(from CPA Practice Advisor) By the time most payroll frauds are discovered, months or years have passed, potentially resulting in devastating losses. Here are four common payroll fraud schemes, and some deterrents for avoiding them.
- Ghost employee schemes: A nonexistent or former employee or vendor is issued checks that the fraudster cashes for personal gain.
- Timesheet fraud: An employee inflates their hours or "punches the clock" for an absent employee.
- Rate adjustment: An employee increases their rate of pay, pays themselves overtime or intentionally gives themselves an unearned bonus or commission.
- Lack of deductions: If items such as federal withholding tax or Social Security are not deducted from the employee's check, the employer essentially pays for the tax or benefit.
For these and other risks, the best deterrent is a simple review of payroll reports after payroll has been approved and processed to verify that payee names, rates of pay, hours and deductions are appropriate. Additional controls include:
- Separate payroll set-up, approval and processing functions.
- Require employees to take mandatory vacation time.
- Cross-train and rotate job duties of employees in payroll and human resources.
- Implement a direct-deposit system for payroll and bonuses.
- Require managers to approve timesheets and overtime requests.
- Review bank statements and cancelled checks each month, making sure the payee matches the accounting entry.
- Establish a zero-tolerance policy for fraud, and prosecute violators to set an example.
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