if no documentation is needed after the trip. However, any company can prevent this type of fraud by implementing a system where employees must submit receipts for all expenses. A payroll audit looks for weaknesses in your payroll management system from top to bottom. Usually carried out by a business owner or trusted employee, an outside accounting firm could also carry out a payroll audit. You should catch missing payroll tax payments when you file payroll forms like Form 941 every quarter. Employees with wide-ranging payroll responsibilities can cover up extra payments by running an off-cycle payroll that doesn’t appear on the business’s payroll register. Unless you’re completing payroll reconciliations that compare payroll records to the general ledger, you may not notice the extra money walking out the door.

Ideally this person will be the manager under which that the employee will or did work. This adds a separation of duties control into this important function. The dishonest employee may not have to take any action to generate Payroll Fraud the payment if the ghost is paid a salary. If the ghost is paid a wage or remuneration calculated on hours worked or the type of work done, the employee may need to forge that information to generate the payment.

What is Payroll Fraud?

The party that’s been victimized can often sue to recover the money that was stolen from them. These types of cases are often subject to state labor laws, so contact a local lawyer if you’re considering a payroll fraud lawsuit. 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. C. Whoever commits the crime of public payroll fraud shall be fined not more than one thousand dollars, or imprisoned, with or without hard labor, for not more than two years, or both.

Payroll Fraud

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How Can Internal Control Overcome Payroll Fraud?

Union workers’ productivity makes contractors’ bids competitive, but only on a level playing field. That’s why the UBC is committed to providing legislators and agency leaders with the research, resources, and professional assistance needed to identify and crack down on construction industry tax fraud. To date, officials in nearly three dozen states have improved laws and enforcement, annually recapturing tens of millions in previously lost revenue. All the mitigating measures for payroll fraud prevention will not have much of an impact if you don’t create a culture of integrity within the organization. The top management needs to set an example of expected behavior, and it also should be reinforced on a periodic basis through internal employee communication. A payroll solution integration with HCM suites ensures seamless flow of data for an error free payroll processing.

It’s a crime that can be committed by both employees and employers. Read on to learn more about the causes of payroll fraud and how it’s detected, or use the links below to navigate the post. Employee benefits depend on workers being classified as employees or independent contractors. It happens by mistake when employers misclassify employees unintentionally. Once you’re confident in your classifications, record them for every employee in your payroll system to ensure you’re withholding the right taxes, offering necessary benefits and using the right forms. According to a TEKsystems survey, only 14 percent of IT leaders strongly agree their organization has an effective offboarding process. Without an effective offboarding process, your company can easily forget important steps such as purging exiting employees from the payroll system.

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The term ghost payroll refers to situations in which companies are unwittingly paying nonexistent employees. This type of payroll fraud is most often committed by a human resources employee or someone with easy access to the company payroll system. The perpetrator can create a fake employee or keep a staff member on payroll who no longer works for the company.

Payroll fraud ranges from mere overstatement of time worked, leave accrued or rates of pay to the payment of “ghost” employees. Only allow access to sensitive systems to those who need it to perform their jobs.

Employees can commit payroll fraud by clocking hours they don’t work or secretly increasing their compensation rate. On the other hand, employers can commit payroll fraud by withholding wages and benefits that they owe their employees. In either case, one party is being deceitful and stealing from the other to enrich themselves. You should implement a system for quarterly and annual reconciliation of payroll books. Additionally, you should audit your payroll records by a third party to detect ghost employees and other instances of payroll fraud. Employees falsify their timesheets to include extra hours which they have not worked. This results in extra payments to employees, which they are not entitled to, causing financial loss to the organization.

And with regard to expenses and reimbursements, a detailed company policy helps keep employees accountable for the claims they submit. Exactly how ghost employees are created varies depending on the type of payroll system in place, but they are often achieved by leveraging internal control weaknesses. Large organizations with high employee turnover are generally at greater risk since there is less chance of a fictitious employee being recognized on the system. While payroll fraud is often committed internally, it can also be committed by external parties. W-2 scams and payroll diversion schemes involve third-party perpetrators who target individual employees or company records.

What is a ghost employee?

A ghost worker is someone who is on a company's payroll but does not do any actual work. In some cases, a ghost worker is a real person who has died or otherwise left the company, but their personal data remains in the books.

It’s crucial to not only stay informed but to also be prepared for the worst by having mechanisms and protocols in place to aid in both response and recovery from such incidents — no matter how big or small. Company A was a road transport company that conducted a transportation business. There was no problem with the transportation side of the company. Establish a zero-tolerance policy for fraud and prosecute violators to set an example. Analyze pay rates for any unusual pay rate alterations, especially with no change in job or other obvious reason for the change.

Because the amounts are so great, payroll fraud warrants special attention. Have payroll accounts reconciled monthly and reviewed by management. Audit payroll information for duplicate deposit account information and repeated Social Security numbers or addresses. By law, you can ask us what information we hold about you, and you can ask us to correct it if it is inaccurate. If we have asked for your consent to process your personal data, you may withdraw that consent at any time. If we are processing your personal data for reasons of consent or legitimate interest, you can request that your data be erased. You have the right to ask us to stop using your information for a period of time if you believe we are not doing so lawfully.

In this case, the cybercriminals who performed the attack actually hacked into the city’s direct deposit payroll system. The employee does not need to control the entire payroll system, or have any control over the system at all. Once the ghost is entered into the system, the system itself will generate the payments to the ghost without further action or review by payroll staff. As long as the method of payment has been considered, the employee may be able to just sit back and collect the payments.

Payroll fraud involves draining money from a business by manipulating the payroll process. The Ascent gets into the sleuth mindset to explain the eight types of payroll fraud and how to detect it.

If you’re like most businesses, employee payroll costs are your biggest operating expense. But if you’re the victim of a payroll fraud scheme, that is exactly what happens. However, they’re becoming common tactics used by cybercriminals who are unrelated to the company and simply want to make a quick buck. This type of scam involves an employee with access to the payroll system creating a fake employee profile. This “ghost” employee receives direct deposit payments for work that is not completed. More than one employee using the same bank account for the deposit of wages.

Payroll Fraud

Keep a close eye on your business’s cash outflow, or cash leaving the company, when employees with financial responsibilities are on vacation. You might have a fraudster in your ranks if there’s an unexpectedly sharp decrease in outgoing cash. It’s standard in many industries to reimburse employees for expenses they incurred on behalf of the business. It’s not standard to grant reimbursements without verifiable proof of payment, however. As a business owner, you’re caught paying for two employees when you got only one.

Can be carried out by individual employees as well as criminals outside your organization. Not at the 2016 IDEA User Conference but would like to know more training on how to use IDEA Data Analysis software for detecting fraud?


Here are the most common types of https://www.bookstime.com/ and how you can protect your business from suffering the same violations. Want to learn more about how Global Managed Payroll can help reduce your risk of employee payroll fraud?

  • There was no problem with the transportation side of the company.
  • The practice’s outside legal counsel retained my team to investigate the controller’s theft and quantify the misappropriated funds.
  • Payroll fraud is the theft of cash from a business via the payroll processing system.
  • Her attempts to garner a bigger paycheck ultimately failed, but her story provides important lessons for fraud examiners investigating these types of scams.

You can source the services of a reputable payroll service provider to help you mitigate the risk of payroll fraud. You can benefit from their technology solutions that leverage Artificial Intelligence and Machine Learning for timely detection of fraud and help prevent financial loss to your organization. Employees with no deductions on the payroll for taxes or benefits. Many global businesses may have employees on a hard currency payroll (USD, GP, Euro, etc.) who work from home in a jurisdiction where there is no withholding obligation on the employer. The employee is paid gross and is left to declare their income to the local authorities via the usual tax return process.

Don’t take this fraud for granted

Companies can face fines from $50 to $1,000 per worker, and even jail time if the misclassification is deemed intentional by the Department of Labor or the IRS. Or, cost less than the employee reported, allowing them to pocket the difference. Putting all of your eggs in one basket is always a recipe for disaster, and that’s no less true when it comes to payroll, according to Mason Wilder, research specialist at the ACFE. This site is directed at, and intended to be used by, persons in the United States of America only.