Company payroll most at risk for theft, fraud

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September 08, 2016
If you’re looking out for internal theft (and you should be), you may be surprised to learn that one business function where employee violations are found quite often is not the office supply cabinet or inventory – it’s payroll.
According to the Association of Certified Fraud Examiners, fraud accounted for $3.7 trillion in losses around the world in 2014, and asset misappropriation is the most common type of fraud. Your small business is especially vulnerable – the ACFE reports that payroll fraud is twice as likely to occur in a small company (fewer than 100 employees) as compared to a larger organization.
You can protect your company by setting up processes to ensure that no one person has too much responsibility for – or control of – your company’s financial activities. Here are four tips to help your company manage money ethically and efficiently:
1. Segregate payroll functions. Assign different employees to approve and process payroll, and those functions should be separate from setting up new employees or making pay rate changes in the system.
2. Hunt for ghosts. “Ghost employees” are a top fraud source. It takes the “employee” being entered into the system as a worker, as well as ongoing time sheets and payroll approvals, to make this scheme work; easy if a single person handles all of these functions. The average “ghost employee” is on the payroll for 36 months. The solution? Run occasional payroll cycles in which employees must show ID to pick up a physical check.
3. Quarterly tests. Frequent – and sometimes, random – testing of payroll systems can identify problems sooner and can act as a theft deterrent since employees know that all processes involving money are under constant review.
4. Rotate staffers. Shifting employees from one function to the next ensures that no one person is responsible for a single money movement area for an extended period of time.  
Who Is Most Likely to Commit Fraud?
You may be surprised to learn that the average internal fraudster is a first-time offender with a clean criminal record. Managers and co-workers can help reduce the likelihood of fraud by being in tune with some common triggers: Employees experiencing personal or financial difficulties; people who are feeling uncommon pressures are vulnerable to making poor or risky decisions. 
Your Best Defense
The single most effective way to stop payroll fraud doesn’t require high-tech or sophisticated surveillance (though cameras in money-handling areas are a good idea). Employee tips are still the most common way companies learn about fraud. Make it easy – and confidential – for employees to report fraud and theft. An anonymous hotline number is simple, inexpensive and effective.
Clear Policies and Communication
As with nearly anything, communication is key – make sure all employees know what constitutes fraud and that everyone has a clear understanding of your company’s position on fraud, theft, and ethical behavior. When employees are in an environment of trust and have the tools to navigate sticky ethical situations, you can count on them to do the right thing. 

Kelli Falk, CPA, is a director of consulting services with RSM US LLP in San Antonio.
Jennifer Van Cleave, Senior Marketing Associate
(210) 253-1595