Payroll Fraud: What is It, and How Can You Prevent It?

Running a business in the modern age is not a simple task. Between economic uncertainty and an ever-shifting market landscape, the challenges facing the contemporary business owner are greater and more diverse than ever.

The risk of a new recession is causing more businesses to consider battening down the hatches, with 2024 expected to be another rocky year. As businesses consider their exposure, more risks emerge in the form of fraud. One particularly pernicious form of corporate fraud presents as payroll fraud – but what is it, and how can it be mitigated?

What is Payroll Fraud?

Payroll fraud is, as the name would suggest, a form of fraud in which a business’ payroll systems are the chief target. Where any part of a business’ finances can become exposed to fraud risk, payroll systems are uniquely supportive of fraudulent activity, with many forms of fraud being difficult to properly detect until long after the fact. Where other forms of fraud can involve bad actors outside of a business, payroll fraud can involve practically anyone – from outside and from within, and from base level employees to those in the higher echelons of management.

Common Schemes and Telltale Signs

Employer Fraud

Numerous forms of payroll fraud can be committed by employers or management, for both personal and for business gain. During the coronavirus pandemic, one of the most common types of payroll fraud was furlough fraud, wherein businesses used fictitious or outdated employee information to receive subsidy for more staff members than were actually furloughed.

A more evergreen type of employer-committed payroll fraud, though, presents in the form of misclassification of employees. Businesses can fraudulently escape certain tax obligations via PAYE by declaring full-time staff members as freelance contractors.

Employee Fraud

There are a great many more ways in which employees can ‘game’ the system, enriching themselves fraudulently. These ways are the same in spirit, but different in form; all involve enrichment through misdeclaration, whether of hours worked (as in zero-hours contracts), expenses incurred, or commission earned. There are also instances in which employees can collaborate, such as where HR staff arbitrarily increase another staff member’s pay rate in order to split the gains.

Reducing Risk

Reducing exposure to potential payroll fraud is a difficult, and multifaceted, process. Where fraud is present in a given business, it must be treated as a systemic issue with systemic change the solution. Where concerns about employee fraud are concerned, payroll outsourcing can be a key alternative to in-house pay processing. Doing this prevents in-house collusion and pay rate fraud.

Management-based fraud attempts can only be prevented through the spreading of accountability across the executive suite. Managers need to hold one another accountable, and independent audits into payroll and staff numbers should be utilised to sniff out ‘ghost employees’ or other instances of falsified information.