You want to trust people. You hired hard-working employees who have glowing references and you believe they are a large part of why your small business is so successful.
But what if they’re also the reason it’s not? Unfortunately, small businesses are the most likely to be hit by fraud and it often comes from inside your organization.
So, how can small business owners, with little extra time and a few extra resources, fight all types of fraud, including payroll fraud? Below are five of the best ways to keep your business safe from payroll fraud and on the path to success.
The Most Common Types of Payroll Fraud
Before you can prevent payroll fraud, you need to understand what types of things you’re looking for. Some of the more common types of payroll fraud are:
- Ghost Employees
- Timesheet Fraud
- Commission Fraud
- Expense Reimbursement Fraud
Each of the instances listed above requires someone on your staff to manipulate your payroll system. In some cases, they may be working with someone else in another department.
Although it is possible for one person to be in charge of the entire scheme depending on the size of your company and the amount of employee oversight.
The good news is that in all of the cases above diligent record-keeping and record review can prevent these types of fraud.
Fighting Small Business Payroll Fraud
According to the Association of Certified Fraud Examiners (ACFE), 89 percent of all fraud cases fall into the category of misappropriation of assets. This includes payroll fraud. It’s also estimated that payroll fraudsters are patient and willing to play the long game: payroll fraud has the longest median duration (30 months) of any other fraud type.
Here are some relatively easy ways to detect and prevent payroll fraud.
- Establish a fraud hotline or confidential reporting system.The most common way that businesses discover fraud is through tips and more than 53 % of these tips are reported by employees. As a result, it’s important that you have a mechanism that allows your employees to provide information in a confidential or discreet manner if they suspect someone is conducting fraud. Here’s another incentive: in organizations with tip lines, the final cost of the fraud was 50 percent less than in companies without one.
- Verify and review payroll every pay period once it’s been approved.It’s common for business owners to review and approve payroll before it’s been processed; however, that makes it easier for someone to hide fraud on the backend. Make sure that once payroll is approved and processed, you’re taking time to review the actual disbursement record. Other things to look out for are unapproved overtime payments, employee rates of pay, and deductions.
- Separate payroll functions.If possible, have someone approve time cards while someone else cuts paychecks. In a small business this might be difficult, but dividing up responsibilities is one of the easiest ways to avoid payroll fraud. Cross-training can be an effective method for managing payroll fraud when resources are limited. Have different employees learn the payroll functions and then rotate those responsibilities.
- Ensure that employees take time off.If you grant vacation or PTO to your employees, make sure that everyone is taking their fair share and enjoying some time away from work. A common red flag of fraudulent employees is someone who refuses to go on vacation and hoards his work. This could indicate that the employee is worried their fraud will be uncovered if someone is covering for them while they’re out of the office. This isn’t always the case, of course, some people just really enjoy their jobs – but it’s best to make sure that your employees are all enjoying some time away.
- Conduct internal and external audits. Payroll audits are time-consuming and can be expensive, but it is important for all businesses, whether fraud is suspected or not, to take a step back at regular intervals and get a look at the big picture. This includes conducting internal audits, where individual departments audit their own records, looking for discrepancies and inconsistencies. However, if the fraud is being perpetrated by an employee, an internal audit may not provide the kind of exposure you need. In that case, you’ll want to contract with an external auditing firm who can provide an unbiased and dispassionate view of your inner workings and documentation.
A word of caution about external audits: be prepared for whatever findings may result. External auditors are looking specifically for compliance issues and discrepancies that could cause problems with other agencies (i.e. the IRS).