How to Protect Your Agency from Payroll Check Fraud
May 2, 2022
Despite preventative efforts by employers and legislators, around 75% of businesses in the United States are victims of payroll fraud. The vast majority of payroll fraud cases come in the form of time theft. This could be employees falsifying their hours on timesheets, clocking-in for an absent colleague, or taking excessive liberties in rounding.
More than one in four employees admit to reporting more hours worked than they actually performed. This dishonesty is costly; businesses lose around $400 billion annually to time theft. Unfortunately, small businesses with thin profit margins can bear the biggest brunt.
But it’s not just the employees. Wage theft on the employer side is also a persistent problem, where companies underpay or entirely withhold pay from workers, leading to frequent wage disputes and vitriolic legal battles.
Luckily, there is a way to ensure honesty on behalf of all parties by automating the entire time and attendance process, from recording hours worked to calculating and issuing paychecks.
But while automation is one sure way to protect your business, it’s also best to have a personal handle on your agency’s finances in order to flag any errors or identify missteps along the way. Protecting your business from wage theft means performing your due diligence as an employer while seeking internal and external support—after all, you can’t do it alone.
Look at your books
First and foremost, it’s essential to familiarize yourself with your books or financial records—in other words, conduct your own internal audit. When perusing the records, you should be able to determine an approximate value for your payroll expenses.
Once you’ve arrived at the number you should be theoretically paying, compare this to the actual payouts. Are the numbers way off or in the same ballpark? If your anticipated budget and actual payouts are largely misaligned, you’re likely a victim of payroll check fraud. Someone is skimming off the top somewhere.
While the most common form of fraud is simply overreporting hours, it can also be more insidious: constructing ghost employees (where a fake employee is created in a system, and pay is claimed for them), exaggerating expense reports, falsely collecting sick pay, or pay rate alteration fraud, which is when employees collude with clerks in the finance department to increase their rate of pay in the company system.
To detect and prevent the many types of payroll fraud, management should be personally monitoring payroll reports and financial records, but they should also consider seeking external assistance. Working in-tandem with a reputable payroll service provider to outsource and validate pay can greatly streamline operations. For a small fee, usually between $20-$100 a month, payroll service providers audit payroll and ensure everyone is paid on time and correctly.
Automate time and attendance
Employers lose about 4.5 hours per week per employee to time theft. This type of paycheck fraud is a prevailing problem because it isn’t apparent in financial records—there’s no way to tell if an employee is exaggerating their hours worked on paper. Luckily, timesheet fraud can largely be prevented with the use of automated time and attendance software.
To ensure employees are actually present and working when they claim, employers have a suite of real-time location services (RTLS), geofencing technologies, and biometric scanners at their disposal. Geofencing coupled with RTLS can issue alerts when an employee travels outside a certain perimeter, while biometric scanners can be integrated with an existing timekeeping platform to require employee fingerprints to clock-in and out.
Nonetheless, time and attendance mistakes can also be innocuous. While manual timesheets are easy to manipulate, they can just as easily be misplaced or simply forgotten about—so, it’s time to phase them out and look to automation.
By automating the clock-in and out process, whether through artificially intelligent kiosks or user-friendly mobile applications, hours can be automatically recorded and calculated in real-time, ensuring honesty on behalf of all parties and accurate paychecks.
Create a system of checks and balances
Even after outsourcing your payroll to artificial intelligence and financial experts, employees can still try to manipulate or game the system. Therefore, make sure you have administrative duties well distributed, creating an internal system of checks and balances.
For instance, the person responsible for entering new employees into a payroll system should not also have access to payroll data. Alternatively, the financial department should not be granted access to on-boarding platforms. Overall, preventing payroll fraud is about limiting and segmenting access to specific systems based on work duties.
You can also set the majority of open-access data in a company system to “view-only,” allowing employees to see their hours logged without being able to make amendments. That way, no one looks like they have anything to hide.
As an employer, remember that it’s important to foster a cooperative work environment for increased productivity. This can be achieved by plugging any loopholes in the system, ultimately allowing you to trust your employees and vice-versa.