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In this article, we’ll talk about the often-missed kinds of payroll fraud and what to do.


Payroll Fraud


Payroll fraud involves the skimming of cash from a company through its payroll system.  This type of fraud comes in many different ways. The act is typically committed by an employee with access to the company’s employee and accounting database. This would include details such as social security numbers (SSNs), salaries, wages, etc. Putting measures in place to prevent this kind of theft within your business is essential.


How To Avoid Payroll Fraud


#1. “Ghost employee” receiving paychecks.

A ghost employee could be a former employee, a possible vendor, or even a made-up person in your payroll system. This can be easily overlooked especially if your company has a large number of employees. Perform an audit of your payroll reports to identify things such as direct deposits made to the same bank account or duplicate SSNs.


#2. Having a coworker punch the time for someone who is not there to do it themselves.

This is a common payroll fraud faced by all types of businesses. Employees tend to punch in additional time for a fellow staff member or themselves when they haven’t shown up for work. This means staff members will be getting paid for work not done. You can ensure that each employees’ work time is carefully documented and always verified by a supervisor to avoid this. 


#3. Seeing unpaid cash advances and other expenses that have already been repaid.

Businesses that do not record all business transactions in a timely manner are at risk of payroll fraud. Cash advances are commonly used by business owners as this can come in handy for day-to-day operations.  When they, along with other expenses, are not recorded in a timely manner, your account becomes vulnerable to payroll fraud. How can you avoid this? Ensure that each transaction is properly recorded in a balance sheet account. This will eliminate the possibility of easily losing track of these expenses and having them wrongfully recorded.


#4. Self-approved pay rate increases, bonuses or bogus commissions, or overtime recorded by employee.

Business owners can quickly identify irregularities by making a habit of regularly going over their finances. In some businesses, employees can personally record self-approved bonuses, commissions, pay increases, or overtime. This would typically look normal in your payroll system. But, what if you’re not aware of these adjustments? You could be losing thousands of dollars each month. You can ensure that a supervisor approves any kind of bonus, increase, or overtime before it is recorded in the system to avoid this. 


Prevent all kinds of payroll fraud with these internal strategies.
  • Review canceled check payees against the names in your books and your monthly bank statements.
  • Implement rotation and cross-training with your HR & payroll staff.
  • Ensure that employees use their vacation time during the year.
  • Properly separate your duties.
  • Set up bonuses and payroll as direct deposit.
  • Have separate individuals doing the processing and distribution of checks, payroll, payment approvals, etc.


Want more?

Looking for more bookkeeping information or tips? Check out our post on How to Avoid Scams