How to prevent payroll fraud

how to prevent payroll fraud

By Rob Binns | Senior Writer

Spot it, stop it, then make sure it never happens again – combat payroll fraud at your business with our top five tips


These days, there are more ways than ever for fraudsters to separate your business from its hard-earned cash. Cyber scams, telephone scams, debt collection agency scams… the world can be a scary place, and you need to remain vigilant.

But what about when the threat’s not external? What if it comes from within your own organisation – an in-house fraudster, cooking the books from behind the lines of your business? 

This is the case with payroll fraud, a scourge costing UK SMEs a total of £12 billion every year. But what is payroll fraud? How is it punished? And most importantly, what can your business do to prevent it? 

Let’s find out.

how to prevent payroll fraud

Don’t let fraud define your business: find out how to prevent fraudsters from exploiting your payroll


What is payroll fraud?

Payroll fraud is theft from a business that occurs via its payroll processing system, usually by an employee. The reason the fraudster is usually an employee is because it needs to be someone with knowledge of (and access to) a business’ payroll process.

So could it happen to you?

The answer, probably, is yes. And, depending on the systems you use to pay your staff and manage their attendance, there are a variety of nefarious ways your employees can cheat the system. Here are a few examples:

Ghost employees

This is where your fraudster creates a fake, ‘ghost’ employee (let’s call him Casper) within your payroll processing system. Casper receives a wage, and is entitled to all the same bonuses and benefits as the rest of your staff. 

The only difference is that Casper doesn’t exist, and those wages are going straight into the scammer’s bank account.

Fraudsters can also pull off this particular scam by prolonging the pay of someone who has left the company. That employee might have left, but the fraudster stays on – collecting the pay, and continuing to haunt your business. 

Buddy punching

It starts with a ‘small favour’ between colleagues, but can quickly add up to big losses for your business. ‘Buddy punching’ is when one staff member arranges for another to clock in for them, even when they’re not there. Their shift is recorded, and they receive their day’s wages – even though they were nowhere to be seen.

Wage falsification

This type of payroll fraud is usually a double act, involving collusion between an employee and a member of your payroll staff. The employee gets paid more than they’re owed, and then splits the cash with their payroll-based partner in crime. 

What makes this one particularly hard to detect is that the offending member of payroll staff can later revert the employee’s wages back to normal, after they’ve received the inflated sum. Find out how to stop this one below.

Other

The list of ways your employees can claim some extra pocket money at the expense of your business is seemingly endless. These modes of payroll fraud can be as straightforward as picking up the paycheck of a fellow absent employee, or simply not paying back an advance. 

On a smaller scale, payroll fraud can take the form of an employee adding an extra 15 minutes to their timesheet here and there. On a daily basis, you’re talking about pounds and pence. But over the course of a year, you could be looking at thousands of pounds of lost revenue

Remember – no matter how negligible some payroll fraud might seem, it’s all damaging. As such, it can lead to some pretty serious penalties for the fraudsters that get rumbled. Jump to our FAQs to find out what they are – because it might be worth reminding your employees from time to time just how severe these sanctions can be.


What are the punishments for payroll fraud?

Like with all crimes, the punishment for payroll fraud depends on the severity of the offence. A seasoned fraudster caught embezzling hundreds of thousands to millions of pounds across years of service will incur more of the law’s wrath than a one-time culprit.

The maximum sentence for false accounting in the UK is seven years in prison. Lower scale offences attract fines of up to 150% of the fraudster’s weekly income, or community service work

None of it’s particular pleasant. If you’re thinking about committing payroll fraud, don’t do it. But if (as we hope) you’re just looking to learn how to stop it from happening to your business, read on.


How to prevent payroll fraud: top 5 tips

From common sense to biometrics, we’ve outlined our top five tips to help you prevent payroll fraud at your business.

1. Check information carefully

The first rule for preventing payroll fraud is to know what it looks like – and that means being able to spot the signs. To do this, you’ll need to check all your payroll information thoroughly. That means wages, taxes, and personal details like names and bank account numbers. 

So what are you looking for?

  • Employees with no deductions for taxes or national insurance
  • Suspiciously large differences in pay between employees with the same title
  • Multiple employees with the same personal details

Any instances of duplicate payments, or repeated names or addresses, should set the alarm bells clanging. Likewise, payments to similar names (or variations on the same name – JO Bloggs, J O Bloggs, and J Bloggs, for example) should also be treated as suspicious. 

These might seem like basic, intuitive things to be keeping an eye out for. But good fraudsters cover their tracks, so make sure you’re diligent in your checks. Keeping a handle on all this information means you’ll be less susceptible to ghost employees, and the downright scary effects they can have on your profits.

2. Use a time and attendance system

Installing a time and attendance system can go a long way in preventing payroll fraud at your business. Employees use their own biometric data, such as a thumbprint (or for secret government labs, a retinal scan) to verify their identity. 

Not only does a time and attendance system work to eliminate the erosive effects of buddy punching on your business, it also records breaks, punctuality, and annual leave, too – reducing your admin load while safeguarding you from payroll fraud.

Need a time and attendance system? Get quotes

3. Outsource your payroll services

Believe it or not, one of the easiest ways to prevent payroll fraud is to… not do your payroll. While we aren’t suggesting you deprive your staff of their daily bread, we are saying that outsourcing your payroll is a more efficient, cost-effective way to pay them. 

It also makes sense from a security perspective. By putting your payroll in the hands of a respected, reputable provider, you take it out of the hands of the small minority of your in-house staff that might choose to exploit it. 

To learn more about the costs of outsourcing payroll, take a moment to complete our quote-finding form. Simply answer some brief questions about your business, and you’ll receive tailored quotes from top payroll service providers

4. Separate your processes

In small businesses, it can be easy to make one person (or team) responsible for running several functions. Just as the lines between sales, marketing, and advertising can become blurred, HR and payroll can also easily end up merging into a single entity. 

But don’t fall into the trap.

That’s right – keep your HR and payroll as separate departments, run by different people. That way, any employee details being entered into the payroll system by your accountant will also need to be verified by someone from HR – rather than one person taking care of the whole process. This helps ensure that all your payments are going to the right place, and narrows the window of opportunity for wage falsification

5. Hire an auditor to monitor payments

Monitoring your payments on a regular basis will not only help you detect payroll fraud, but stop it from happening altogether. But even if you don’t have the time or patience to do this yourself, there’s no reason to let this slip – because you still have the option to hire an external auditor.

It’ll cost you in the short-term, but the long-term benefits will pay for themselves.

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FAQs

What are the punishments for payroll fraud?

As with all crimes, the punishment for payroll fraud depends on the severity of the offence. A seasoned fraudster caught embezzling hundreds of thousands to millions of pounds across years of service will incur more of the law’s wrath than a one-time culprit.

The maximum sentence for false accounting in the UK is seven years in prison. Lower scale offences attract fines of up to 150% of the fraudster’s weekly income, or community service work

None of it’s particular pleasant – so if you’re thinking about committing payroll fraud, don’t do it. But if (as we hope) you’re just looking to learn how to stop it from happening to your business, read on.

Rob Binns
Rob Binns Senior Writer

Rob writes mainly about the payments industry, but also brings industry-specific knowledge of CRM software, social media monitoring, and invoice finance. When not exasperating his editor with bad puns, he can be found relaxing in a sunny corner, with a beer and a battered copy of Dostoevsky.

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