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Employee Payroll Fraud


Employee Payroll Fraud

Employee payroll fraud is a type of asset misappropriation and the most common fraud in many medium-sized businesses. Payroll fraud involves the altering of an employee’s records or altering the timecard type of work performed or rate of pay. In this article, we look at ways of detecting employee payroll fraud and red flags that could indicate the presence of employee payroll fraud in an organization.

Prevention of Employee Payroll Fraud

To prevent employee payroll fraud and set up strong internal controls in employee salary payment disbursement, the following steps can be adopted:

  • A person someone other than the Payroll or HR department must distribute the salary payments.
  • Each of the person receiving a salary must be identified properly using their identity cards.
  • Check Payroll accounts routinely for duplicate names or addresses or deposit accounts.
  • All overtime claims must be authorized by a supervisor.
  • In case of extensive overtime by a single employee in a department, the records must be checked more thoroughly.
  • Distribution and calculation of payroll must be routinely rotated amongst the team without prior notice.
  • A person must maintain a personnel record different from the payroll and time-keeping functions.
  • Make employee payments through a separate bank payroll account.

Red Flags of Payroll Fraud

All organizations must watch out for the following red flags that could indicate the presence of payroll fraud in the business.

  • No references and backgrounds were checked for new hires.
  • Wage rates not authorized in writing by the designated official.
  • Sick leaves, vacations and holidays are not reviewed for compliance with company policy.
  • Payroll records are not checked against attendance or personnel records for terminated employees, fictitious employees, etc.,?
  • There is no proper bio-metric system or attendance system used for verifying the presence of employees?

Factors Leading to Employee Fraud

In a report titled Deterring Fraud: The Internal Auditor’s Perspective by Dr Steve Albrecht, nine factors were identified as motivational factors leading to fraud:

  1. Living beyond means
  2. An overwhelming desire for personal gain
  3. High personal debt
  4. A close association with customers
  5. Feeling pay was not commensurate with responsibility
  6. A wheeler-dealer attitude
  7. A strong challenge to beat the system
  8. Excessive gambling habits
  9. Undue family or peer pressure

High-Risk Employees

Based on the above findings, another report was published by Richard C. Hollinger, listing persons with a certain background that had a higher risk of committing fraud:

  • People with few ties to the organization or local community
  • New employees
  • Part-time employees
  • Unmarried employees
  • Employees in low-paying, low-status jobs
  • Alcohol and drug abusers
  • Reckless individuals who enjoy breaking rules and dangerous activities
  • Individuals who associate with people having a criminal background.

For more information about employee payroll fraud, contact a Forensic Auditor or visit Nearest. Expert