How to prevent a payroll fraud

How to prevent a payroll fraud

Payroll fraud is a common type of fraud that is prevalent in the business world for many years. It also features among the costliest forms of fraud amongst businesses. Since the company’s internal teams managing the human resource processes manage it, payroll fraud cases rarely feature in media reports. Besides, there is a minimum likelihood of recovering money from such paycheck fraud cases. 

Payroll fraud is defined as a false scheme under which an employee gets payment from an employer through the payroll processing system. Employees carry out such payroll fraud through false payment claims while employers make payments through a false scheme to sidestep paying payroll insurance and taxes. Generally, companies who have not employed suitable payroll controls and have managers and employees from the payroll department with access to those systems that issue false payments are the soft targets. 

Types of payroll fraud 

The most common payroll fraud schemes are the following: 

Ghost employees 

In such schemes, non-existent employees are added to the company’s payroll, but some other employee receives their salaries.  

Timesheet adjustments 

Employees engage in such payroll fraud schemes by adjusting timesheets to show more hours of work while the employee works for fewer hours.  

Misclassification of workers 

In such payroll fraud cases, employers may misclassify the workers from employee to independent contractor to avoid tax and insurance payments. 

Falsifying wages 

Employees engage in such payroll fraud by claiming salaries for hours not worked or manipulating the pay rate in the payroll system. 

Benefits fraud 

Employees engage in these types of payroll fraud schemes by charging extra benefits or commissions they did not earn in the real sense by providing fake results of the factor on which wages are based.  

Expense reimbursement schemes 

Employees claim reimbursement for the expenses not incurred or incurred in less value by showing fake bills.  

Means to combat payroll fraud 

We all know that prevention is better than cure. Therefore, companies must employ measures to prevent payroll fraud rather than finding solutions after the fraud has occurred. We provide you the following ways to prevent payroll fraud in your company: 

Conduct auditing of payroll 

Auditing of a process is a sure-shot way of checking for any errors and identifying any payroll fraud cases. Employers must arrange for such quarterly audits of their payroll system. It can be an internal or external audit. However, it is a better practice to hire an external authority or service provider to conduct the audit so that the payroll frauds are not neglected, and the audit process ensures fair results.  

Review payroll reports regularly  

Once all the payments of salaries, wages, bonuses, and other benefits are done, payroll reports are prepared and submitted to the managers for an evaluation. Managers must assess these reports carefully and comprehensively to identify any possible threats of payroll fraud. Check if any multiple payments have happened to the same account, there are some missing accounts, or the payment amount is too huge. All these and some other points are identifiers for a possible paycheck fraud.   

Keep a check on timesheets 

Managers cannot keep an eye on every employee’s log-in and log-out time or hours worked daily. However, once a week, checking the employee timesheets is a good practice. Such random checks may let you identify some anomalies in the number of hours clocked in a day or week, which is inconsistent with the usual number of hours of that employee.  

Employ different people for payroll duties 

Keep rotating the job duties of payroll processing to different employees in the payroll team. Only one employee must not be responsible for the entire payroll process. If one employee is involved in entering the payroll, another should check the payroll reports, and these duties must change in the next month or every quarter. Furthermore, the payroll team must check the bills for expenses multiple times and require approval to avoid any payroll fraud cases.  

Keep a check on canceled cheques 

You must make sure not to sign on any blank cheque. Furthermore, conduct a monthly review of all the canceled cheques to see if they are really canceled, or those cheque numbers have appeared elsewhere. Similarly, a monthly review of the bank statements is also crucial to ensure the authenticity of money coming in and going out.  

Assess commission, bonus, benefits, and pay rate policies 

Companies must conduct regular assessments of the commission policy, bonus policy, extra benefits paid to employees, and pay rate policies. Check for anomalies such as an increase in sales commission while a decrease in sales, the status of commissions for canceled sales, approval of all types of bonuses, claim sheets for benefits, and work productivity of employees with hourly pays.  


Adopt these tricks to safeguard your company from potential payroll fraud threats since it can be a costly expense. Such measures of internal payroll control implemented at the right time can ensure a reduced probability of payroll fraud, thereby saving time and money for your company. 

Start typing to search

Shopping Cart
Translate »