Understand how this type of theft typically occurs at practices is key in avoiding payroll fraud
“Joyce” was “Dr. Quincy’s” long-time trusted office manager, and had been with his practice for more than 15 years. Dr. Quincy regarded Joyce as his “second in command.” Not only did she handle all of the administrative and book-keeping duties in the office, but she had more institutional knowledge than anyone else. And most importantly, his patients loved her. He sometimes worried what he might do if she no longer worked for him. The office ran in tip-top shape and Dr. Quincy could focus on his passion — helping and healing his patients — without any indication of anything wrong such as payroll fraud.
Joyce wore many hats for Dr. Quincy. She processed the office’s payroll and handled the accounts payable; she also posted patient payments and took the practice’s cash and checks to the bank. Unfortunately, because she had such unfettered access to the company funds, it was only too easy for her to begin stealing from her employer and hiding her misdeeds. The fraud started when she issued herself payroll advances every week but did not report all of those advances on her paycheck. On the back end, she manipulated the digital accounting so it appeared those extra checks were going to legitimate vendors.
Dr. Quincy never noticed these anomalies. He was alerted to a problem when he noticed unfamiliar bill payments were made with the practice’s debit card. By the time the forensic investigation concluded, Joyce had stolen more than $20,000 from Dr. Quincy in payroll theft and unauthorized debit card charges.
Payroll fraud and detection
Payroll fraud is theft of a company’s money using the payroll system. Payroll fraud schemes are some of the most financially devastating because they tend to take place over an extended period — on average, this form of asset misappropriation goes undetected for two and a half years. Like most frauds, the perpetrator is often the company’s most trusted, loyal and likable employee, making the loss both financial and emotional.
Four of the most common examples of payroll fraud schemes include:
Timesheet fraud. An employee logs time for hours not spent on the job. In a larger organization, a fraudster may ask a coworker to “punch the clock” for him in his absence or to hide tardiness or skipping out early. Employees with access to the payroll system can alter check amounts or issue themselves unauthorized checks, as Joyce did in the case example.
Ghosts on the payroll. Ghost employee schemes occur when a payroll employee enters a fake employee into the accounting system or continues to issue checks to an employee who no longer works for the company. The extra checks are then pocketed for personal use.
Commission fraud. This fraud is most often perpetrated by sales employees who take advantage of weak controls in commission policies. For example, an employee who inflates his sales numbers in the CRM system to receive higher-than-earned commissions.
Lack of deductions. An employee with access to the payroll system can alter their checks to avoid paying mandated deductions, such as federal and state (if applicable) withholding taxes and Social Security, effectively leaving the employer to pay for them.
The upside of payroll fraud is that is it easy to prevent by implementing simple internal controls that even microbusinesses can do. Here are seven safeguards that can help detect payroll fraud before it snowballs, and reduce the likelihood of it happening at all.
1. Review payroll reports each pay period, after payroll is processed (whether in-house or by a payroll service). Many employers approve the payroll before it’s processed without comparing it to what was actually paid. Businesses should recognize and verify employee names, rates of pay, hours worked, any deductions and to ensure overtime is justified and approved.
2. Require employees to take mandatory time off. A common red flag of fraud is an employee who hoards her work duties and never takes PTO. This type of behavior could mean an unwillingness to leave for fear the fraud will be discovered by someone who is covering for her.
3. Cross train and rotate job responsibilities to ensure continuity of your practice.
4. Require supervisor approval on timesheets and overtime requests.
5. Review paper bank statements and cancelled check images every month. It’s not enough to look at an online statement of account activity. Look at every check and verify the payee and the amount.
6. Ensure payroll tax deposits are made to state and federal regulatory agencies on the same day payroll checks are processed.
7. Establish a zero-tolerance policy against employee theft of any kind and prosecute fraudsters when they commit a crime.
Understand your payroll
Payroll fraud happens when business owners leave this delicate and important function to a trusted individual, without making sure there are proper safeguards in place. To reduce the likelihood of payroll fraud, employers should make sure they understand that payroll is being paid on time and to appropriate employees at their appropriate rates of pay and hours worked.
What’s more, it is critical to ensure that your payroll taxes have been deposited with regulatory agencies on time. Lastly, make your employees aware that payroll is being scrutinized at each pay period. One of the most important parts of protecting a business’s financial assets is to vigilantly monitor cash in and cash out to disrupt fraud before it happens.
Tiffany Couch is CEO and founder of Acuity Forensics, a nationally-recognized forensic accounting firm. She is also the author of “The Thief in Your Company,” a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be reached at firstname.lastname@example.org or 360-573-5158.