How to detect and prevent employee payroll fraud

Payroll fraud can be disrupted through simple internal controls that your company can easily implement

Payroll fraud is one of the most common forms of employee theft. At its simplest, payroll fraud occurs when someone has access to a company’s funds and its payroll processing system and manipulates that system to siphon additional, illicit monies for personal gain. Even more alarming, the average duration of a payroll fraud scheme is 30 months, by which time the fraudster has potentially stolen hundreds of thousands of dollars.

Three of the most common payroll fraud schemes are:

Timesheet fraud: This is especially common in companies that rely on a punch clock or pay their workers hourly. In this scheme, the fraudster asks a buddy to punch the clock for him – either to mask tardiness or a complete absence.

Ghost employees: A ghost employee is either a former worker who should no longer be on the payroll or a completely fake person altogether. In this scheme, the payroll check is issued to the ghost but actually cashed (or deposited) by an existing employee.

Rate Adjustment: This is a fraud where an employee increases their rate of pay, pays themselves overtime, or intentionally gives themselves a bonus or commission not actually earned.

The good news is that payroll fraud can be disrupted through simple internal controls that businesses of all sizes can implement. Consider the following actions:

Review payroll reports after payroll has been processed. Most employers are accustomed to approving payroll before it’s paid, but very often do not compare what was approved with what was disbursed.

Enforce mandatory vacations. That devoted, seemingly hard-working employee who comes in early and stays late may very well be the fraudster, because they fear if they are absent, someone will discover their actions.

Do not use a signature stamp. Employers should be the only one to personally sign checks, and never sign a blank check.

Require manager approval for timesheets, overtime, and bonuses. It’s just that simple.

Segregate job duties. One of the best deterrents to fraud is to make sure no one employee is issuing payments and receiving checks and making the bank deposits. Even in the smallest organization, assign and rotate financial duties periodically.

Verify bank statements and canceled checks each month. The ease of online banking means many businesses are paperless. However, it’s worth a few extra dollars to ask the bank to mail printed bank statements and copies of cancelled checks. Take 30 minutes each month to review deposits and debits using physical documents, which is much faster than scrolling and clicking through hundreds of line items on a website.

In conclusion, one of the best lines of defense against any internal fraud is to keep a finger on the pulse of the business. Fraud happens when employers take their eyes off the financials and incorrectly assume “it can’t happen to me.” These small measures of prevention can go a long way toward preventing payroll theft.

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm based in Vancouver. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be reached at or (360) 573-5158.

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