5 Payroll Fraud Red Flags to Ignore at Your Peril

22nd August 2018

 

Payroll fraud continues to appear in the news, reminding us of the importance of staying vigilant against scammers.

Having evaded capture for seven years abroad, a tax consultant who scammed £6.9 million from workers’ payroll was arrested at Heathrow Airport in January. He has now been convicted of running a conspiracy of fraudulent payroll schemes.

Fraud costs UK businesses an estimated £38 billion a year. The public sector is responsible for £300 million of that.

The risk to businesses is very big and very real.

How to Spot Payroll Fraud

Preventing payroll fraud is the job of everyone in a business. You must exercise vigilance. But, your HR and payroll teams are uniquely placed to spot 5 of the most common payroll fraud red flags:

1. More than one employee using the same bank account number or address
2. Employees with no deductions for payroll taxes or benefits
3. Symptoms of an employee living an overly expensive lifestyle for their earnings
4. Greater than 30% difference in wages between employees who have the same job
5. Unusually high overtime pay

Types of Payroll Fraud

We define payroll fraud as the theft of funds from a business via the business’s payroll function. However, payroll is often complex, leaving a variety of opportunities to defraud a business. Types of payroll fraud include:

• Ghost Employees
• Wage Falsification
• Misclassification of Funds
• Timesheet Fraud
• Commission & Bonus Fraud
• Expense Reimbursement Fraud

Ghost Employees

Ghost employees are names of people listed in the payroll register who don’t actually work for the business, but are receiving pay. The usual scheme requires the fraudster to have the ability to place a fake name in the payroll system, falsify the attendance report and divert the payment.

Ghost employees come in various forms, from totally fictitious to previously terminated real employees. They could also be no-show new employees or temps.

Prevention: How to Protect Yourself Against Ghost Employee Fraud

Any employee who has their data already in the system makes the fraud even easier, so it is vital that you keep your employee data uptodate. If a person leaves the company, make sure their payroll details leave with them.

Another way to spot ghost employees is to keep an eye out for duplicate BACs payments or pay cheques issued for identical addresses, names or jobs.

If two employees are sharing a bank account or address, this could be a red flag for ghost employees and demands further investigation. The reason could be simple, but it’s always better to check.

Wage Falsification

Wage falsification usually occurs with the collusion of a member of the payroll team and an employee. The payroll team member pays a little extra to the employee and they split the take.

Prevention: How to Protect Yourself Against Wage Falsification

This type of payroll fraud is exploited in situations where there is little oversight on your payroll team. You can combat wage falsification by keeping the duties of processing payroll and issuing payments separate. Do regular checks of your payroll budget and payments to spot any patterns or inconsistencies. Having an extra pair of eyes on your processes is often all you need to prevent wage falsification.

Misclassification

Classing a full-time member of staff is as an independent contractor for the purposes of payroll is an example of misclassified. This means that neither the business, nor the employee is subject to payroll taxes and National Insurance contributions.

This allows the business to reduce staffing costs and reduce their overall employer tax bill.

Prevention: Make Sure All Employee Statuses Are Correct

If you’re an employee, you may be thinking “Great! More money for me!”

But consider this: If you are classified as a contractor, the HMRC holds you responsible for declaring income and paying the taxes your employer would normally take care of. In addition, the less you pay in National Insurance, the less your State pension is going to be.

Perform regular audits and reviews of your employees’ contracts. Audits will keep you compliant and ensure that you continue to pay HMRC correctly.

Timesheet, Bonus & Commission Fraud

Falsified timesheets and commission fraud is one of the most common frauds in HR and payroll. These frauds occur when employees falsify their timesheets or sales activity. This is more common in places with out-of-office staff, or departments with insufficient management oversight.

Fraudsters can use deception or even collusion to get their time sheets authorised by a manager. We have seen that this fraud is most common in part-time employees. They avoid detection by not exceeding the 40 hours a full-time staff member would earn. But they get paid for more hours than they really worked.

Prevention: How to Protect Against Timesheet & Commission Fraud

Just like wage falsification, you can prevent this type of payroll fraud with more oversight. Give your managers the power to manage their team’s timesheets and overtime independently. This allows them to accurately check submitted timesheets against time worked.

Make sure the person authorising commissions, bonuses and timesheets is not the same person submitting them. This will help ensure accurate payments. You should also regularly review your bonuses and commission outlays to identify any anomalies.

Don’t leave your business exposed to fraud. Remain vigilant, informed and on the ball. Get more tips on protecting yourself against payroll fraud right here.

Overworked or under supervised payroll teams are vulnerable to payroll fraud. Businesses with a lack of oversight are vulnerable to fraudsters, so get your security in place today.