Huge Payroll Fraud highlights danger to business

25th January 2017

An employee in charge of payroll at a US sweet distributor has received a 45-year prison sentence for stealing over $800,000 from the payroll. The payroll fraud over a three-year period has highlighted the risks business face if their internal procedures are poor and auditing worse, and the impact on profits and reputation.

Worse for the company, Candy Crown, is that only $327,000 can be recovered (according to the Macon Telegraph), as the monies were taken over weekly pay periods starting in 2012, and much cannot be proven.

With continued media attention around payroll theft, with stories now making international headlines, organisations should be on guard against externals threats and internal misconduct, detecting and ultimately preventing payroll fraud.

I reported last year on the research from insurance company Hiscox which provided eye-popping statistics and tell tales pointers for organisations. Interestingly the research got it absolutely right when it said that half of money obtained through frauds is never ever recovered. The report provided real food for thought for organisations across the globe, whether US or UK based, and particularly SMEs.

In the UK we’ve determined that there are three basic types of payroll fraud – ghost employees, false wage claims, and over inflated expenses claims.

Research has suggested that most people would commit fraud if they thought they could get away with it and certainly false wage claims and overinflated expense claims are often quite common to an organisation. The creation of ghost employees, however, often involves someone at the heart of the organisations payroll department, and can include external help.

Key stats from the Hiscox report that should make employers take note:

90% of payroll fraud involves companies with less than 150 employees

40% of fraud occurs from a finance or accounting professional, with the rest predominantly made up by employees in senior roles, right up to CFO

The not for profit sector is not exempt with over one in ten payroll frauds in the States being in that sector

Most payroll thefts are conducted by women in their fifties

In the Uk the National Fraud office reports over £300million of fraud every year in the public sector alone, so the risks to any business is immense

SO WHAT CAN BE DONE TO COMBAT PAYROLL FRAUD?

1) Let everyone in your business know what’s expected – clear guidance, guidelines, coaching and training on the impact of fraud in your organisation

2) It starts at the top – bring fraud into the open and discuss it openly from the top down. Ask your employees to be vigilant, and let you know of any weaknesses in your systems – you may not have thought of all possible failures in your systems.

3) Reduce the risk – use an outsourced provider for your payroll and build you internal audit procedures and practices around that, ensuring anything handled internally carries dual signatories or ongoing audit checks. If you can grab extra time to spot fraud through outsourcing then you should take it.

4) Check, check, check – both internally and externally. Robust employee screening should be the norm internally. Ensure any outsourced payroll provider has ISO 27001 and in the UK Payroll Assurance Scheme accreditation so that you can be sure security is at the top of the agenda.

5) The ‘tell’ will help you spot potential problems – as in poker employees can give away signs that all might not be well. Unexplained wealth or purchases, knowledge of large employee debts, drug habits or gambling are all tell-tale signs. Be aware of bragging on social media.

6) Know your team – Always be on the lookout for anomalies – employees with the same address, team members staying late for no apparent reason, and thoroughly check their expenses (they’ll soon get to know if you only take a casual glance).

7) Never leave just one person in charge – It’s hard, especially within smaller companies, to have more than one person in charge of payroll, but it’s risky. If you cannot do that in your organisation then consider rotating roles on a regular basis or get someone independently to sign off payments.

8) Stay on top of leavers – make sure your procedures when someone leaves are watertight.

9) Periodically audit your process – in the case of Candy Crown the actual company losses were difficult to establish (resulting in $30 000 audit costs after the payroll fraud event, with inconclusive results)

Practical steps can help limit the risk to your business. Taking no steps will leave your company exposed.