OCT 3, 2024

Payroll Fraud: How to Identify Fraud & Safeguard Your Company

 

There are various threats to the security of your business, one of which is payroll fraud. Business owners need to protect the interests of both their businesses and their employees by understanding this threat and knowing how to protect against it. Let’s look at what this form of fraud is, some examples of payroll fraud, and some best management practices to prevent it.  

The Definition and The Types

 

Payroll fraud is when funds are embezzled from your business through the payroll system. This type of business fraud is not uncommon. Enterprise software company Ramco Systems reported in August 2022 that 27% of all businesses are the victim of this type of fraud, and an April 2024 report from AI and technology company Thomson Reuters stated most of these fraud schemes last 18 months, with an average of $2,800 embezzled per month. In addition to the money stolen, this kind of fraud can affect trust within the company and damage the company’s external reputation.  

 

The are several different kinds of payroll fraud:

 

  • Ghost employees – fictitious employees are added to the payroll to divert funds to fake accounts. 
  • Timesheet fraud – employees’ timesheets are falsified to add hours to their pay that they didn’t work. 
  • Worker misclassification – workers are incorrectly classified (either by accident or deliberately by someone on your staff), resulting in unpaid taxes and denied benefits and/or compensation.  
  • Pay scale alteration – unauthorized changes are made to an employee’s pay scale or hourly rate.  
  • Wage theft – employees aren’t paid their full wages for the hours they work. 
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Payroll Fraud Warning Signs 

 

If your business is the victim of fraud, it’s important to catch it as quickly as possible. You should always be on the lookout for warning signs that someone is embezzling from your payroll: 

  • Payroll deliveries or transfers that you didn’t authorize or initiate.  
  • Unexpected payroll deposits going to employees, particularly ones marked “extra deposit.”  
  • Changes to payroll that weren’t authorized by either you or anyone you employ to manage your payroll.  
  • Email requests to preview payroll payments or changes you weren’t expecting. 

 

These are all signs that there may be a breach of security with your payroll system and require swift action. Contact your payroll managers, bank, and the necessary authorities to investigate and deal with this potential threat.  

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Fraud Prevention

 

Of course, the best way to deal with fraud is to prevent it altogether. There are various best management practices (BMPs) to avoid payroll embezzlement; one of these is hiring a third-party payroll service provider like Payroll Vault. A payroll service provider has a team of payroll experts to manage and monitor your payroll, which provides a degree of oversight for your payroll you wouldn’t get trying to manage it by yourself or with a single in-house payroll manager. 

 

A third-party payroll service provider also provides you with a robust security system specifically designed to keep your payroll safe and prevent unauthorized access. By having your payroll managed by a third-party provider, you’ll also make it more difficult for would-be embezzlers to access your payroll system from inside your business.  

 

Finally, a third-party payroll service provider ensures you’ll have comprehensive payroll records, helping catch payroll discrepancies if they do occur.  

 

Other BMPs to prevent payroll embezzlement include:  

  • Keeping your antivirus software updated 
  • Changing passwords whenever there’s a change in payroll administration 
  • Restricting access to computers that are authorized for payroll administration 
  • Regularly self-auditing your payroll system and examine your payroll records for discrepancies 
  • Verifying that the number of payments made each payroll cycle match the number of employees you have. 
  • Ensuring every employee that splits direct deposit payments between accounts is sending them to verifiable accounts.  
  • Avoiding over-access for any one employee within your payroll administrative system. 

 

These measures can help you and your business avoid becoming the victim of embezzlement through your payroll system.  

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Protect Your Payroll System with Payroll Vault 

 

We’re proud to offer you a comprehensive range of payroll solutions, including safe and secure payroll processing, payment options, tax filing, and record keeping. Our boutique-style payroll service is tailored to your business needs. Visit your nearest Payroll Vault location today or call Payroll Vault San Diego South Bay at (858) 967-0417 to find out what we can do for your business.