Spotting and Preventing Payroll Fraud: Top 5 Schemes to Watch For

For employers looking to safeguard their organizations, payroll is among the most obvious targets for fraud. After all, that's where the money is. If not carefully guarded, payroll can stand out as a bright red bullseye for criminals.

How prevalent is payroll fraud? According to the Association of Certified Fraud Examiners' "Occupational Fraud 2024: A Report to the Nations," 15% of all occupational fraud schemes in the United States and Canada involve payroll. These crimes typically last 18 months before detection, with an average loss of $2,800 per month.

Clearly, the stakes are high. What's worse, payroll fraud can happen in many ways. Here are five of its most common forms:

1. Workers’ Compensation Insurance Fraud

Employees who are legitimately injured on the job are generally entitled to receive workers' comp benefits. However, some employees fabricate injuries and make fraudulent claims, which can elevate your insurance premiums and cause substantial out-of-pocket losses for self-insured employers.

Prevention Tip: Establish detailed policies and procedures for handling workers' comp claims, including how to report injuries. Installing surveillance cameras to capture workplace injuries may also help.

2. Buddy Punching

Buddy punching occurs when one employee improperly punches a time clock for another to inflate hours on a timesheet. This usually means lower productivity and indicates a general culture of dishonesty. Time-tracking apps may help curtail buddy punching, but employees can still share login credentials and devices to cheat.

Prevention Tip: Create, distribute, and enforce clear rules about recording time worked. If buddy punching becomes a recurring issue, require workers to verify their identities with ID cards, face recognition, or fingerprints. Ensure supervisors carefully review timesheets and note suspicious behavior.

3. Bonus and Commission Fraud

Many employers offer bonuses or commissions for meeting sales goals or other benchmarks. While these incentives can drive productivity, they can also tempt dishonest employees to fudge the numbers, especially in stressful environments with fierce competition and tough goals.

Prevention Tip: Provide a level playing field and make goals achievable to reduce resentment and desperation. Monitor bonuses and commissions paid each payroll period. Investigate any amounts that seem unusual or excessive.

4. Ghost Employees

Accounting department staffers or anyone with access to payroll records can create "ghost" (nonexistent) employees and issue paychecks to them. These checks are typically deposited in accounts set up by the perpetrators. Criminals usually invent names for their fictitious employees but sometimes use identities of former employees to collect wages illegally.

Prevention Tip: Regularly review payroll records to ensure there are no ghost employees. Look for red flags such as unfamiliar names sharing personal information with other employees, like the same home address or phone number.

5. Expense Reimbursement Fraud

Expense reimbursement fraud is a common form of wrongdoing. Some employees may not even think that falsifying expenses for business trips is unethical because they believe "everyone does it." Without a detailed expense reimbursement policy, employees may submit fraudulent claims.

Prevention Tip: Establish a detailed expense reimbursement policy requiring employees to substantiate claims with receipts and obtain manager sign-off. Stay apprised of the latest IRS rules on reimbursing employees' expenses to avoid trouble with taxing authorities.

Conclusion

Payroll fraud poses a significant threat to businesses, but understanding its common forms and implementing preventive measures can help safeguard your organization. For more information or assistance with payroll fraud prevention, contact us today.