roll fraud occurs more often than most people would think.
Often when discovered, payroll fraud cases remain unprosecuted due to the low possibility of recovering the stolen funds. Unlike underpayment scandals that are currently dominating media headlines, payroll fraud remains under the radar as it is often managed by internal HR processes.
Payroll fraud is enabled by a myriad of things, including mediocre processes, untrained people and loose systems. If an organisation takes the time to tighten and examine the accountability of its payroll processes, that company can significantly reduce its chances of losing funds.
Instances of payroll fraud can often be avoided if qualified and well-trained professionals are employed within an organisation. If you have a gut feeling that something is not right, no matter how big or small, it is vital that you investigate the matter.
These are the seven red flags to look out for if you suspect an employee of payroll fraud:
1. Loose security: Only payroll personnel involved in the business of paying people should have access to the payroll system. Even those in senior management should have restricted or read-only access. Not only will this reduce the opportunity of payroll fraud, it also protects those with read-only access from suspicion.
2. Out-of-hours access: Most fraudulent activity occurs out of normal office hours and often through remote access to the payroll system. If there are people in your organisation regularly accessing payroll outside of business hours, then you might want to investigate why and if they need this sort of access in the first place.
3. Duplications of data and ghost employees: A ghost employee is someone who is recorded on the payroll system but does not work for the business. In my experience, I have come across cases where twins that share a bank account and live at home with their parents are on the same payroll – but this is incredibly rare. If you find duplicate names, addresses, dates of birth, tax file numbers or other masterfile details, this is cause for concern and should be looked into further. This will eliminate the risk of ghost employees.
4. Regular masterfile changes: Masterfiles refer to a collection of records that pertain to one of the main subjects of an information system, which in this case would be employees. When there are regular changes in employee bank details or leave balances, this can be a sign that further investigation needs to be conducted. Sometimes, there can be a simple explanation for these changes – however, this is the most common red flag in payroll fraud.
5. Sharing logins or using obsolete logins: Sharing logins for the payroll system is an absolute no-no and concerns should be raised about anyone who does this. If an individual has a genuine reason to access a payroll system, they will need to have their own login and password. When there is turnover of payroll staff, companies need to ensure that old logins are deleted so that third-party users cannot use them. Using external payroll managers or companies can also eliminate the opportunities for payroll fraud.
6. Payroll audit trail: Find out if your payroll system has a robust audit trail, and as a top priority, that you aren’t using it to audit critical fields. A payroll audit trail will often directly point to fraudulent activity and highlight the areas that need to be investigated. Often, the activity you need to look out for is varied, however it will become quite apparent to anyone who understands the payroll process. It is crucial to make sure that the auditing feature of your payroll system is working so that it’s available to you when and if you need it.
7. High percentage of casual employees: While this may not always be a cause for concern, most payroll fraud is committed by the casual workforce. When you have a high percentage of casual employees, more attention needs to be focused on the internal processes to minimise and/or eliminate the opportunity for payroll fraud.
Tracy Angwin is CEO and payroll expert at the Australian Payroll Association.
