No small business owner likes to think that his or her employees have the capacity to commit payroll fraud. After all, you hired certain employees because you trusted their experience and work ethic. Unfortunately, payroll fraud can happen in any industry and to companies of all sizes. It’s so common that the Association of Certified Fraud Examiners reports that the typical American business loses five percent of its annual revenue to payroll fraud. While prevention is critical, it’s also important to know the signs of potential payroll fraud to enable you to stop it in its tracks.
Indications That One or More Employees Could Be Committing Payroll Fraud
The more people think they’re getting away with criminal activity, the bolder their actions tend to become. This is as true of payroll fraud as any other type of workplace crime. Some signs to watch for that could indicate some employees may be committing fraud on the job include:
- Employees who seem to live a lavish lifestyle despite earning a modest salary
- Obvious discrepancies in payroll records
- Multiple non-related employees using the same address or sharing a single bank account for direct deposit purposes
- Requesting someone from outside the payroll department to check records
- Payroll audits routinely uncover wrongdoing
Common Types of Payroll Fraud Scenarios
Although payroll fraud comes in a variety of forms, the following tend to be among the most typical:
- Padding time and attendance records when submitted manually or an employee having a co-worker punch in or out instead
- Submitting false expense reports for reimbursement
- Requesting an advance on wages and then not paying it back
- Withholding taxes from the paycheck of another employee and then keeping the money instead of remitting it to the proper taxing authorities
- Creating a fictitious employee and pocketing his or her wages
- Deliberately misclassifying a worker as an independent contractor when he or she meets the definition of an employee
While this list can appear discouraging, the good news is that you can create a system of checks and balances that prevents payroll fraud before it ever starts.
Implement These Tips to Prevent Payroll Fraud
One of the best ways to ensure that your small business doesn’t fall prey to payroll fraud is to complete due diligence on every prospective employee prior to hiring. This means running a complete background check, including criminal activity, as well as speaking to former employers and references. Although someone can still commit fraud when they never have in the past, keep in mind that past behavior is the best indicator of future behavior.
You will want to conduct internal audits frequently and demand answers from the appropriate people if anything looks suspicious to you. Additionally, be sure to follow up to see that the person responsible for making payroll tax deposits does so as expected. Creating a separate bank account just for payroll activities can help fraudulent actions stand out more as well. Finally, make sure all employees know the consequences for payroll fraud along with how to anonymously report any suspicions they have about their co-workers.
Schedule an Appointment to Learn More Fraud Prevention Strategies
Perhaps you’re ready to begin a formal payroll fraud prevention program or just want additional self-help tips. Capital Business Strategies would be pleased to assist you in either situation. Please contact us today to learn more about how we help small business owners in the Warren, Ohio area minimize financial risks and increase their bottom line.