payroll security

Payroll Fraud Prevention Guide

Payroll Fraud Prevention Guide

Posted On: October 8, 2018

Payroll fraud is no laughing matter. It leads to millions of dollars in lost profits every year and can cause many businesses to have to lay off valuable employees to stay afloat. This type of fraud comes in many shapes and forms, but it always has an impact on the businesses in which it occurs. If you want to safeguard your company, it’s important that you take this type of fraud seriously. The first step towards preventing it will always be educating yourself on how and why it happens.

Guide Sections:

Why does payroll fraud occur?
Common payroll-related fraud cases
How to detect payroll fraud
Payroll fraud prevention
Conclusion

Why does payroll fraud occur?

There are many reasons why payroll fraud cases exist. Sometimes, it’s just a matter of pure greed – the wrong people are given too much trust and abuse it as much as possible. In other cases, fraud and employee theft occur because of a lack of oversight and accountability. Fraud even occurs because businesses are too free with their information and make it too easy for the wrong types of people to obtain that which should be hidden. No matter what the case, this type of fraud happens because there is an opportunity for people to take advantage of what might be a particularly lucrative security opening.

Average instance of fraudulent payroll activity

Fraudulent activity happens differently in depending on the types of businesses. As a rule, though, about one in four companies are going to deal with some kind of fraud when it comes to payroll. This fraud does, however, tend to vary greatly depending on the size of the business. Between differences in the way that payroll is done and the general relationships between employers and workers, only certain types of fraud work at different levels. Once a business is aware of what types of payroll fraud are most likely to occur, though, that business can better prepare its own fraud defenses.

 

payroll fraud

Fraudulent payroll activity in small businesses

On average, direct fraud is more common in small businesses than in their larger counterparts. While this type of fraud happens in about twenty-seven percent of all businesses, it’s an issue for closer to fifty-percent of all smaller businesses. As such, it’s always important for a smaller business to keep track of who is looking at their payroll, how it is processed, and ultimately what procedures are used to ensure that the money being paid out is equal to the labor that’s actually being done for the business. Failure to do so can lead to the kind of catastrophic losses for which a small business is simply not prepared.

It should also be noted that smaller businesses are more often victims of internal fraud than external fraud. While it’s become more common for thieves to target small organizations, it’s technically easier for those in charge of payroll to defraud a business when they are the only ones actually looking at the books. In many cases, small businesses get to experience all the same types of fraud that their larger counterparts experience with an added helping of fraud that requires too much trust to work in a larger company.

Fraudulent payroll activity in small businesses

Once a business becomes bigger, certain types of fraud become less likely. Any type of fraud that requires having unfettered, individual access to payroll is just less likely to occur, if only because more eyes will be on the books than in a smaller company. Mid-sized companies do, unfortunately, often get hit with many other types of fraud. In fact, mid-sized companies are perfectly positioned to not only deal with many of the same types of fraud as small businesses but to deal with the similar issues as larger businesses.

 

payroll fraud

 

Because it’s easier for an employee to become lost in the shuffle, issues like timesheet fraud and ghost employment tend to start cropping up at the mid-size level. It’s also more likely for sophisticated thieves (and unscrupulous insiders) to target the payroll systems directly through the use of information on the company’s checks. Mid-size companies are usually in a difficult position because they are large enough to be targeted by those who want to commit fraud but still small enough that they may not have the budget or manpower available to have the same security measures in place that a larger business might have. As mid-size companies grow, fraud paradoxically tends to become more common and somewhat less catastrophic.

 

Related: How to prevent buddy punching

Fraudulent payroll activity in large corporations

Larger corporations are fantastic targets for fraud. Fortunately, most realize this and they put systems in place to deal with that fraud. That’s why large, spectacular fraud cases are so commonly portrayed on the news – they’re shocking, because most companies can catch them before they reach the point of no return. Instead, larger companies tend to deal with many minor instances of fraud that end up costing the company more money over a greater period of time. It’s not necessarily better than what smaller companies have to deal with, especially when the problems become systemic.

Timesheet fraud is incredibly common in larger corporations, especially when employees self-report their hours. Ghost employees are likewise quite common, especially when it’s possible for an employee to get lost in the shuffle between multiple branches and remote commuting. It’s very easy for hours to get lost here or there, especially if the business is in a growth cycle. Large businesses also tend to have some real problems with employee classification, especially when it comes to management positions. When these issues become a problem, the company might be expected to weather major labor-related fines.

Certain types of fraud are more common than others. While there are certainly dozens of different ways for individuals to defraud a company, a few types of fraud tend to crop up at businesses of all sizes. These types of fraud are generally fairly low-tech, but they are also often quite successful. The best way to defend against them is to know what they are and the signs for which you should be looking out. Four types of fraud tend to stand out in the business of all sizes and thus should be your primary security concerns.

Ghost employees

Ghost employees are a fairly common issue when it comes to the world of payroll fraud. They’re often a result of putting too much trust into a particular time-keeping system, allowing employees to make it onto the payroll with little oversight over those who have added them to the list. Indeed, the ghost employee may not be an employee at all – but he or she is definitely drawing a paycheck.

 

payroll fraud

 

These employees come in a few different forms. One type is the true ghost, an employee who doesn’t actually exist. Another is a real person, but one who doesn’t actually show up to work at the business. In either case, an excess individual is put on the payroll and checks are cut for him or her. The money may go back into the pocket of the person in charge of payroll or it might end up being split between several co-conspirators. No matter the specifics, though, it can be a major drain on the finances of the company.

Worker misclassification

Not all forms of fraudulent payroll activity are done on the part of the employees or even an outside agent. Some forms of payroll fraud happen at the management level. One of the most common types of fraud is employee misclassification, which usually occurs as an attempt to avoid paying taxes and/or benefits to an employee who might otherwise be eligible for the same type of compensation as others in the company.

The most common way this happens is through the misclassification of a standard employee as an independent contractor. 1099 contractors can be incredibly attractive to some businesses because there’s not the same tax burden involved as found with typical employees; but a business can’t just declare employees to be contractors at a whim. Contractors are not the same as employees, and any attempt to treat them as such might be seen as fraudulent by the IRS.

It is also common to deal with misclassification when it comes to management. Classifying an employee as management might allow the business to make certain requirements (frequently a lack of overtime pay), but if the employee doesn’t actually make management decisions, this can be seen as a misclassification. Running afoul of a labor board or the IRS is common for businesses that fail to classify their employees correctly.

Worker misclassification

Payroll security breaches can come in many shapes and forms. In some cases, these breaches are as simple as someone having access to payroll information that shouldn’t have access. In others, though, it can constitute a full breach of the company’s data storage systems, giving the infiltrator access to a wealth of information as well as several different methods of taking money from the company. Payroll security breaches are serious issues that require serious steps to fix.

 

payroll fraud

 

Payroll security breaches are most easily handled by keeping better track of who has access to your payroll information. Limiting points of contact make it not only easier to keep the information safe, but also easier to track down the source of any breaches. Taking basic safety steps to ensure that no more information than necessary leaves your business is often a good way to shut down these leaks before they occur.

Payroll security breaches may, however, be indicative of a systemic information security problem. If such a breach does occur, it’s important for a business owner to take a look at the security measures in place and find out how effectively they are being used. Once you are aware of your security shortcomings, you can put plans in motion to ensure that these breaches occur less often.

 

Timesheet fraud

If you’re looking for a particularly common type of fraud, the first place you should look is always at timesheets. It’s very easy for numbers to get mixed up and fudged, especially by individuals looking to make – or save – money. The time worked by an employee is what is legally owed to be paid, so it’s important that the time on the sheet actually matches the time worked. Even adding a few minutes to a time sheet is technically fraud, so be on the lookout.

The easy way to deal with this type of fraud is to add systems to guard against it. Electronic systems tend to be less prone to abuse by employees, but that doesn’t mean that abuse cannot occur. Timesheet fraud can still be perpetrated by managers and by supervisors, especially when they are under orders to keep hours down. If an individual chooses to alter the time forms, he or she is committing fraud.

It is important to guard against this type of fraud from both employees and managers. Always make sure there is a third party available to make sure that timesheets are reconciled correctly. While this might be extra work, it’s also the easiest way to make sure that this type of fraud doesn’t fall through the cracks. When you can eliminate timesheet fraud, you can help to ensure that your payroll accurately reflects the hours worked by your employees.

 

Related: How Employers can Reduce Workers Compensation Fraud

How to detect payroll fraud

Detecting payroll fraud isn’t necessarily easy, but it’s often less complex than you might think. The best way to start is with a clear understanding of what your payroll should be every month. If you can check your real numbers against your assumed numbers, it will be easy to see if there are any wild discrepancies. This type of basic oversight can go a long way towards ensuring that you aren’t missing anything that should be easily spotted.

 

payroll fraud

 

Basic oversight is, in and of itself, often one of the most important parts of detecting fraud. There should never be a situation in which only one person oversees the payroll operations.Even if this means that another person simply has to sign off on the payroll it is processed, this helps to ensure that errors and omissions are quickly caught. In most cases, it won’t take a massive amount of technical ability or many high-end tools to do the work of the second pair of eyes.

In fact, it’s important that you audit your payroll security system on a regular basis. Figure out what’s working, what’s not, and what you can realistically change. The more work you put into detecting payroll fraud, the less work you’ll have to do to prevent it from occurring.

Payroll fraud prevention

Preventing fraud takes several steps. The first, generally speaking, is vigilance. It’s important that you know who works for you, who is in charge of your payroll, and what type of numbers you should see on a daily basis. If you aren’t in a position to monitor your payroll yourself, you should have someone you trust monitoring the numbers – and someone else you trust ensuring that the other person isn’t left in a position where temptation becomes too strong.

Related: 3 Ways to Detect Payroll Fraud in the Digital Age

Common sense is also invaluable when it comes to preventing payroll fraud. Don’t print excess information on your checks, keep all of the paperwork locked up when it’s in use, and make sure that someone in management meets every new employee added to the payroll. These are little steps that don’t really take any extra time, but they can help you to prevent some of the most common types of fraud. Exercising just a modicum of caution in the way you handle your payroll process will allow you to make sure that your business isn’t an easy target.

 

payroll fraud

Conclusion

As you can see, payroll fraud can occur no matter what the size of your business. It takes quite a bit of work to prevent it from occurring, but even then you can be sure that certain people will continue to look for ways to defraud your company. The best way to prevent this from occurring is to know whether or not the measures you have in place today can realistically defend against a fraud attempt tomorrow.

 

If you are ready to start taking your payroll security seriously, click here to take the Payroll Security Quiz.

Common Payroll Security Issues

Keeping your payroll data secure is incredibly important no matter the size of your business. When this type of data is breached, your company can lose not only some of its most important assets, but also the trust of its employees. If you want to start taking payroll security seriously, it’s important that you start by taking a look at some of the most common payroll security issues faced by businesses of all sizes across the world.

[Read more…] about Common Payroll Security Issues

Payroll Security Best Practices for Small to Mid-Size Businesses

Making payroll is one of the most important things a company can do. Not only does it help to keep the business’ employees happy, but it helps the business to avoid major fines. Unfortunately, it can often seem like the best payroll security available online is geared towards massive businesses with huge budgets. There are, however, a few payroll security best practices that a business of any size can follow. If you have a small or mid-sized business, you can undertake a few changes to the way you deal with payroll in order to ensure that you are doing everything possible to keep this vital part of your business secure.

[Read more…] about Payroll Security Best Practices for Small to Mid-Size Businesses

Payroll Security 101 – The Basics You Need to Know

Payroll Security 101 – The Basics You Need to Know

Posted On: July 9, 2018

It’s hard to overestimate the importance of proper payroll processing. While your employees may believe in your business, they likely wouldn’t come to work without a paycheck. Making sure that your paychecks arrive on time is just one aspect of having a working payroll system, though. Making sure that system is secure is an important undertaking, one that can impact the future of your business. Taking a moment to look at the basics when it comes to payroll security issues is one of the best ways to ensure that you won’t be caught unaware by them if they occur.

Guide Sections:

The basics of securing payroll
The most common payroll security issues
Payroll security best practices
How to do a payroll security audit

The basics of securing payroll

When you’re looking at an issue as important as securing your payroll, it’s important to go back to the basics. There are certainly some incredibly sophisticated tools you can use to keep your payroll secure, but they won’t do you any good if you don’t understand why and how they should be used. That’s why anyone interested in this type of security should start by looking at why payroll processing needs to be secured – and what they can do to ensure that they make use of the best security measures available.

 

payroll security

Why does a payroll system need security?

It’s never a bad idea to question why you need certain systems in place. After all, you should never go with something just because it’s the industry standard – you need to understand exactly why you’re undertaking an action before you spend the money on implementation. Fortunately, payroll security is fairly simple to understand. Because your company’s payroll deals with money, some forms of security are automatically understood. Digging deeper, though, will give you a clearer look at why this type of security is so important.

At a basic level, payroll systems need security because they deal with something that’s near and dear to your employees’ hearts.

Payroll that runs efficiently and on time is not just a perk – it’s something that every employee expects from his or her employer. Failures on the payroll front are sure to drag down employee morale and give some of your best employees a good incentive to start looking for work elsewhere. If you’re not closely guarding your payroll, you’re sending a message to your employees that you do not care about their livelihoods.

payroll security

Beyond securing the money that needs to go out to your employees, payroll security is also information security. Your payroll records contain data that can be very dangerous in the wrong hands. Social security numbers, addresses, and other forms of personal data are all stored because they are necessary for properly processing payroll and the related taxes. If someone was to get into your payroll system, you’d be giving them much more than a single payday – you’d be giving those people access to information that could very well ruin the lives of all of your employees.

In fact, the security of your payroll is closely related to the general financial security of your business. If someone is able to penetrate your payroll data, they’ll get access to much more than your employees’ data. They’ll also get access to vital data about your business’ finances and possibly even access to your business’ accounts. If you don’t practice proper payroll safety, you may be setting yourself up for a major financial upset.

This is one of those areas that is, unfortunately, easier for some thieves to penetrate than other aspects of your company’s network, and the damage they can do is fairly significant.

Finally, keeping your payroll secure helps to keep your business’ reputation intact. Failure to have an intact security system can wreak havoc on how you are perceived. Not only will you lose the respect of your employees, but others in your field will begin to wonder how well you are protecting your data in general. This can lose you contracts, vendors, and the relationships that are necessary to keep your business running. If you’re not able to prove that you can keep something as important as payroll secure, you’re signaling that your business isn’t taking information security seriously enough.

payroll security

It’s important to note that these factors impact businesses of all sizes.

It doesn’t matter if you’re doing payroll for two employees or ten thousand – failure to properly account for the security of payroll can destroy your business’ credibility and leave your employees wondering where they’ll find their next paychecks.

 

The most common payroll security issues

Payroll issues vary from company to company. Depending on the size of the business and how it operates, there can be a myriad of issues that impact how well payroll is handled. Fortunately, there are a handful of problems you can watch out for if you’re concerned with the overall security of your payroll system.

One of the biggest security issues is fraud.

This is a problem that’s entirely human in nature, and it generally goes hand in hand with smaller businesses. In the early days of a business, it’s common to have a single person work on payroll. This is a great cost-saving measure for some, though it definitely makes it easier for fraud to occur. After all, a single payroll employee has ultimate power over what goes on with payroll and it can be tempting to fudge the numbers a bit. Security problems in these cases can range from wage theft to stealing personal information, and each issue can quickly spiral out of control.

In fact, most of the issues surrounding securing payroll are very much based around the human element. A lack of proper education on information safety is another major problem in many businesses. While Hollywood might love to glamorize the idea of data thieves as people who perform wizardry with computers, the truth is that most breaches occur because an employee was too quick to give out confidential information to the wrong person. When employees – and especially payroll employees – don’t know how to keep data safe, there are bound to be major problems.

payroll security

 

That is not, however, to say that there aren’t very real issues with payroll processing software and online intrusions.

Failure to update software, keep firewalls enabled, and deal with malware in a timely manner is a fantastic way to fall prey to basic scams.

It doesn’t take a mastermind to infiltrate a system with these tools – this is someone who can send out a clever attachment and is willing to wait for a poorly-secured company to take the bait. If you’re not paying attention to your data security, you’re not preparing your business for potential payroll intrusions.

Outside of online data breaches, there are a surprisingly large number of businesses that practice poor data security in the physical space. Not properly disposing of payroll processing documents, for example, is a good way to let your employees’ banking information get out into the wild. Likewise, printing too much data on a payroll check can be a good way to give strangers access to important information. If your business isn’t keeping its traditional data safe, it is putting your employees and your payroll in just as much danger as a failure to guard digital data.

If there’s one common bond between all of these issues, it’s that companies don’t pay quite enough attention to their payroll data. While problems surrounding getting a single check wrong might be fixed quickly, problems surrounding the whole system are often ignored because they are difficult or expensive to fix. All of the problems listed above can be avoided so long as those in charge of the business can be made to realize the fiscal long-term importance of keeping all of their payroll data safe and guarded against outside intrusions.

Payroll security best practices

The best practices in securing payroll are a combination of data security practices, employee training, and old-fashioned financial security.

Some of these practices are more important than others depending on the size of your business, but they should all be put into place as soon as they are appropriate. It is much easier to do so before a situation occurs than after you have to deal with a breach.

Related: Payroll Security Best Practices for Small to Mid Sized Businesses

First and foremost, make sure that you use up-to-date payroll software on systems that are regularly updated. Most people who would attempt to breach your system are counting on out-of-date software that is vulnerable to known exploits. Fortunately, investing in better technology can help make your entire payroll department more productive, so this is one cost that should be easy to justify. If you can’t afford new systems, make sure that the ones you have available are updated and continually monitored.

Monitoring is, in general, another major watchword when it comes to best practices. If you want to prevent easy internal fraud, make sure that more than one person has access to payroll. You should never put this kind of burden on a single employee, so split the duties and make sure that each employee works as a check against the others. Putting together a system that requires employees to stay honest isn’t necessarily burdensome and actually takes some of the pressure off of individuals. If you can remove the ease of fraud, you can remove much of the threat.

Remember to continually review the paperwork of your payroll department.

This isn’t something that can go out and be forgotten. Make sure to set up specific dates for audits and don’t be afraid to inspect the files on a random basis. This isn’t just something that will protect you from fraud – it will also protect you from issues that might have been missed in the interim. These sort of departmental check-ups should be normal for every other department in your business, so no one should treat them as unusual in payroll.

Practicing reasonable data security with your paychecks is also another good way to avoid major problems. On a basic level, this means avoiding printing unnecessary data like social security numbers or full employee addresses on your checks. At a more stringent level, it means keeping blank check stock secured outside of the payroll area and making sure that you keep careful track of who’s actually able to sign off on the payroll. Keeping track of these mundane physical matters can make it much easier to prevent simple fraud.

Finally, another necessary practice is employee education. Make sure your employees understand the impact of payroll fraud and what they can do to stop it. For the most part, that means educating them on things that can be considered fraud, like signing for ghost employees, manipulating time sheets, or other issues. It also means teaching them the importance of data security and how they can avoid some of the more common phishing scams.

How to do a payroll security audit

One thing you’ll absolutely want to do is an audit of the security of your payroll. This will allow you to learn exactly where you stand in terms of those security best practices and help you to reveal any glaring problems that might occur. This process isn’t necessarily grueling, but it should be thorough enough that you’ll uncover even those problems that are professionally hidden. Your first audit will be the hardest, but it will absolutely be the audit that helps you to redefine your company’s stance on security when it comes to your payroll.

The best place to start an assessment on payroll is with your payroll staff. Every member of your payroll team should have a chance to describe what they do during the day, whether by responding to a survey or through a direct interview. This will reveal a great deal about the daily security practices – follow up questions will be necessary to clarify some procedures. During this time, it will be important to ask those in payroll about ways security could be improved. While not all of these suggestions will be feasible, they could reveal some important weaknesses in your current system.

payroll security

Your next step should be to look at the data. This means going through the typical process of a payroll audit to determine if any security breaches have already occurred. Yes, this can be a tremendously time-consuming task, but it’s also a very good way to catch issues. It will be easier to tell if there are systemic problems if you can determine whether or not your payroll is able to be reconciled. Remember, a lack of problems here absolutely does not mean that your security is up to par – it just means that no problems have happened yet.

Now that you’ve talked to employees and looked at the payroll data, you can conclude the assessment phase of your audit by taking a look at your payroll systems. Your job will be to find out if they are up-to-date and whether they are systems that have known flaws. This is very likely a job for your IT staff, and the information they return to you will have a great deal of bearing on what you do next. Your investigation of your security systems will allow you a better chance to understand exactly what might need to be changed next.

payroll security

Your final step is to gather your data. Through talking to your employees, examining payroll, and looking at your systems, you should now have a fair idea of how your current practices compare to the best practices. You’ll have to prioritize what needs to be fixed based on immediate need and the number of resources that your company can dedicate to the problems. Once you know exactly the issues you face, though, you can make rational decisions that will better allow you to both fix existing payroll concerns and to avoid problems that are likely to occur in the future.

Simply put, the security of your payroll really is the security of your company. If you can’t protect this vital resource, you’ll have a hard time protecting the rest of your company’s assets. If you find yourself wondering where to go next, it’s important to remember that you are not alone. It is possible to get the professional help that will allow you to better understand the weaknesses in the security of your payroll and how you can fix those problems. If you’re ready for help, make sure to contact PayTech to get your free payroll security audit.

Payroll outsourcing mistakes and tips to avoid them

As you might imagine, it’s possible to make some significant mistakes when you’re dealing with outsourcing payroll. This is a common problem when you outsource any kind of function, so learning how to avoid these mistakes is a necessity. Your first goal should always be to identify what others have done wrong in the past, and then you should work to make sure you can take a course of action that will allow you to avoid those mistakes in the future. Below are three of the most common mistakes companies make when they choose to outsource payroll services – as well as the simple steps you can take to avoid those same mistakes.

Making Assumptions

Your relationship with your payroll company is one that’s predicated on a signed contract. Unfortunately, far too many businesses make assumptions about what their payroll company will do for them, leaving them to scramble to figure out what needs to be done when they realize that the task they assumed was being done was actually not included in the paid-for service. This extra work leads to extra costs and, in many cases, a fraught working relationship between the payroll processor and the client company.

Tip: Read your contract and make sure you know what is included in your services. If you are not sure about what your payroll company does, just ask your representative. There are many benefits that come with payroll outsourcing, but you can only make use of them if you actually know what they are.

Garbage In, Garbage Out

An important term in computing is “GIGO”, or Garbage In, Garbage Out. In short, this means that any process that starts with bad data is going to produce a bad result. As your payroll processing company can only work on the data that you give them, they can only produce the results that come from that data. Many businesses blame their payroll company for problems when the actual issue is the information that has come from the originator.

Tip: Double-check the information that you give to your payroll company before you send it over. Never assume that your numbers are correct – run them a second time and make sure that there is always a second set of eyes on anything you’re sending out. If you are able to send out reliable data, you’ll end up getting reliable results in return.

Concentrating on Cost

One of the cardinal sins of business planning is only concentrating on the cost. While there is certainly something to be said for being thrift, you generally get what you pay for when you’re working with payroll outsourcing companies. Going for the bottom dollar might save you money in the short-term, but it can lead to problems in the future.

Tip: Instead of focusing on getting the absolute lowest price, try to focus on getting the best price for the services you actually need. Doing so will give you a much better chance of actually saving money over the long run and give you a good chance to avoid payroll problems in the future. Try to focus on the value of the service rather than just the price tag.

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