Payroll is one of the largest, if not the largest, expense on a corporate income statement. Accordingly, companies should design, implement and maintain a system of controls over payroll in order to ensure that transactions are properly authorized and recorded. Payroll-related fraud is not industry specific and can be difficult to detect. It is also one of the most common. According to a 2014 report by the Association of Certified Fraud Examiners (ACFE), payroll fraud is the top source of accounting fraud and employee theft. The ACFE estimates that payroll fraud occurs in 27% of businesses. Finally, they note that the average payroll fraud lasts approximately 24 months. Payroll fraud, like many other frauds, often starts out small and grows over time as the perpetrator finds success. Some common examples are as follows:
Ghost Employees ― Fake or fraudulent employees created by an individual who processes payroll. Checks are then deposited into an account in which the individual can access the funds.
Inflated time records ― Time cards (or equivalent records) that include hours that were not worked. The most obvious example would be an hourly employee attempting to gain additional compensation by inflating the hours worked on his/her time card. However, salaried employees whose compensation has a bonus component tied to a goal involving hours worked would also have motivation to inflate time records.
Unauthorized payroll or bonus checks ― Fraudulent payroll disbursements made to an individual without proper approval.
Manipulation of leave time ― A payroll claim and disbursement for fictitious or inflated leave time.
Manipulation of withholdings ― Failure (by an individual with payroll processing authority) to withhold items such as 401(k) or health insurance deferrals from an employee’s paycheck, while funding the items from company cash when initiating transfers to benefit administrators.
Expense report fraud― A claim and reimbursement for fictitious, inflated or personal expenses.
The following are simple, cost effective controls that can be put into place to prevent and detect fraud in this important area:
Many of the controls listed above can be implemented without significant financial costs; however, they do require some time investment. While it is important for organizations to create an efficient environment, it is equally critical to ensure that there are processes in place safeguard a company’s assets.