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How to Save Your Company from Payroll Fraud?

Most people portray their theft as threatening and rob whatever they want, but in the business world, thefts choose the smarter way. One of the best instances of this is payroll fraud, wherein an employee controls the system in such a way that the outcomes are- paying them more from what they have earned. Let’s first understand the meaning of payroll fraud.

What is payroll fraud?

In simple terms, payroll fraud is a kind of theft executed by using the company’s payroll system. It’s mostly performed by higher level management like managers and senior employee of the payroll department who has access to the payroll systems and can misuse that access for issuing fraudulent payments.

More so, according to ACFE “2018 Report to the Nations on Fraud” that include the number of days a fraud can impact the business, which is as follows:

  • Financial Statement Fraud- 24 days
  • Billing frauds- 24 days
  • Payroll fraud- 30 days (the whole month)
  • Check tampering- 24 days
  • Cash larceny- 24 days
  • Corruption- 22 days
  • Skimming- 18 days

Thus, the report clearly states that payroll fraud is that serious. Thus, you need to be very cautious about your payroll fraud.

However, there are five types of common payroll fraud:

  1. Timesheet fraud-

An employee logs in for hours doing nothing. In fact, in most cases, the employee asks another co-worker to “punch the clock” for him/her in the name of friendship either for leaving early or for saving their breaks.

Moreover, employees who have access to the payroll system can modify check amounts or issue themselves illegal checks.

  1. Ghost employee on the payroll system-

This fraud occurs when a payroll employee adds a fake employee into the accounting system or continuously issue checks to an employee who no longer works for the company. And then, these extra checks are used for personal desires.

  1. Commission fraud-

By commissions, you might have understood that the fraud is performed by field agents who are appointed on the commission basis. They increase their sales number in the CRM system to get higher commissions that earned commissions.

  1. Miss-classification of employees-

This type of fraud is carried out by managers, it can happen accidentally, but most of the time it is done intentionally. It takes place when managers classify a full-time, salaried employee as an independent contractor to evade payroll taxes and worker’s compensation insurance. By doing this, they reduce their staffing costs.

  1. No deductions-

An employee who has access to the payroll system can amend their checks to avoid paying authorized deductions, such as federal and state withholding taxes and Social Security.

The advantage of payroll fraud is it is easy to prevent by implementing some critical strategies that even small businesses can do.

Here are the red flags that can help you spot payroll fraud in your business before it impacts your bottom line:

  • Evaluate your payroll reports during each pay period, after processing payroll. Many employers approve the payment before it is even processed, without comparing it to what is actually paid. Thus, businesses should understand and verify employee names, rates of pay, hours, etc., and all the overtime payment are justified and approved.
  • Keep a hawk eye on employees who don’t take leaves. If an employee reserves its work duties and never takes leaves is a definite red flag of fraud for your firm. This type of behavior is spotted as fear to an employee if their fraud will be catch hold in their absence.
  • An employee in more than one role and rotate job responsibilities in payroll.
  • Make sure you verify all the paper bank statements and annulled check images every month. It’s not enough to look at the online bank statement. Check each paper related to the payroll process.
  • Keep yourself as the primary authority for signing checks and make sure you don’t sign a blank check accidentally.
  • If you find difficulty managing your payroll in-house, outsource payroll processing to a reliable firm who is efficient and has the expected expertise in payroll processing.
  • Establish intolerance policy against such frauds and sue the fraudsters when they commit an offense.
  • Audit individual records by using software technologies to catch any error or fraud in the payroll system. Some popular choices are IRIS Payroll Business, BambooHR, Payroll by Wave, etc.


With the help of the mentioned-above payroll detecting techniques, you can quickly reduce the cost incurred in the payroll fraud. You can randomly check any employee’s detail of your choice and verify if all the entries are accurate. The best thing you can do is keep yourself vigilant and ready for these frauds. By eliminating the risk of payroll fraud, you can earn well and also ensure that your business is running successfully with trustworthy employees.

Author Bio – Eliza Davies holds seven years of experience as a Business Development Manager at Cogneesol, an outsourcing firm helping businesses to achieve their goals. Eliza is passionate about writing on the topics finance and accounting, small business growth, entrepreneurship, branding, marketing and help startups and small businesses to plan and grow their money with her writing skills. 

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