Payroll fraud costs UK businesses £12 billion a year – here’s how to stop it

14 September 2020 - Reading time: 5 Minutes

HR Legislation

When it comes to types of fraud, we’re all familiar with insurance, tax and even identity theft, but payroll fraud is often swept under the rug. It’s not one to be ignored, as every year it costs UK businesses £12 billion in loss.

5 types of payroll fraud

One of the reasons why payroll fraud is so rife is because of the complex nature of the payroll function. With new legislation release in the UK every few months, and the constant changes to payroll, there are dozens of opportunities for fraud. Here are some of the different types of payroll fraud your organisation can be vulnerable to:

  1. Timesheet fraud – this is one of the most common types of fraud. It originates from an employee putting incorrect information on their timesheets, whether it was on purpose or unintentionally, and it being authorised by a manager without being challenged, usually because it wasn’t accurately checked.

  2. Expense reimbursement fraud – like timesheet fraud, this is where an employee purposefully claims for a larger number of expenses than they incurred or where entitled to. This is exacerbated when you rely on manual processes to submit and track expenses such as handing someone in payroll a note with an amount on, instead of receipt, without sign off from a manager.

  3. Wage falsification – this type of fraud requires someone in payroll to be corrupt and in cahoots with another employee. The one in payroll adds extra funds to the other’s wages and they split the profit.

  4. Commission & bonus fraud – there are two ways this could be done. The first is submitting inflated sales performance to gain higher commission or a larger bonus. The second involves collision of an employee and the payroll employee who handles commission who ‘tops up’ the commission of the sales employee to split the difference.

  5. Ghost employees – there may be several ‘ghost’ employees lurking on the payroll database who receive pay but don’t actually work at the company. They may be a fake person added to payroll, a former employee whose details haven’t been removed and is still receiving pay, or new starters and temporary workers who were added to payroll but never started.

Protecting your payroll

This lost above contains common types of payroll fraud, but it is not an exhaustive list. Fraudulent activity thrives in conditions where there is a lack of control and clear processes. 

You might also have added complexities, such as paying people in different types of roles like contractors or temporary staff, across multiple sites. With this type of complex payroll, it’s easy to make errors and have difficulty reconciling hours worked and pay rates.

However, with the right steps in place you can beat payroll fraud. Below are some tips:

Harness automation and technology

Eliminate timesheet fraud by using an automated system that links to payroll. The right system can calculate hours worked and automatically request approval from managers flagging when someone has claimed for over time.

Expenses can be easily logged, approved and reimbursed by using an automated system which uses OCR technology to scan and validate receipts.

Use integrated payroll systems

Manual processes performed by one individual across multiple systems increases the risk of fraudulent activity. Switch to technology that integrates with payroll to improve accuracy and security and reduce errors. For example, timesheets that can be automatically sent to payroll to review and process.

Perform background checks on employees

Unfortunately, Payroll fraud often starts with a payroll employee. Employers can reduce the risk by performing background checks on all employees, referred to as a Disclosure and Barring Service (DBS) check in the UK. You can request a basic criminal record check for all employees or a more detailed check for certain roles, such as payroll, finance and anyone looking after sensitive data.

Outsource payroll to a credible supplier

By outsourcing payroll to a reputable supplier who is security accredited, you can relinquish the burden. Outsourcing puts your payroll in the hands of a team of payroll specialists who understand complex payroll. The staff should be background checked before they can work for the company, which you won’t have to pay for. Plus, you’ll have regular performance reviews to make sure accuracy and efficiency is maintained. In the rare occasion that any fraud does occur, the outsource company will be liable for any loss or damages.

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