What must you do to safeguard your company from payroll fraud?
By Lia Marus
In the current tough economic climate, businesses are in survival mode. People need to work harder than ever before to get recognition from the companies they work for. Unfortunately, this gives rise to many disgruntled employees who feel that they are working at 150% capacity but are not getting rewarded for it. As such, these individuals are more than happy to “dip their hands in the payroll jar” to get what they feel they deserve from the company.
Small businesses are especially prone to payroll fraud as they don’t have formal systems in place to prevent payroll fraud from happening.
At the beginning of last month, at an interactive forum run by Accsys entitled Payroll in the 21st Century, CEO of Profile Software International David Brown , spoke about a number of forms of payroll fraud that you need to be aware of to ensure the health of your company’s payroll.
Buddy punching is not just about giving your friend a black eye…
Brown indicated that this type of payroll fraud originated with the old punch card system where people would punch their friends in to make it seem as if they were at work. This type of fraud would only work if there was a single point to get in and out of the operation.
Don’t let your company be haunted by ghost employees!
Ghost employees, as the name indicates, are employees who are “ghosts” in your organisation but are very much present on your payroll and draw a salary.
These types of employees are very easy to create and can be created by anyone who has access to your HR system. All you need to create a ghost employee is a valid ID number.
Be careful that your employees’ discharge is not delayed
Another very popular form of payroll fraud is delayed discharge. What this means is that if an employee is discharged on 31 October, his third-party deductions – e.g. medical aid deductions, pension fund, etc. – will be stopped but his gross salary will continue to be paid into his bank account. He will continue to be paid for November, December and January of the following year. In February, he will be taken off the payroll system. This means he will pick up three months’ extra gross salary without doing a stich of work.
Other payroll fraud which is very easy to carry out:
1. Unauthorised payments,
2. Abuse of leave pay-outs,
3. Abuse of reporting of leave taken,
4. Excessive or unauthorised overtime,
5. Abuse of loans and advances, and
6. Inaccurate of commission calculations.
Look out for one of these 7 red flags in your company’s payroll
1. Employees living an overly expensive lifestyle,
2. Employees, who are not family members, sharing an address or bank account,
3. Heavily indebted employees who work with large amounts of cash,
4. Employees who have gambling problems,
5. Employees who never take annual leave,
6. Unauthorised absenteeism, and
7. Poor administrative systems.
How can you eliminate payroll fraud in your company?
1. Buddy punching:
Get a supervisor to stand at the time clock at the beginning and end of each shift. This will make employees think twice about falsifying their hours.
Incorporate fingerprint-scanning technology into your company’s clocking-in/clocking-out process. This will make it much harder for people to falsify their hours on behalf of their colleagues as people’s fingerprints will need to be scanned to verify that they are actually at work.
Have different entry and exit points to your company.
2. Leave fraud
Ensure your employees report all the leave they take because if they underreport this benefit, when that employee resigns you will have to pay him out for leave that he has indeed taken because you have no record that he took it.
3. Abuse of loans and advances
Ensure that the loans you give employees get communicated to the payroll department so the fact that this employee needs to repay a loan is documented against his salary.
4. Keep a close eye on expenses
Fog expenses are expenses for items or events which never happened. So make sure that your employees don’t try to pass off personal expenses as business expenses, and scrutinise every single till slip or company credit card statement that you get presented with to sign off. Remember that if fraud occurs – especially with company credit cards – you will not be able to write these expenses off against tax.
5. Outsource your payroll payments function
This practice is becoming increasingly popular:
The initial payroll information is produced by the internal payroll department and is sent to an external organisation which will effect payment. So if fraud is going to occur, it will have to occur across both organisations.
6. Investigate employees’ bank account changes monthly to see if these are legitimate
Scan your bank accounts monthly to see if you have any employees who have the same bank accounts or if two or more employees (who don’t live together) have the same addresses.
7. Produce monthly salary reports to verify who must be paid what
This will eliminate any unauthorised payments from being made.
8. Get written confirmation of discharges from managers
9. Keep your payroll information safe and secure
Only grant access to your company’s payroll information to people who need to be privy to this information for their jobs.
Author: Lia Marus
Lia Marus is the editor of HR Pulse, which is an online HR publication published by ITWeb. She has a BA in French, Italian and Linguistics from UCT, an MA in translation from Wits and a Postgraduate Diploma in Management from the Wits Business School. She is currently studying towards her LLB through Unisa. Lia started her career off in corporate communications, where she worked as a sub-editor, researcher and marketing coordinator. She then heeded the call of the publishing world and went into the business-to-business publishing field where she worked as a sub-editor as well as a chief sub-editor. Before joining ITWeb, Lia managed an HR guidebook at a leading international publishing company.