4 Common Payroll Fraud Schemes
November 16, 2020
Dishonest employees may test the waters with payroll scams before they attempt bigger, bolder fraud ploys. In hindsight, these crimes may seem easy to catch. But weak internal controls can cause them to go on for months — or even years. In fact, the average duration of payroll scams was nearly three years, according to the Association of Certified Fraud Examiners (ACFE). Knowing how these crimes are committed is the first step to lowering a company’s risk.
With National Fraud Awareness Week upon us, here are four common schemes to watch for in your business.
1. Doctored Hours
Probably the oldest and most straightforward payroll fraud scheme is lying about the number of hours worked. Hourly employees may misrepresent their time on the job and falsify their compensation rates — for example, when they claim they’re owed overtime pay.
In companies that use manually prepared timecards, an employee may forge a supervisor’s signature or collude with a manager and agree to split the proceeds of the fraud. In companies that use automated systems, employees may rely on co-workers or a supervisor to enter timecards when the employee isn’t at work.
Although the process of cheating is more difficult for them, salaried employees can also arrange to receive compensation they don’t deserve. These frauds require access to personnel files and the ability to change pay rates.
2. Ghost Employees
There’s nothing supernatural about ghost employees. In this frequently seen fraud scheme, a fictitious employee (or an actual person who doesn’t work for the company) receives regular paychecks.
Usually that person works in accounting under lax supervision and arranges to have the paycheck of the “ghost” deposited into an account set up for the purpose. If the ghost employee is a real person — say, a friend or relative of the perpetrator or a terminated employee — paychecks may go directly to them.
3. Commission Fraud
Commission fraud schemes involve falsifying sales so that an employee receives an unearned commission — or a commission at a higher rate than sales numbers warrant. How the perpetrator manipulates sales figures and commission rates varies by industry and the employee’s access to employer records.
If an employer pays commissions based on sales captured via a point-of-sale system, the employee may commit fraud simply by entering a fictitious sale. On the other hand, if the sales department must generate invoices, an employee might invent a document trail that includes fake purchase orders, shipping records and invoices. At the same time, the employee may inflate sales and commission rates to boost the amount of payments he or she will receive.
4. Direct Deposit Redirect Schemes
Direct deposit redirect schemes are more likely to be perpetrated by outside parties, rather than employees. In these cases, thieves may send emails to an HR or payroll department staffer that appear to come from the company’s CFO or another executive. The email states the executive wants to change the bank account the company uses to direct deposit employee paychecks. Of course, the new account is under the control of the fraud perpetrator.
These official-looking emails generally request the account change be made immediately. The criminal hopes to intimidate the recipient into acting quickly, without asking follow-up questions that would expose the scheme.
In-house training sessions on common fraud ploys can help deter fraud in two ways. First, they educate managers and frontline workers about potential red flags and how to report suspicious activity. Second, fraud training sends a powerful message to employees that management is serious about fraud prevention. This can help reduce the perceived opportunity for employees to steal from their employers.
If you believe your business has fallen victim to payroll fraud, DM Payroll Solutions, along with the Certified Fraud Examiners at our CPA affiliate firm Doeren Mayhew, are here to assist you uncover the evidence. Contact us today!