Payroll fraud

What are payroll fraud schemes?

Payroll fraud schemes are the most frequent types of fraud. They occur when an employee’s wages/bonuses are incorrectly calculated based on intentionally misrepresented information (overtime, hours worked or other data for determining wages and bonuses), leading to direct damage to the company. The most frequent payroll fraud schemes include:

• Falsified wages and hours worked
  
  • Employees falsify the value of wages or number of wage payments
  • Employees falsify the number of hours worked or the hourly rate value
  • Employees take unreported leave
• Ghost employees
  
  • Former employees who no longer work for the company or fictitious individuals related to the offender, who illegally receive wages (e.g. wife of the payroll department head, friend).
• Commission fraud
  
  • Employees falsify, for example, the volume of sales or percentage rate used to calculate their commission. In most cases the offenders create fictitious transactions artificially increasing the sales volume based on which they are paid unearned commissions.

Motives

The motives for committing payroll fraud are more or less identical to those described in “Occupational Fraud”. The most common ones include:

• Taking advantage of non-existent or weak control system
• Employee’s inability to pay off his/her debts
• Meeting of targets set by company management for sales staff
• Meeting the expectations of other employees and maintaining successful social status (e.g. by creating fictitious sales)

Indicators

Indicators of payroll fraud within a company include:

• Employees without standard identification data commonly maintained in the company (e.g. no bank account, address or phone number)
• Employees without health insurance or social security withholdings
• Employees still on the payroll although they have been dismissed
• Unclear responsibilities of specific payroll department employees
• Sequence of commissions inconsistent with sales volumes
• Unexpected increase in past-due receivables
• Data from sales staff used to calculate commissions is not checked by an independent person