By Alan McEwen
Payroll fraud is a serious, and expensive, problem for employers. It can come in many forms — one common problem is the issue of “ghost employees.” That’s when employees who don’t exist pop up on the company payroll.
Other hot spots are timesheet fraud and the potential for collusion between employees. So what can employers do to minimize the risk for fraud? There are a number of tactics employers can pursue.
Among very small employers, the most effective form of prevention is for the business owner to maintain direct control over payroll.
This works, so long as the entrepreneur has personal contact with everyone who should be paid. However, at some point that will become counterproductive. Direct control by the business owner of payroll takes up too much time, interfering with running the business itself.
Failing such direct control, employers must delegate payroll responsibility to others. Once the business owner no longer has hands-on management, there are a number of tactics that can reduce the chances for fraud.
Larger employers: 2 common approaches
There are really two very different approaches commonly taken to prevent or reduce payroll fraud. The first focuses on policies and procedures that impose accounting controls. The second looks at testing and sampling techniques.
Both are intended to reduce fraud — the first makes it more difficult to accomplish, while the second makes it easier to detect. While it might not seem as effective to focus on identifying fraud after the fact, exposing it acts as a deterrent.
These two very different approaches can be seen if we look at timesheet processing.
Approach 1: Divide up responsibility for timesheets
One form of accounting controls is to divide up responsibility for timesheets among several different people. For example, one person is given the responsibility to schedule employee time, while another person processes the resulting timesheets.
Exceptions from scheduled time then require explicit supervisor approval, either in advance or after the fact. This approach can be taken regardless of whether scheduling and timesheets are electronic or paper-based.
The assumption behind such controls is, that for fraud to occur, there has to be collusion between the different people involved. If employees submit claims for overtime they did not work, it would be harder to slip this fraud through if supervisors have to sign-off on all exception time.
However, such policy- and procedure-based controls have their limits. The more supervisors and line managers are required to approve run of the mill, everyday transactions, the greater the risk such approvals will be given without any real consideration. In other words, supervisors may simply sign off as a matter of course, without giving timesheets any real thought.
The other risk is such approvals can be forged. This is still a risk even if time and attendance systems require electronic approvals. Just as some employees may be able to forge supervisor signatures, others will be able to steal supervisor passwords.
And there is always the possibility there will be collusion between the different people involved, such as a supervisor and employee conspiring to split fraudulent gains.
Approach 2: Testing and sampling techniques
The other approach to fraud prevention is based on testing and sampling techniques. Such techniques can't prevent fraud, but should be able to discover it. The more publicity surrounds such discoveries, the more testing and sampling will act as a deterrent.
There are several ways testing and sampling techniques can be applied to timesheets. For example, organizations can review exception pay records for unusual patterns, such as overtime hours claimed in an otherwise slow period or an uneven distribution of overtime claims between employees.
Where employee time is job costed, cost accounting reports should be able to identify jobs with an unusual or high pattern of labour costs. Similarly, the accounting system should be able to identify cost centres with high labour costs or where there are large variances from budgeted labour costs.
However, looking for unusual patterns in timesheets or overtime claims may not be much help where fraud is so pervasive among employees or has gone on for such a long term that fraudulent claims themselves have become part of the normal pattern of events.
In the end, organizations have to weigh the costs of any preventive measures described above against the actual losses experienced from payroll fraud.
Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (905) 401-4052 or visit www.alanrmcewen.com for more information.