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Payroll Problems: The 5 Most Common Forms of Payroll Fraud

Payroll fraud costs US employers roughly $14 billion a year. The practice, defined as the theft of funds via the payroll process, is mostly committed by employees, but employers themselves have been known to commit payroll fraud as well, especially when it comes to claiming extra money from the government in the form of COVID-19 relief. 

In this post, we’re going to focus on employee payroll fraud, as it’s the most prevalent. Below, we’ll talk about the most common forms of payroll fraud, so you can be aware of them and be on the lookout for them in your own business. 

  1. Timesheet Fraud

This is probably the most common type of payroll fraud and is most prevalent when employees can manually adjust their timesheets. There are a few different ways employees can commit this type of theft, including clocking in and out at incorrect times, having someone else clock in and out for them, and making false claims about the number of hours they worked. 

Installing the best fingerprint time clock for a small business is the most effective way to fight timesheet theft. Since no two fingerprints are alike, employees won’t be able to manipulate their hours. 

  1. Advancement Fraud

This type of payroll fraud occurs when an employee asks for an advance on their salary and never pays it back. Advancement fraud is more common in businesses where the accounting department isn’t organized or doesn’t track finances closely. 

The best way to prevent this type of theft is to ensure your accounting team is highly trained and your books are closely monitored. Working with a professional accountant will also help prevent this type of fraud. 

  1. Ghost (Fake) Employee Fraud

Ghost employee fraud happens when someone in the payroll department creates a fake employee or continues to pay funds to an employee who no longer works there. The perpetrator then alters the payment details to route the ghost employee’s money into their own bank account. 

This type of fraud works best in large corporations where a lot of money is constantly coming and going, so the crime can go undetected for a long time. It is essential to monitor your payroll records closely to identify ghost employees. A sure sign that your payroll includes a ghost employee is a lack of deductions on their paychecks, as the perpetrator wants to receive as much money as possible. 

  1. Fake Expenses Fraud

Claiming fake expenses is another common type of payroll fraud. For example, an employee might claim meal costs as a business expense when they’re actually treating family and friends to expensive meals on the company’s dime. 

To prevent this type of theft, you must know who your employees are meeting with and when. You should also require receipts for every expense they want to claim. 

  1. Pay Rate Fraud

This type of payroll fraud requires the cooperation of two or more people, with one person working in the payroll department. To commit this theft, the payroll employee falsifies the pay rate for another employee, giving them more money than they should be receiving. The two perpetrators then divide the extra funds amongst themselves. Often, the payroll employee will return the payroll records to their original state after just a few pay periods, so the theft is hard to detect. 

As you can see, payroll fraud is easy if business owners are not on top of their company’s finances. Thankfully, with close monitoring and advanced technology, you can prevent payroll theft in your business. 

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