Payroll Fraud Is Real And Why SMEs Are Most At Risk

Broadly defined, payroll fraud is the theft of cash from a business via the payroll processing system. Contrary to popular belief, payroll fraud is a widespread issue that is not defeated by technology. Rather, technology is the main perpetrator of payroll frauds.

With the rapid advancements in technology today, payroll frauds these days go beyond a case whereby an employee requests for a cash advancement and fails to pay back the company. In fact, payroll crimes have evolved alongside technology, becoming more stealth and difficult to nab.

An article from “Coronavirus Pandemic Is a Perfect Storm for Fraud” shows that fraud proliferates during economic instability. According to the Association for Certified Fraud Examiners (ACFE), the average case of payroll fraud lasts two and half years and results in losses upwards of $63,000. Moreover, cheque tampering is considered the most costly type of fraud case, with companies incurring a median cost of approximately USD158,000 per instance! Additionally, the study also reported that the occurrence of cheque tampering and payroll fraud were twice as common in small organisations as opposed to large organisations.

However, payroll fraud can take any form – from creating a ghost employee to photographing cheques with a smartphone for deposit purposes. Moreover, organisations of all sizes are susceptible to the various types of payroll fraud. This could ultimately result in hefty revenue losses, sky-high legal fees, reputation damage and in worst cases, closure of a business.

Nevertheless, there are various strategies that can be implemented to combat payroll fraud. Here are some ways that can help to prevent and detect payroll fraud.

Payroll analytics reports

Engaging a payroll outsourcing vendor to help generate audit and payroll analytics report can assist in spotting any fraudulent activity and ghost employees. For instance, it can help to identify any duplicate employees or analyse monthly overtime pay or employee claims.

Direct salary deposits through a vendor

Most small businesses might still be issuing traditional salary cheques to employees. Disbursing salary to employees through a vendor might mitigate risks of unapproved or unauthorised wire transfers. While it might impose additional costs to the organisation, it could help reduce the number of hefty losses due to payroll frauds in the long run.

Beef up security on the payroll system

Employees in the payroll department should impose strict security and password protocols. Access to the payroll department should be controlled and printers as well as copiers should be kept in secured areas. Similarly, organisations that engage a payroll vendor should reach out to find out about their payroll system security protocols as well.

As mentioned, all companies are prone to payroll fraud, from both internal and external sources. As the payroll schemes continue to evolve, organisations should always be on the ball to defend against fraudulent activity by understanding the potential weaknesses within their payroll processes or systems. That way, organisations can always be one step ahead in preventing opportunities for these perpetrators to commit payroll crimes.

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