How Can Companies Prevent Payroll Fraud?

Companies constantly seek an opportunity to identify external problems and find opportunities to resolve them. They employ different strategies to provide value addition and increase the returns for the shareholders. All companies at the same time should ensure the internal processes are robust, manipulation free and sustainable. Various financial and non-financial frauds can occur in a company due to many factors.

Payroll Fraud is one of the costliest forms of financial fraud amongst companies. As the company’s internal teams, such as the accounts and human resource processes, manage the payroll functions, usually such payroll frauds rarely feature publicly. Therefore, there is minimal possibility of recovering money lost to the fraudsters in cases of such payroll frauds.

Payroll Fraud

Payroll fraud is generally considered an illegal scheme under which a company employee gets the salary or reimbursement payment from the company through the payroll processing system. It can also be viewed as an act of stealing money from the company’s payroll system. Usually, company employees carry out such fraud by making false claims to their employers to process payments for a fraudulent scheme to sidestep paying towards payroll insurance and taxes.

Company Payroll fraud is usually insidious in the business’s accounting department involving bookkeepers or payroll managers who generally have access to company bank accounts and records with an ability to manipulate company financial statements.

Types of Payroll Fraud

The following are some of the types of payroll fraud:

Company Ghost Employees

It is a type of fraud that occurs when the employees are present in the company payroll books but not working for them. But the payment will be processed for these ghost employees, which affects the company financially.

Timesheet alterations

Company Employees at times involve in this type of payroll fraud scheme by adjusting the work timesheets to add more hours of worktime wherein the employees work for fewer hours. Company staff with full access to the company payroll system can manipulate the timesheet records to pay themselves more than the actual sum earned by increasing the commissions and wage rate.

Misclassification of company Employees

This type of payroll fraud involves employers misclassifying the company workers from full-time employees to independent contractors to avoid government tax and other insurance payments. In addition, the company management intentionally employs these practices to prevent health care insurance and contribution towards the employee pension schemes.

Employee Benefits Fraud

Company Employees involve and responsible for this type of payroll fraud scheme. It is carried out by charging the extra business benefits or higher commissions which were not earned in the true sense by providing supporting documents with fake results to factors correlating to their wages.

Work Expense Reimbursement Fraud

This type of payroll fraud occurs when the company employees claim reimbursement for work expenses that are not incurred or inflate the actual value by generating and showing fake bills.

Measures to Prevent the Payroll Fraud in a Business

Companies must have a robust structure designed to prevent payroll fraud. However, the company should, at the same time, employ punitive measures when such fraud takes place in the company. Below are some of the steps that company management can consider to prevent fraud.

Regular Audit of Company Payroll Taxes

An audit can uncover any accidental fraud that may have occurred in the company. For example, suppose any company employee is accidentally classified as an independent contractor during the audit. In that case, this audit review of payroll taxes allows the company management to identify the mistake and take corrective actions.

The company management must arrange for such internal or external audits regularly for their payroll system. It is also beneficial for the business to hire an external authority or Payroll Service Provider with relevant experience to conduct the payroll audit and ensure fair results.

Robust System of Checks and Balances

The company should employ a robust internal process wherein the same individual who hires a new employee shouldn’t be the same person who reconciles company reports and balances the company payroll books. In addition, the company should employ a system to thoroughly check the book of accounts on a quarterly and annual basis for possible errors regarding payroll padding or ghosting employees.

Companies can have a system where the company executives approve all overtime work and commission checks regularly. Companies can also cross-train and periodically rotate the functional roles of employees handling the payroll processing system to keep frauds at bay. 

Explore Direct Deposit System for payroll and Bonuses

Though the company managers cannot daily employees’ work hours, they can check employee timesheets weekly. The random checks can identify any anomalies in the total number of hours clocked in the period. In addition, the company can ensure that the timesheet system is based on a biometric or two-step authentication process to prevent buddy punching. The system should also employ a method to directly deposit all the pay and bonuses to the provided bank account instead of physical cash or paying to third parties.

Review Policies on Pay, Commission, and Bonuses

Companies must conduct a regular review of current pay & commission policy, bonus policy, and other benefits awarded to company employees—lookout for any anomalies in all areas of pay, commissions, benefits, and bonuses.

How Can We Assist?

Jaxa Chartered Accountants are one of the well-known accounting and auditing companies in the UAE. Our offices across different Emirates in the UAE serve clients to set up the payroll process and process monthly payroll. Please Contact Us for any queries on payroll processes. We’d be happy to help you!

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