Payroll fraud is a concern for all employers – and, if it isn’t, it should be. According to Forbes, payroll fraud happens in 27% of all businesses. And the average case of payroll fraud drags on for approximately three years before being detected. While you may not be able to prevent fraud, there are definitely things you can do to limit its impact.
1. Conduct background checks
Pre-employment background checks are the first defense against payroll fraud, shedding light on everything from prior offenses to overwhelming financial debt. However, background checks in the APAC region present a number of challenges, ranging from incomplete infrastructure and databases to legal limitations. Before conducting background checks, it’s important to understand the regulatory environment for each area in which you’ll be operating.
2. Perform regular audits
A primary method of payroll fraud is through the creation of “ghost employees” – a scheme in which money is paid to employees who either don’t exist or have left the company. In Singapore, for instance, one employee kept submitting time sheets for more than six months after he was dismissed. It was happenstance that the employer finally caught on: The man submitted a timesheet for a date that was a federal holiday. A payroll audit would have alerted the employer that they were sending checks to someone who was no longer an employee. Audits are also good for identifying warning flags like direct deposits for two different employees going to the same bank account.
3. Limit access to payroll data
Use password protection to limit access to those employees who have a job-related need to view payroll information. Even then, don’t give blanket access. Narrow the focus to only that information that is necessary to perform the job.
4. Provide checks and balances
Commonly referred to as “keeping the honest person honest,” a well-established process of checks and balances can often eliminate opportunistic payroll fraud. In other words, with lax controls, committing fraud is so easy that even employees who are otherwise honest are tempted into taking advantage of the system. It’s like leaving your car running with the keys in the ignition. Effective checks and balances include things like making sure the employee who enters payroll data into the system is not same employee who processes the checks, requiring management approval to add a new employee, and having a well-established weekly routine for deleting employees who are no longer with the company.
5. Encourage employees to use direct deposit
While there have been cases where employees committed payroll fraud through direct deposit, physical checks make it a lot easier. Where possible, move employees to direct deposit. If you must continue relying on physical checks, never allow an employee to pick up a check for someone else, and, at least once a month or so, require an ID before handing over a check.
Nobody likes to think that their employees are stealing from them. But it happens – and ignoring the problem won’t change that. You can reduce your risks by implementing time-tested controls designed to eliminate the loopholes that make it easy for employees to commit payroll fraud.