When doing payroll, you might think all is running well only to realize there are some fraudulent individuals draining money from your company from behind the scenes using the same paychecks. Payroll scams often go unnoticed until the damage is too big to miss. Research has shown that a typical fraud case can cause a loss of $8,300 per month and lasts 12 months before detection.
Payroll scams are rampant these days, and without the right precautions in place, your business could become the next target. To be on the safe side, you must learn how to recognize and avoid payroll scams. That’s what this article will show you. Read on to learn how to keep your information and money safe.
What is a Payroll Scam?
Payroll scam or fraud refers to any intentional misuse or misreporting of company payroll information for financial gain. Every year, payroll fraud can cost businesses thousands of dollars in lost wages, tax penalties, and investigation and legal fees. Companies must put strong internal controls and oversight procedures in place to detect and prevent payroll fraud early enough before it becomes a major problem.
Types of Payroll Scams
Here are some popular tactics used to execute payroll scams:
1. Timesheet fraud
With timesheet fraud, an employee deliberately reports more hours worked than actual hours to receive unearned wages. The employee may clock in early, take extended breaks, or work a side job while on the clock.
2. Pay rate fraud
An employee commits pay rate fraud by reporting a higher pay rate than what they are actually entitled to. This could involve falsifying documents to show a promotion or higher position that wasn’t actually granted.
3. Commission Fraud
With commission fraud, an employee manipulates sales records or commission calculations to receive more commission than they rightfully earned. This can involve fabricating sales, altering commission rates, or inflating sales amounts.
4. Paycheck Diversion Fraud
An outsider scammer gains access to employee paychecks and directs the funds to another account. This is typically done by changing the direct deposit information or mailing addresses of the paychecks.
5. Ghost Employee Fraud
A scammer creates a fake employee identity to receive fraudulent paychecks from the company. The scammer may forge documents to enroll the “ghost employee” in payroll and benefits systems.
6. Advance Retention Fraud
An employee requests and receives pay advances or loans from the company but has no intention of actually repaying the funds. The employee keeps the money as an illegitimate gain.
If you don’t have the in-house resources to identify payroll fraud, consider outsourcing payroll and HR to a specialized firm. They’re typically proficient with advanced payroll tools that will uncover any loopholes your current systems miss. Third-party payroll services will also help to conduct regular audits of payroll records to spot suspicious activity in your payroll.
Payroll scams can be tricky to spot, but being aware of the warning signs and staying vigilant can help protect you and your employees. Don’t hesitate to hire a professional auditor or payroll service to help scrutinize your systems and records. The investment will be worth it in the long run.