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7 Steps to Preventing Payroll Fraud

Date: June 21, 2011

Payroll Discounts for NFIB Members

This article was provided by NFIB's member benefit provider CompuPay, one of the leading payroll, tax filing and HR-related service providers in the country. NFIB members receive special discounts on NFIB Payroll services that help small business owners simplify their payroll process. Learn more about NFIB payroll discounts.

Payroll fraud comprises 8.5% of occupational fraud worldwide and costs businesses an average of $72,000 per payroll fraud case, according to a recent study.1 The Association of Certified Fraud Examiners (ACFE) found that “small organizations are disproportionately victimized…these organizations are typically lacking in anti-fraud controls…which makes them particularly vulnerable to fraud.”2

Tom Heinzmann, executive vice president at CompuPay, outlines seven steps your business should take to avoid payroll fraud.

1. Conduct Background Checks

Conduct a full background check on anyone who will be responsible for payroll or who will have access to company bank accounts. A thorough pre-employment screening helps ensure that the person hired will be trustworthy, qualified and fit for the position. The background check should include federal and state criminal checks, a credit check, an alias search, motor vehicle report, Social Security number trace as well as education and employment verifications.

2. Limit Access to Payroll Information

Another best practice is to limit access to payroll data to only those who absolutely need to have access to that information to do their jobs. Provide each employee with their login information to access electronic data and establish a policy against login and password sharing. If reports or any other payroll data are printed or recorded on other media, ensure that all documents are stored in a secure area and are destroyed when disposed.

3. Use Segregation of Duties

Always process payroll using a checks and balances process, where one person prepares the payroll and a different person reviews the payroll. This is known as segregation of duties and reduces the temptation for an employee in the payroll group to run fraudulent payroll. Reconcile bank accounts with every payroll by a different person than who processed the payroll. In addition, the person managing or running the payroll should not be the same one signing the payroll checks.

4. Review Reports Every Time

Small businesses should set up a review process every pay period to help eliminate fraud and errors in the payroll.  General guidelines for payroll report review include: 
 

  • Send data to the payroll processor earlier enought to allow enough time to review payroll reports before printing checks or making direct deposits (we recommend three days prior to check date).
  • Have a business owner or manager review reports every payroll – including a review of all employee information to ensure that no fictional employees appear in the report.
  • If anything appears to be incorrect on the payroll, direct the reviewing person to immediately contact the processing company.

5. Use a Positive Pay Service

According to an Association of Financial Professionals (AFP) 2011 study, 71% of organizations experienced attempted or actual payments fraud in 20103, with checks the most likely target for fraud. Small businesses can avoid this type of fraud by taking advantage of an automated fraud detection tool – positive pay service – that is offered by most banks. This service matches the account number, check number, dollar amount and, at some banks, the payee of each check presented to the bank for payment against a list issued to the bank by the company. If these components do not exactly match the list, the check becomes an “exception item.” The bank, in turn, will provide notification of the exception item to the appropriate company representative who then reviews the item and instructs the bank to pay or return the check.

6. Set Up an ACH Filter

The 2011 AFP study cited a 12% attempted fraud in ACH fraud during 20104 so set up an Automated Clearing House  (ACH) filter with your bank. ACH filters ensure that only authorized companies have access to your business’ bank account.  An ACH filter allows an organization to send the bank a list of companies authorized to debit your account and the bank only allows debits from vendors on the previously approved list. Some banks also set a limit on how much can be withdrawn as part of the ACH filter or allow their clients to provide a list of authorized debits with the vendor and exact dollar amount, which is similar to the positive pay service offered for checks. 

7. Promote Direct Deposit and Pay Cards

Encourage your employees to receive their pay via direct deposit or pay card instead of by check. This method is not only more convenient for employees, but it eliminates the risk of payroll check fraud for you, the employer. Since there aren't any checks to steal or alter, these payments are more secure.

 

1 Association of Certified Fraud Examiners, “Report to the Nations on Occupational Fraud and Abuse,” 2010 Global Fraud Study, page 15.
2 Association of Certified Fraud Examiners,“Report to the Nations on Occupational Fraud and Abuse,” 2010 Global Fraud Study, page 4.
3 Association for Financial Professionals, “2011 AFP Payments Fraud and Control Survey: Report of Survey Results,” March 2011, page 2.
4 Association for Financial Professionals, “2011 AFP Payments Fraud and Control Survey: Report of Survey Results,” March 2011, page 3.

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