Payroll fraud is when there is a theft of funds from a business via the payroll processing system. This crime is committed by an employee or employer who is abusing the workplace payroll system to take money they are not entitled to,and in the case of employers, it’s when they are withholding payment of rightfully earned wages or taxes due on those wages. There are several methods whereby people can steal funds they are not entitled to – which we will discuss further down in the article.

Recurring identifiers for payroll fraud are as follows:

• Getting an email for a payroll you never submitted
• Seeing flaws or modifications to your payroll that you did not perform, such as employee status changes
• When an employee receives untimely or extra money in their paycheque and/or payroll transactions labeled “extra deposit”
• If employees share an address or bank accounts this could be a sign of fraud if they are not related.
• A potential red flag is when an employee never takes their paid time off. This could indicate an unwillingness to leave for fear the fraud will be discovered by someone covering for them.

Types of Payroll Frauds

1. Timesheet fraud

Timesheet fraud involves paying employees incorrectly for the hours they work. In some cases, companies overpay employees based on falsified timesheet submissions; employees might even have a co-worker clock in and out for them when they aren’t even scheduled to work. In one common timesheet scheme, an employee will “forget” to clock in or out, thus requiring a manual entry, to which they then add extra hours. In other cases, a payroll clerk may be in on the scheme, and manually overriding employee timesheets to increase the number of hours worked, or even the rate of pay.

2. Altering pay rates

In this method a regular employee will conspire with an employee from the payroll department and get them to increase their hourly pay in the payroll system. This scheme can occur a few days before payday, and is then changed back to the original legitimate rate to avoid detection.

3. Worker misclassification

Knowing your status as well as the status of the people who work for you is important. A person who works for your business must be classified either as an employee or an independent contractor. Employers sometimes misclassify workers by accident, but others may do so intentionally in an attempt to avoid paying unemployment tax, payroll taxes, or workers’ compensation insurance. This is employer payroll fraud and can be punishable by law.

4. Outstanding advances

If an employee requests advanced payment and doesn’t pay it back, this is considered payroll fraud. If the accounting department charges this advance to “expenses,” nonpayment of the advance often goes unnoticed.

These forms of payroll fraud depend upon lax accounting and oversight procedures. Businesses should maintain and strictly adhere to thorough accounting and anti-fraud policies at all times.

5. Ghost employee fraud

A ghost employee is a fake employee who has never worked for you. They are a made up person who has been created via payroll to divert funds. A ghost employee can also be someone who once actually did work for you and has left your company, but was never officially terminated in the payroll system.

For example, let’s say there is a payroll clerk by the name of John Doe. John has decided that he wants more money from work, so he makes a “new” employee named John Doe-Lynn. So then, when he runs payroll, he can create and issue two checks, one legitimate to John Doe, and then another to John Doe-Lynn.

Another example, assume that an employee by the name of Mary Beth left the company. The payroll manager John Doe decided that he wants Mary Beth’s salary. So instead of officially terminating her pay, he diverts the pay to his own pocket.

Ghost employees can usually be flushed out with regular audits, and comparing your payroll registers to the checks that have been cut or deposits made to locate anomalies like duplicate names, addresses, and Social Security numbers, and the names of employees who no longer work for the company.

6. Sick leave fraud

Sick leave fraud occurs when an employee claims sick pay from their company when they are not actually sick.

7. Bonus and commission fraud

This type of payroll fraud occurs when an employee claims bonuses or commission that they are not entitled to by terms of the agreement/contract.

Payroll Fraud Prevention

There are many different types of fraud out there, and the best remedy is always prevention instead of trying to deal with it after the fact. Here are a few tips on preventing payroll fraud:

• Monitor payroll reports. Be vigilant when signing payroll reports. Don’t just add your signature to a legal document without double checking that everything makes sense first. Fraud occurs when due diligence is not taken.
• Don’t let one person take on too many duties. Cases of fraud can be significantly reduced when different employees are responsible for different parts of the payroll process. Don’t assign the same individual to process payroll and make changes in reporting or amendments to payroll reports.
• Be cautious of canceled cheques. As part of the monitoring process, review all canceled cheques to ensure they really are canceled. Also, never sign your name on a blank cheque.
• Audit payroll. Schedule for audits created to reconcile payroll at least once a quarter, and have the process overseen by an individual other than the person who regularly processes payroll.
• Payroll Automation. Payroll automation helps organize your payroll information and keeps a keen track of all your records.This will make it easier to spot discrepancies in the system, rather than sifting through all the records by hand. It will also encrypt the data, so you can give only certain people access to the records.

How to Report Payroll Fraud

If you have any suspicions that payroll fraud has occurred, you can contact the Professional Conduct Committee. Even if you are not part of the Canadian Payroll Association, you may still contact them with your concerns. For a complete guide on how to formally submit a complaint please see this guide.

Payroll Fraud Investigation Procedure

Once the proper reports have been submitted, the committee will start reviewing and investigating the claims. Here are a few examples of items the committee might look out for (but are not limited to):

• The system used to record wages, bonuses, expenses and benefits.
• The types of contracts your staff are employed under, including self-employed staff.
• How your staff are classified in your payroll system.
• How you pay wages in terms of regularity, fairness and accuracy.
• Redundancy payments.

The Professional Conduct Committee shall then hold a hearing and notice will be given to the complainant as well as the person thought to be in violation of the code of professional conduct. The hearing takes place no more than 60 days after the date the committee receives the complaint.