Payroll fraud is a widespread and hugely costly form of white-collar crime.
According to research conducted by Alexander Forbes around a decade ago, payroll fraud was costing businesses more than cash-in-transit heists.
“There are a lot of tricks that people use to commit payroll fraud,” says Yolande Schoültz, a payroll fraud specialist and founder of YSchoültz Attorneys & Conveyancers & Notaries.
Having investigated numerous payroll frauds during her career, she can point to common tactics.
“Everyone knows about ghost employees, that being employees that don’t exist, but you still pay them. A different tactic is with employees who don’t get paid every month, so someone changes the banking details to take a salary in the off month and then changes the details back.
“Changing bank details is very common – I often caught people who would sneak such changes in at the last minute because nobody checks. Other examples include weird overtime patterns or re-enrolling previous employees. If there is a gap, people will take it.”
Why does payroll fraud thrive?
One would think payroll fraud is easy to stop considering it leaves a clear audit trail. Yet on average, it takes eighteen months to notice payroll fraud – and often by accident. According to the same Alexander Forbes research, companies with single payroll administrators are most likely to experience such fraud. Schoültz notes there is often even a pattern to this:
“I don’t want to make you suspicious of hard-working employees. But we regularly found that a single payroll administrator who always arrives very early and leaves very late might be hiding something. One person in charge of all of the payroll is bad practice. We place a lot of trust in payroll administrators, but that’s not good policy, and it actually just means others are ignoring their responsibilities.”
By this, Schoültz refers to the strange limbo payroll often finds itself in. There is an ongoing debate about whether payroll is an HR or finance function. Very often, it’s seen as part of HR because it involves employees. But payroll is literally about paying employees – frequently the largest single financial cost to a company – and that is a finance responsibility. For Schoültz, the debate is splitting hairs.
“Payroll belongs to both HR and finance. The finance director owns payroll because it’s a big financial cost. But proper payroll requires HR and finance to work together. If there isn’t collaboration, there will be undetected fraud.”
Lacking access controls and segregation of roles are other significant catalysts for fraud. If one person can access all of the payroll system, they can manipulate the system. And since payroll systems are complicated and layered with data and compliance, we often delegate it to the experts.
Stopping payroll fraud
Yet these problems are easy to overcome, especially when using modern cloud payroll software platforms. The number one step all companies can take – virtually guaranteed to reduce payroll fraud – is to do small spot checks. For all payroll’s complexity, fraud usually has a clear tell: changing bank details.
“If you do minor checks each month, you will pick up payroll fraud. For example, print a report that shows you changes in banking details. For each change into the banking details, you must have a supporting document.”
Why don’t companies check these reports? It’s a combination of ignorance and complexity. Many people in finance don’t understand payroll systems or the types of reports they can generate. Traditional systems also make it taxing to generate such reports. But more modern alternatives do it well and fast. And spending a little time every month to check for bank details, overtime changes, or new employee enrolments will stop millions in theft.
Access control is another benefit of the cloud era. While traditional software often requires a licence for every user (companies save by limiting access), cloud payroll software is subscription-based and can efficiently allocate specific rights to different accounts. Thus, a finance director can access a self-service section if they want to generate monthly reports.
Collaboration between HR and finance will also quickly flag strange payroll activities, says Schoültz, “The biggest issue in payroll fraud is that you don’t know what you don’t know. Finance and HR must work together. It’s so easy to load a ghost employee, especially if you’re in a very big company. But if each month, for example, you generate a report that gives you new employees, terminations, and reinstated employees, and both departments sit together when they check this, if there’s something funny, you will pick it up.”
Focus on the small things
Stopping payroll fraud is not hard if you can focus on the small things. And doing that isn’t difficult if you take a little time each month to study reports, manage access control, and encourage HR and finance to see payroll as essential duties. The new generation of cloud payroll software makes all these steps easy to implement, removing many of the manual processes, arcane interfaces, and escalating licence costs.
“Modern payroll systems give you the tools,” says Schoültz. “They give you access control that can be defined. They give you reports that you can use for monthly checking. But the most important, they make it much easier for the right people to do these things. Payroll fraud happens because of small changes. And it’s small changes that make a big difference to detect that fraud.”