Reducing payroll fraud within your organisation

Payroll fraud is a growing concern for businesses worldwide, with each incident costing an average of £40,000  and taking up to 18 months to detect. This type of fraud can be detrimental for any business, particularly for small enterprises, which often lack the robust safeguards necessary to prevent it. Contrary to popular belief, payroll fraud can be committed by both employees and employers, making it essential to understand the risks and take proactive steps to protect your organisation.

What is payroll fraud?

Payroll fraud occurs when the payroll system is manipulated for financial gain, either by an employee or employer. This manipulation can take various forms, from altering work hours to creating fake employees. Let’s explore some common types of payroll fraud:

“Buddy punching”

“Buddy punching” is a type of time theft that occurs when one employee clocks in or out on behalf of another who isn’t present at work. This might seem like a minor infraction, but when it happens repeatedly, it can result in the business paying for hours that were never worked. Over time, this can lead to significant financial losses and contribute to a culture of dishonesty within the organisation. The APA estimates that over 75% of companies lose money from buddy punching. Employees have reported stealing around 4.5 hours/week which is the equivalent of an average of £63 per week in the UK.

Ghost employees 

A ghost employee is a fictitious worker on the payroll who doesn’t exist. This type of fraud often occurs when someone with access to payroll fails to remove a former employee or creates a fake one, diverting their paychecks to their account. This type of fraud can be particularly damaging because it often goes unnoticed for long periods, allowing significant amounts of money to be stolen before the fraud is discovered.

Payroll company fraud

Highlighted by Gov.UK the ‘Payroll company fraud’ involves a legitimate business transferring its payroll responsibilities to a fraudulent company. This rogue entity then fails to declare or pay the appropriate taxes to HMRC, leaving the original business exposed to legal and financial liabilities. This not only puts the business at risk of legal penalties but also damages its financial standing. 

Fraudulent expense reimbursement  

This occurs when an employee submits reimbursement claims for expenses that either didn’t occur or were inflated. Over time, these fraudulent claims can accumulate, costing the business a substantial amount of money.

Recognising the signs 

Identifying payroll fraud can be challenging, especially since those committing the fraud often go to great lengths to cover their tracks. However, there are certain warning signs that can indicate something is amiss:

• Unexplained Changes in Payroll Records: Unfamiliar alterations in payroll records or employees sharing identical bank account information can indicate ghost employees.
• Errors or Gaps in Payroll Data: Unexpected increases in an employee’s pay without HR approval might signal “buddy punching.”
• Suspicious Emails: Receiving payroll emails from unknown addresses or emails containing payroll information you didn’t submit can also be red flags.

Even with these signs, identifying the perpetrator can be difficult, which is why prevention is so critical.

Strategies to prevent payroll fraud

Preventing payroll fraud requires a proactive approach. Here are some effective strategies.

Regularly review payroll records for anomalies. Look for employees without tax or National Insurance deductions, significant pay discrepancies among similar roles, or multiple employees sharing the same personal details.

Using biometric systems for time and attendance can eliminate “buddy punching” by ensuring that only the actual employee can clock in and out. These systems also track breaks and leave, reducing administrative workload and further safeguarding against fraud. Examples of systems include Chime, ClockRite and ARATEK.

For smaller businesses, ensuring that payroll and HR are managed by different people or departments can significantly reduce the risk of fraud. This separation means that any changes to employee information must be verified by multiple parties, making fraud more difficult to commit.

One of the most effective ways to prevent payroll fraud is to outsource your payroll functions. Phase 3 offers managed payroll services that provide external specialists to handle a company’s payroll, ensuring compliance and timely payments while eliminating opportunities for fraud.

How Phase 3 can help

We offer comprehensive managed payroll services designed to mitigate the risks of payroll fraud. Our external specialists can handle as much or as little of your payroll operations as you wish, ensuring that your payroll is not only compliant with all regulations but also free from fraudulent activities. 

Advanced software solutions

To further protect your business, we are partnered with advanced software solutions such as PeopleXD. This software provides an all-in-one HR solution, fully integrating payroll, people management, workforce management, talent development, digital learning, recruitment, and analytics. This not only safeguards your company’s finances but also improves overall efficiency, allowing you to reinvest savings into growing your business. For more information on how to protect your payroll contact us today.