Paying your employees is all part of running a business. Employees provide the man-hours necessary to create and sell a product, and in return receive compensation for their time by way of earned wages. Unfortunately, any time your employees are paid with a printed check, you’re opening up your bank account to potential criminals.
Payroll fraud can happen in any number of ways. Here are a few scenarios:
- Have you seen the television commercials for banks offering electronic check cashing via a photo taken on your smart phone? Some opportunistic criminals are taking advantage of this convenient new feature – and then taking the physical check to a check cashing store for double their money! Because the check cashing stores don’t know the check has already been cashed, they go ahead and cash it – and then come back to you as the check writer to get their money back when the check doesn’t clear your bank. You’ll have to spend time explaining the check was already cashed and may be threatened with a lawsuit. Many local grocery stores that provided check cashing services are discontinuing this convenience because these acts of fraud are costing them money.
- “Ghost” employees – these can either be real people who have been on your payroll at one time or another but are no longer actively working, or they can be fictitious people who have been added to your employee roster in the payroll system. In both scenarios, the ghost employees are given hours and then a check or direct deposit is created for them. A ghost employee is most difficult to detect when set up as a salaried employee, especially if timesheets aren’t required and the employee is paid via direct deposit.
- Employees generally don’t have access to your payroll system and therefore can’t affect their hourly pay rate. What they can affect, however, are the number of hours for which they are paid. Time clocks are an easy, convenient way to track hours worked but they can also provide ways for dishonest employees to cheat the system – having a friend clock in and out for them when they’re not actually working, not clocking out for breaks, etc. in order to inflate their hours worked, and in turn, their paychecks.
- Or, criminals can take the Frank Abagnale approach and blatantly forge or alter checks. Today’s technology allows even easier access to paper, printers and scanners that can be used to create fraudulent checks. Forged checks are often made out for small, uneven amounts because they are easily overlooked.
The four payroll fraud scenarios listed above are only the most common ones that we see – they are hardly an exhaustive list. As technology changes, criminals find different and easier ways to steal money. Being informed of the ways payroll fraud occurs is the first step in minimizing losses, the second step is to find ways to prevent it from happening. Here are some suggestions:
- The easiest and possibly most effective way to prevent payroll fraud is to participate in the positive pay program offered by your bank. There may be a small charge for this service but it’s well worth the investment. Your payroll processor simply sends a file to your bank with each payroll containing the series of check numbers in the run, and then your bank uses the list as a reference when cashing checks written on your account. If any withdrawals come through on the account that aren’t in the series, you will receive a notification from the bank. Positive pay is also an option for your accounts payable checks.
- If you are a client of Mize Houser’s payroll service, check the Active Without Earnings report on the Report Center as you review each payroll. Or, if you use another payroll system, find out if your provider can give you a report that contains employees who are marked as active but have no earnings for the pay period. Reviewing this report with each payroll will help keep your active employee list accurate. While this doesn’t prevent fraud, it can provide evidence that something is amiss. If a ghost employee is in the system and the criminal forgets to add hours for that pay cycle, the name would appear on this list. Similarly, check for terminated employees that are on the list – perhaps they were left active intentionally so checks could still be written to them.
- Institute a check pick-up policy in which employees must sign for their own checks before receiving them from a manager – no substitutes allowed. This provides acknowledgement by the employee that the paycheck was received and the employee can’t come back later and claim otherwise. This also provides another control for discovering ghost employees. If a check would happen to come through made out to an unfamiliar name, your manager should alert you.
- Convert all of your employees to either direct deposit or pay card payment methods. Changing payment methods eliminates the need for positive pay and a check pick-up policy. A few other benefits of converting to all electronic payments include:
- Time savings for your managers and office staff by not having checks to distribute.
- No payroll shipping charges.
- No printed checks means that your bank account and routing numbers can’t get into the hands of a criminal who would forge physical checks.
- No risk of late paycheck deliveries due to weather conditions.
- Reconcile your bank account at least once per month and monitor your account frequently. Unusual transactions such as several withdrawals in the same amount or check numbers out of series can alert you of fraud on the account. However, this won’t catch fraud before it happens like positive pay will. If you do elect for positive pay, your bank will do the monitoring for unusual check activity.
- At the end of each pay period, compare the hours worked for the period from your time clock reports to the hours paid from your check review before the payroll is finalized.
- Outsourcing your payroll to a payroll processor such as Mize Houser is another fraud prevention method to consider. While there is a fee involved, and you’ll still want to practice some of the other preventive measures listed above, outsourcing can provide a segregation of duties within your organization – and potentially eliminate the need to hire a staff member as your organization grows or experiences turnover.
Payroll fraud can happen to anyone – and usually does eventually – which is why understanding how it can happen is so important. I encourage you to practice as many of these preventive measures as possible in your organization to mitigate your risk for losses.