Tips to Identify and Mitigate Payroll Fraud

November 11, 2022

By Hubert Klein and John O'Grady

During National Fraud Week, the third week of November, EisnerAmper takes a look at several types of common business-related fraud and offers preventative tips.

Payroll Fraud is a form of asset misappropriation that involves the theft of cash through a company’s payroll processing system. Common payroll fraud schemes include:

  • Ghost Employees – This involves the creation of a fake employee in the company’s payroll system. Large companies become more susceptible to this as the number of employees increases because tracking compensation becomes more voluminous.
  • Buddy Punching – This scheme involves an arrangement of employees who fraudulently clock-in for one another when one of them is not present. The missing person is receiving his/her wages without physically being present and performing his/her work duties.
  • Pay Rate Alteration – Employees of a company who collude with the payroll department and/or system to adjust their pay. This type of fraud is more likely at a small company due to a fewer amount of controls and segregations between work.

There are things an organization can do both to prevent occurrences of payroll fraud and mitigate the impact if and when fraud is discovered. Here are several:

  • Perform a periodic auditing of the payroll reports. Randomly checking for this can prevent or catch it sooner rather than later.
  • Install a camera to monitor the time clock. You can take it a step further and use advanced technology to better uniquely identify the employees, such as finger prints or retinal scans.
  • Segregate duties and controls. Only allow a few people to process the payroll, and then have different employees record the payroll.

It may be challenging to eliminate all instances of payroll fraud at an organization. But with the proper procedures, training and awareness, you can significantly mitigate its impact.

This article is part of EisnerAmper’s Fraud Week Series. For more information on fraud awareness week, visit https://www.eisneramper.com/fraud-awareness

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About Hubert Klein

Hubert Klein a Partner, the Firmwide Valuation Services Leader, and the New Jersey Forensic, Litigation & Valuation Services (“FLVS”) Market Leader, is a nationally recognized expert witness and professional educator in forensic accounting, damages, and valuation topics.

About John O'Grady

Mr. O'Grady is a Director in EisnerAmper's Financial Advisory Services . He specializes in fraud and forensic accounting, business valuations, commercial damages assessments, and family and civil court matters.

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