How To Prevent Payroll Fraud

Payrolls are an essential part of any organisation’s finances to ensure employees are fairly compensated for their work. It can also become a target for payroll fraud, where records are intentionally manipulated or tampered with for personal gain. Committed by employers or employees, its consequences can have devastating financial effects for the organisation.

Fraud isn’t just a threat to the integrity of a business, it’s a crime. According to High Performance Consultancy, UK firms lose up to £12 billion per year as a result of payroll fraud. It accounts for up to 8% of financial loss and has seemingly increased in the last few years.

It isn’t always outright stealing finances, it can also be subtle actions. If employees clock in for hours that they aren’t actually working or secretly increasing their compensation rate, it also counts as fraud. For employers, it could be underpaying employees for their work.

You may consider some of the leading companies offering payroll software in the UK for your company, including:

  1. Rippling
  2. Pento
  3. Deel


Types Of Payroll Fraud


There are a few common categories of payroll fraud that a company can be faced with. It is usually the responsibility of the employer, finance or human resources department to check for any fraudulent activities that could be taking place.


Overtime Or Timesheet Manipulation


If there aren’t strong internal controls in place, employees can falsely claim that they have worked overtime hours for extra pay. Similarly, employees can also manipulate their timesheets by saying they worked more hours than they did or have employees clock-in for them if they are off. On the other hand, employers can also be guilty of this. If they alter the hours in order to underpay employees, it is also considered fraud.

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Ghost Employees


This form of payroll fraud occurs when an employee is listed on the payroll system, but doesn’t actually work for the organisation. It can be a real person or a fictitious one created by someone with access to the system. They can then cash in on the money that was intended for the employee. This typically occurs in larger organisations where an extra employee can usually go undetected for a while by management.


Commission Pay Fraud


For employees that earn commission from sales, they can commit fraud in one of three ways. The first is by creating a fake sales contract to indicate a fraudulent sale to qualify for commission. Or, employees will alter sales reports to claim that they had more sales than they actually did. Lastly, employees could alter the businesses’s records to show a higher pay rate so they get paid more commission than they are actually due.


False Expenses


This is a common form of payroll fraud particularly for employees who work remotely or are required to travel frequently. Employees can either add personal expenses, claim for expenses that don’t exist or overstate existing ones to be paid more money. Employers should request documented proof of all expenses that are being claimed for to ensure validity.



Pay Rate Alteration


In this case, employees will usually have an accomplice that works within the payroll department. The accomplice has access to changing the employee’s pay rate to a higher amount. This new amount is then generally split between the employee and their accomplice.


Preventing Payroll Fraud


Every organisation should have systems put in place to detect fraudulent activities before they spiral out of control. The longer that fraud occurs, the more financial impact it’s going to have on the business.


Internal Audits Of Payroll Taxes


Employers or those in charge of payrolls should regularly review the payroll system. Mistakes can be picked up quicker and rectified, and any suspicious activity can be intercepted before it escalates. It is always a good idea to have more than one pair of eyes checking for accuracy.


Implement Anti-Fraud Policies


All companies, especially large-scale organisations with a lot of staff, should have an anti-fraud policy in place. When employees are hired, they should be made aware of the potential consequences they could face should they commit any fraudulent schemes. A detailed policy usually acts as a preventative measure and should put off any employees from taking the risk.


Limit Access To Payroll Information


Payroll information should not be readily accessible to the majority of the organisation. It is sensitive information that should be known to a select few that are only absolutely necessary. If multiple employees need to access it, they should each have their own login information with different passwords for tracking purposes.


Consider Outsourcing


Having a third-party company handle your payroll removes any temptation for employees, or employers, to engage in fraudulent activities. If you do choose this route, it’s important to do research and select a reputable company that specialises in payroll services.


The Consequences Of Payroll Fraud


Punishment for this type of fraud will depend on the severity of the situation, and differs from case to case. In the UK, perpetrators can face a maximum of seven years in prison. Smaller offences can result in being fined up to 150% of the offender’s weekly income or even community service for first-time offences.

It remains crucial for businesses to constantly review their payroll systems for any irregularities. Early detection of fraud can end up saving a business hundreds, if not thousands, of pounds.


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