We at B&J Bookkeeping are dedicated to bringing you the latest in bookkeeping and tax related scams. We have also stumbled on to the world of payroll fraud, i.e. fraud that takes the funds meant to pay loyal workers and is funneled somewhere less worthy. According a report from the Association of Certified Fraud Examiners, payroll fraud is the number one source of all accounting fraud and the largest employee global threat. It is estimated to affect up to 27% percent of all businesses and lasts an average of 36 months.
Quick Facts on Payroll Fraud
- Payroll fraud occurs at nearly twice the rate in small business with less than 100 employees, or at about 14.2%.
- Larger companies with more than 100 employees have payroll fraud occur at a rate of 7.6%. This is usually because larger companies can afford large payroll departments where dishonest employees have several hurdles to clear before they can successfully commit fraud.
- Payroll fraud is more likely to occur surrounding circumstances with new employees rather than be perpetrated by altering the pay of established ones.
- One of the most egregious examples of payroll fraud occurred in Delaware. A School District Finance Director used it to pay himself an extra $150,000 over a period of eight years. In order to do this, he also underpaid several other employees a combined $50,000 in one school year.
How to Prevent Payroll Fraud
Payroll expert Nicolette Nicholson of the South African Payroll Association has many great tips, and so do we:
- Time Card Payroll Fraud – This is often the most common form of payroll fraud, and in many cases, just accounts for a few extra minutes here and there. However, one or two employees can really defraud of a lot funds by working together to falsify their time cards. This is why it is essential to have an electronic time card system in which an employee must be physically present to clock in and out.
- Ghost or False Employees – Even in companies where there are fewer than 100 employees, it can be difficult to keep track of them all. In one example of payroll fraud, an employee simply added herself twice under a different name and had two paychecks deposited into two different accounts every period.
- 1099 Payroll Fraud – This is the practice of assigning an employee a 1099 worker status, also known as an independent contractor. Dishonest business owners do this in order to avoid paying payroll taxes, unemployment tax, and even workers’ compensation insurance. This allows them to submit lower bids for services and projects and outbid honest companies. FYI, this practice is also illegal.
- Use an external payroll professional – Just like you have an audit done on finances, have an external professional come in and do one for the payroll on a surprise basis. Don’t even let the payroll department know they are coming.
More on Payroll Fraud
“Payroll fraud is very much a reality … it’s most prevalent in medium to large companies that run electronic payroll systems, and where the number of employees makes manual checking difficult,” said Nicholson. “Typically, the (payroll) fraud takes place when new data is entered onto the system, and that’s why it’s not easily picked up by financial audits.”
Still not convinced that payroll fraud is a big deal? Just do a simple news search on Google, Bing, or any other search engine for “payroll fraud” and you will see that businesses have lost tens to hundreds of thousands.
For tips on how to report payroll fraud, click here:
Payroll in Houston
If you live in Houston and need help in establishing and maintaining honest and safe payroll services, send us an email or give us a call at 281-894-6494.