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Keep fraud out of your payroll process

If you’re like most businesses, employee payroll costs are your biggest operating expense. The last thing you want is for this expense to go up. But if you’re the victim of a payroll fraud scheme, that is exactly what happens.

Payroll fraud refers to any type of scheme where an employee abuses the payroll process to steal money from their employer. Here are three common types:

Padding Work Hours

In this form of payroll fraud, a dishonest employee falsifies their timesheet or misuses the company time clock to inflate their hours and pay. This may be done by intentionally misreporting hours worked on a timesheet or with the “buddy punching” system, where one employee clocks in or clocks out another employee to give them credit for unworked time.

Without using technology such as a biometric time clock, detecting and preventing this fraudulent activity requires supervisor accountability and a zero-tolerance policy that is enforced. It’s a good idea to require supervisors to review and sign off on employee timesheets or timecard reports and to report any discrepancies.

Ghost Employees

This payroll scam happens within the payroll department itself. Employees will enter the information for a fake “employee” within the payroll system. The scammer then pockets the unearned, unapproved wages sent to this fictitious worker.

Pay Rate Alterations

In this scheme, an employee may collude with a manager or payroll department employee to raise their hourly rate within the payroll system, sharing their ill-gotten earnings with their collaborator as a kickback.

Payroll schemes that go unnoticed pose a serious threat to your bottom line. Thankfully, these scams can be spotted with routine audits, increased scrutiny of workers’ reported time and verification of payroll system updates.

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Tips to avoid payroll fraud
  • Have supervisors review and sign off on employee timesheets and report any discrepancies.
  • Audit newly created employee entries in your payroll system to spot potential fakes.
  • Have two or more HR personnel sign off on pay raises within your payroll system.
  • Review account transactions and reconcile regularly.
  • Use Check and/or ACH Positive Pay to help prevent unauthorized payments.
  • Implement dual control procedures for the initiation of payments.

More tips for your business.

Fraudsters are smart, but you are smarter. Equip yourself with tips and resources for a more secure banking experience.