Fraud is a risk that most everyone is aware of in business, but it is addressed in different manners by different people at different times. This type of inconsistency can lead to holes in your company's protection against fraud. Taking a look at the risks is the first step in addressing the issue, and payroll fraud prevention is the focus today.
Who doesn't want a raise? That nice feeling when you receive a paycheck and it is a bit larger than the prior one. But when that paycheck or bonus was not approved or authorized, management will probably take issue when you cash that check. Within your business, you should be aware of the following schemes and how they might be perpetrated. Otherwise, how will you act to detect such frauds or prevent them from occurring in the future?
Here is a link to a story about a long standing employee looking to make a few more dollars. If you click on the link you can read all the details of how the well respected office manager was able to steal $300,000 over a 5 year period. This organization had some control weakness (such as no segregation of duties) and the office manager was able to steal with little resistance. Here is a list of controls that your organization can look for:
Abuse of Authority: Most types of fraud involve someone taking advantage of their role to scam the system. Supervisors are responsible for others and so have authority over approvals. But supervisors also need to answer to their managers. The question is: are managers of supervisors monitoring behavior or just trusting that the right things are being done? And are supervisors checking up on their employees to ensure that the right things are being done?
- Payroll Employees/Managers: These employees are high risk since they have access to the system. Frequently, they also perform the reconciliations for payroll because they are the most knowledgeable. That may speed up processing, but it also means that when the payroll supervisor is receiving two paychecks and a bonus, they will also be the person responsible for checking to see if they are receiving two paychecks and a bonus. Oversight and review is vital to prevent this type of fraud.
- Ghost Employees: This is rare as a scheme, but still important to check for. When employees are terminated, are you certain that they are no longer paid? How do you know? Further, are all the employees who receive paychecks actually employed in your company? Or do you have a Dr. Seuss on the books who lives with your Payroll Administrator (has the same address)?
- Managers Signing Their Own Timesheets: They signed the sheet that says they worked all week, but did they? Were they around all week? How long is a workday on Friday in Spring? Even managers should have their activities reviewed, just as company presidents answer to the board.
- Collusion and Timesheets: When an employee and a supervisor decide to commit fraud together, it is called collusion. With regard to timesheets, an employee may add time to their timecard and the supervisor will approve the card in exchange for some of the proceeds, such as half the amount of the overtime pay. A process for reviewing overtime approvals will help to identify this type of fraud, as will rotation of employees to different supervisors.
Behavioral Signs of Fraud: When a child is hiding a cookie from you, where do they put their hands? Behind their back, of course. Behavior is key to intent, and if your employees do the following, you may want to investigate further into their actions:
This is a hard worker, or someone who does not want to be observed:
- Frequently comes to the office early, or leaves late, or both.
- Frequently works nights and weekends.
This person is very serious about their work being perfect, or is trying to hide something:
- Possessive about their work and will not share or delegate. Holds work off until they can address it.
- During absences, stops in at the office to check up on things.
- Little or no vacation time taken so no one else will perform their work.
In the end, the key to fraud prevention is to (1) know how fraud may occur and (2) have controls in place that function well to prevent the likely frauds. Awareness and action: when discussing fraud in the absence of these, the question is not if fraud will happen, but when.
Please contact me if you would like more information on preventing, detecting, or investigating fraud in your business.
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