Payroll function is one of the most delicate and time-consuming functions in any organization. If not managed well, it can be prone to data entry inaccuracies or payroll calculation errors. Another pitfall of a poorly-managed payroll process is the susceptibility to payroll scams.
Any business, regardless large or small, is prone to payroll scams and fraudulent activities. In fact, payroll frauds are twice as prevalent in small organizations than in large corporations. Payroll scams can result in serious repercussions on the organization, including significant financial losses, leak of confidential payroll and employee details as well as employees' distrust and high turnover rates.

Here are some common payroll scams and how to avoid them.

Compensation fraud
Compensation fraud occurs when employees or payroll administrators falsify their wages or tamper with the payroll calculations just before the monthly payroll runs. They may also falsify their expenses by submitting non-work related expenses or insurance claims. This may lead to financial losses on the organization and unnecessary increased pay to the employee for an extended period of time.

How to avoid the scam
Organizations should implement clear guidelines on expenses and insurance claims. This may include specifying the amount of expenses claims per expense type that each employee is eligible for. Organizations should also mandate employees to submit the original receipts of their expenses claims during submission to avoid any falsification. Likewise when it comes to payroll, there should always be check controls in place. Payroll records should always have multiple levels of approvals in place to prevent any compensation fraud.

Bonus fraud
This type of fraud occurs when employees boost the number of products or services sold for high bonuses or commission. Bonus frauds may occur when sales competition is extremely fierce within the team or organization. Employees may also falsify their sales achievements if sales targets are set too high for them to meet.

How to avoid the scam
Sales managers and HR will need to review sales targets to ensure that it is realistic for sales employees to achieve. It is also important to review bonuses and incentives metrics to ensure equitable and competitive payouts based on employees’ sales performance. Likewise, they may also review historical sales performance to determine if the employee has indeed outperformed for a certain period or is simply boosting his or her numbers for a higher bonus payout.

Ghost employee
This occurrence happens when a fake employee or ghost employee exists in the payroll records and receives wages from the organization. Some payroll staff may also prolong the pay of an employee who has just left the organization, and alter the payment record such that it is directly deposited to them. This may be prevalent in large organizations with a huge number of staff, making it difficult to track the new hires and exiting employees on a regular basis.

How to avoid the scam
Implementing an effective off-boarding feature that immediately purges the exiting employee’s details from the payroll system can help to prevent the occurrence of ghost employees. Monthly payroll audits can help the payroll team to spot ghost employees. Another red flag of a ghost employee is when there are no deductions from the ghost employee’s wages, as the perpetrator may want to receive the maximum compensation payout.

Phishing is the most common type of payroll scam, with an estimated 3.4 billion spam emails sent every day. It occurs when external parties impersonate an existing employee within the organization to access employee information and redirect employee funds. Their email may look like an actual email employee in the organization and has all the information regarding the actual employee, but is actually fake. Once the payroll team fulfills the request to update the banking details through the phishing email, the funds are then directed to the fraudulent account.

How to avoid the scam
As phishing scams can be difficult to detect, it is best to educate employees to be alert when communicating through emails or clicking on and replying to suspicious-looking links within emails. Train them on looking out for unusual email requests and reporting them to the IT security team immediately. Payroll staff should also validate with the employee in-person before making any changes to their bank accounts.

There are many ways in which payroll scams can occur. Such payroll scams can also be difficult to detect if the amounts involved are small in the beginning. However, if prolonged, these amounts can escalate into a significant sum in the long run. It is always prudent to implement prevention activities, including investing in a robust payroll system with proper data security protocols in place. In addition, it is imperative to educate employees on the various types of payroll scams so that they can also play a key role in identifying and preventing payroll scams.

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