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5 Protections from Payroll Fraud

Posted by: on 1 February 2016 in Compliance, Payroll

Over half the organisations in Australia have experienced economic crime in the last 2 years. Much of this is through payroll fraud and it is preventable! 

Leaving your company open to employee fraud, of any kind, not only affects you financially but it can destroy your team. The financial risk is obvious and a great recent example is the alleged $4million fraud involving a senior exec at Anglo American. However good systems that protect an employers financials also protect each employees integrity from question. Without these systems and checks in place, employees can be falsely accused when things don’t match up and this can very quickly turn a trusted workplace into The Hunger Games

So how do you protect your company from payroll fraud, the most common type of fraud? These 5 tips can help protect your company from this threat and your employees from this temptation:

  1. Many links in the chain

The most important thing to protect any organisation from fraud of any kind is the segregation of duties. Having a single trusted person who approves timesheets, adjusts payroll information, processes pay runs and then distributes this money to the bank is very common but is extremely dangerous. Not only does this person have the potential to commit payroll fraud in any number of ways, but they are also going to be on ‘the chopping block’ if they make a normal human error which could be seen as fraud. In fact, studies have shown that payroll errors account for 1.2% of wage costs so differentiating between accidental and deliberate errors could be problematic. 

Instead, you need to split responsibilities as far and wide as possible. If employees are the only ones who can fill in their timesheets, Operations are the only ones who can add new employees and summarise hours, HR are the only ones who can confirm new employees and adjust employee details, Payroll are the only ones who can process pays and Finance are the only ones who can upload funds for processing, your payroll is inherently protected from fraud. As an added benefit, separating these responsibilities actually improves employee sentiment as each of them can focus on their own speciality and they won’t have the frustration of wearing too many hats.

  1. Send in the machines

Paper based fraud is very common but it could be unintentional! A timesheet could be poorly written and interpreted incorrectly, an employee at the end of the day filling their timesheet might forget that they were 15 mins late in the morning or an annual leave form might have been faxed to head office but never received. The hours into the payroll system might be mistyped or the payment summary for the bank upload might have been adjusted in error. An employee termination form could even be lost and a former employee might unintentionally get paid an ongoing salary despite the fact that they have left.

This risk factor is easily mitigated with technological improvements and automation. By using biometric scanners to create timesheets and then using automatic interpretation to summarise these hours for payroll, much of the risk disappears. Using online Employee Self Service with workflow approvals for leave, hires and termination means paperwork can’t be lost. Streamlining the final payment using an EFT provision from your payroll system provider reduces the risk even further.

  1. Make sure it all balances

Comparing reports between your time and attendance, HR and payroll system eliminates errors and identifies fraud. Good payroll systems like ADP’s Payforce have dynamic reporting capability and ready to use reporting profiles to make this job quick and painless. Here are some suggestions of the reports you could run:

  • Hours paid vs hours recorded – identifying potential timesheet fraud
  • Bank details changes since last pay run – identifying any that have changed which can be double checked
  • Staff paid vs staff worked – identifying any potential ‘ghost employees’
  • Reported payment vs actual payment – identifying any potential ‘post payroll’ fraud

This is just the tip of the iceberg and if you don’t have a payroll and times/attendance system that can generate powerful reports like this then maybe you need to look at updating. To take it a step further, many companies outsource their payroll processing as running most of these balances and checks are part of their service offering and the specialist advice you can get is priceless.

  1. Spread the information

The main limiting factor for identifying payroll fraud is the number of eyes looking for it. By using a good payroll system with the ability to quickly distribute payslips and customised reports to site managers for checking, the number of eyes looking for inconsistencies can greatly increase. Some ideas to make this happen:

  • Encourage employees to check their hours, rates of pay and allowances as part of your regular distribution of payslips.
  • Distribute reports at the end of each payroll to line managers . As well as a basic summary report, try to include variance and exception reports for them to check.
  • Distribute a list of new starters in each payroll run to everyone in HR including OHS and Learning support . This not only assists in new starter engagement but also protects the company from ghost employees.
  • Distribute a summarised list of pay-rate changes to the finance team so they can check that all of these adjustments were approved.

There are many more ways you can involve your whole company in identifying fraud and the more people involved in checking your payroll operation is working, the more protection you have.

  1. Analyse and improve your employee engagement

The final way to protect from payroll fraud is improve your employee engagement. 

Engaged employees are less likely to commit payroll fraud, more likely to identify and rectify errors in the workplace and generally will improve your company’s productivity and profit.

Employee engagement is easier for small operations, but as companies grow they struggle as company structure distances and isolates employees. This is where the human resources department should shine by creating initiatives to analyse and improve engagement. This engagement can be regularly monitored through an effective human capital management system. For example, absenteeism could be compared across cost centres to identify areas of the business that are less engaged. These areas could then be targeted for improved engagement initiatives and also for more fraud scrutiny in the meantime.

By adopting these 5 areas for improvement, you will not only protect your company from payroll fraud but you will also improve your business understanding to make better strategic decisions, improve your employee engagement and ultimately increase your productivity and profit.

Author: The ADP@Work Team


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TAGS: Cyber Security fraud Payroll protection Security