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October 8, 2020 | Payroll Software | Posted by Ascentis

How to Avoid Common Payroll Fraud Practices

Sometimes the most important considerations about a work environment are ones that usually get taken for granted. For instance, most employees enter a job with the assumption that they’ll be paid consistently, accurately, and on time. On the other side of the equation, most employers bring workers on board with the assumption that they’ll do the work they’re paid to do and report it accurately. Unfortunately, for all parties involved, those assumptions don’t always match the reality.  

Payroll fraud is a perennial concern for employers of all sizes, and each new advancement in payroll technology brings with it new potential for exploitation. Payroll accounts for 30-40% of the annual operating expenses of most businesses. That’s a significant chunk by any measure, which makes stamping out payroll fraud a crucial concern. Estimates say that U.S. businesses lose as much as 5% of their annual gross revenue to some manner of fraud, with small and independently owned businesses at the greatest risk. Letting payroll fraud slip through your system unchecked not only puts you at financial risk, but also puts your company’s reputation on the line.  

To that end, let’s look at some of the most common types of payroll fraud and how your organization can avoid them.  

Misclassifying Employees 

As more and more businesses have shifted to a blend of full-time employees and contract or contingent workers, the risk of classification errors has increased. As described by the U.S. Department of Labor, misclassifying an employee as a contractor or vice versa can directly impact an organization’s compliance with wage and benefits laws. A misclassified worker could be denied overtime pay, FMLA leave, and other legally required benefits.  

Inaccurate classification also likely means that the employer is not paying appropriate amounts of state and federal payroll taxes. Contributions to workers’ compensation funds, unemployment insurance, and retirement funds are also likely to be affected. Whether intentional or not, employee misclassifications put your organization in danger of fines and sanctions that can do irreparable damage to your reputation. Automating your payroll operations can go a long way toward preventing accidental misclassifications while also creating thorough records that can be quickly referenced in the event of an audit. 

Timesheet Fraud 

Falsifying or misrepresenting timesheets is perhaps the most common form of employee payroll fraud, partially because older methods of timekeeping made these schemes easy to perpetrate and difficult to detect. In the era of paper timesheets and manual punch-clocks, it was considerably easier to get away with buddy-punching, submitting extra hours, or taking extended lunch breaks. Even small amounts of time-theft add up over the course of a year — studies show that American companies lose hundreds of billions of dollars annually to workplace time thieves. 

While some level of gaming the system will probably always be inevitable, tech solutions and automation can help reduce the risks significantly. Biometric time-tracking tools like voice activation and facial recognition eliminate opportunities for buddy-punching. Cloud-based timekeeping software with employee self-service options helps to streamline and standardize timesheet processes, making it easier to detect discrepancies.  

Ghost Workers 

It may sound like a far-fetched concept, but so-called “ghost employees” are a surprisingly common problem for employers. Essentially, someone within a payroll department abuses their access to fabricate employee records, add a friend or relative to the company payroll, or extend the “employment” of someone who has already left the company. The payments made to this nonexistent employee are then collected by the person or people who have set up the bogus records. 

The risk of phony employee scams can be mitigated by having a strict process with multi-party authorization in place for adding employees to the company payroll. Thorough digital recordkeeping that allows for regular audits discourages this kind of fraud and makes it easier to detect if it does occur. An online dashboard that is accessible to multiple members of your team can also put more eyes on the payroll, helping to spot discrepancies before they become a problem.  

Expense Report Fraud 

Roles that offer reimbursement for business expenses also provide ample opportunity for fraudulent expense reports. Items like travel expenses, meals, lodging, and technology are necessary to a lot of jobs, and also easy to falsify if proper precautions aren’t taken. Studies suggest that more than one-third of business travelers submit at least one bogus expense per year. That’s a high enough figure to merit some serious attention. 

Expense report fraud can be reduced with clearly communicated policies and standardized systems that make sure every report is submitted and processed the same way. A customizable dashboard that generates regular expense audits and keeps thorough records of receipts is also a must, not only for preventing fraud but also for accessing evidence if bad practices do occur. 

There’s probably no such thing as a fraud-proof payroll system. As technology advances and employers move away from antiquated spreadsheets and paper systems, though, online payroll solutions are making it easier and easier to stay ahead of costly mistakes and outright fraud. Learn more about the ways Ascentis payroll software can help reduce the risk of fraud for your business.