Payroll fraud can put a huge dent in your bottom line – costing companies billions of dollars annually. Unfortunately, companies are often unaware that a corrupt employee is in their midst. According to data from the Association of Certified Fraud Examiner’s (ACFE) 2016 global fraud study, Report to the Nations on Occupational Fraud and Abuse, payroll fraud is an especially high risk for small organizations. In the United States, 131 cases of payroll fraud, representing 12.6% of all asset misappropriation schemes, were reported in 2016. While most fraud is uncovered within one fiscal year, payroll fraud tends to fly under the radar for an average of two years before detection and on average costs companies $90,000 per occurrence.

As business advisors, we stress the importance of internal controls to prevent fraud and theft and to ensure the accuracy of accounting data. However, many situations still exist in which organizations fail to establish adequate control systems to reduce transaction costs for many reasons. Whether it is a lack of information or a lack of personnel, the fact of the matter is that payroll fraud is usually perpetrated by a single or multiple insiders. The following strategies can help prevent and detect payroll fraud in your organization.

• Have a system in place.

This is one of the most effective strategies, and if you do not already have one, we strongly recommend implementing processes that regularly check for schemes. Consider specialized software that combats ghost employee tactics by looking for red flags such as duplicate Social Security numbers, addresses or direct-deposit accounts. Another step is to be transparent with your audit plan. Making employees aware that you conduct such audits may be enough to deter them.

• Take advantage of data.

Compare payroll numbers against output. A spike in overtime hours during a slow month, for example, should prompt further investigation. We can help you analyze your data and identify any red flags.

• Adequately separate duties.

This will prevent incompatible functions from being performed by the same individual, especially in the accounting department. Ask your payroll company if they allow multiple people to be in the authorization chain of command. Most payroll companies allow for multiple recipients of payroll reports; be sure you send final reports to an outside accountant and the owner.  If one employee handles payroll, we recommend hiring an outside person to input the information into the accounting system, acting as the internal control.

• Routinely check documentation.

Check documents such as timecards and any other payroll documentation. You should be on the lookout for employees who are claiming excess hours and overtime as well as any other items that seem suspect. If employees know you are regularly checking time cards, they will be less likely to test the waters.

• Controls for new and terminated employees.

These are often overlooked. Make sure you collect the right documentation when adding new employees. Equally important is following protocol for terminated employees. While failure to remove a terminated employee from payroll is not fraud, controls will help you avoid the embarrassment of paying an employee after termination.

If you have concerns about payroll fraud in your organization, please call one of our professionals today.