How Can Internal Controls Overcome Payroll Fraud?

By July 30, 2020 Payroll

Payroll fraud occurs when employees get their employers to pay them more wages and compensation than is due to them by making false claims and falsifying records. By being more vigilant and adopting control policies, you can protect your business from the losses you might incur because of payroll fraud. The Association of Certified Fraud Examiners warns that internationally, businesses can lose up to 5% of their revenues every year because of fraud; and small businesses typically suffer more because they lack the elaborate internal controls that larger companies might implement.

Non-existent Employees

Your employees could be collecting wages in the name other employees who are not actually working for you; or who have worked for you in the past and have left your company. To overcome this problem, you must make sure that when an employee’s services are terminated, your records are updated right away. Also tally the actual number of present employees with the number of payments made. You could also get your employees to physically pick up their cheques and sign for them. Make sure, they provide you with proper identification such as a National Insurance Number that you can later verify with the authorities. Also check if your records have actual addresses and all payments show mandated withholding. If any of your employees complains that she has not received their pay, you might want to check your entire payroll process.

False Time Sheets

Another method of claiming undue compensation is by clocking in extra hours than the employee has actually put in. If you have an electronic time card system in place, you can assign a supervisor to punch cards. You can also implement new technology by which employees have to add in a password or a code when checking in to work. Scrutinise overtime payments carefully and put in a system of rotation by which supervisors are reassigned from time to time. Separate payroll duties so that supervisors are not the same personnel who add up the time clocked and make payroll. If your bonuses are based on work hours, you could take it upon yourself to authorise them.

Bank Statements and Taxation

You can keep a close watch on the wages you are paying by studying your bank statements. For instance, if you see any similar bank details it could be an indicator of double payment. On the other hand, if details of a particular payment are missing, you might want to investigate the recipient. Also, be on the alert for any payment codes that were dormant but have suddenly been activated. In case an employee changes his bank account number, you might want to verify and ask for reasons. You could also verify your bank payments against your list of employees. Above all, you could monitor the taxes you are deducting and remitting to the HMRC for inconsistencies.

Sales Commissions

Your employees can also add false entries to sales records and commission statements to claim added pay from you. To protect yourself, check your sales revenues against the commissions you are paying. Also, confirm if you are paying for sales that did not actually materialise. If your sales figures are going down but the commission charges are constant or even rising, you might want to investigate the issue. Further, carefully study reports of customers not wanting to honour their payments. When making payroll, check the percentages of the commissions your employees have requested from you against the sales they claim.

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