Many organisations don’t realise they are victims of payroll fraud. How do they find out?
The damage caused by payroll fraud and ghost employees is often catastrophic, with large sums lost and additional spending in investigations and prosecutions. In many of these cases, companies forgo legal actions and act by only firing the fraudster, who often moves to a new business and restarts their crimes.
Yolande Schoültz, founder of YSchoültz Attorneys | Conveyancers | Notaries, and an expert who has investigated many such cases says that most companies unfortunately only uncover payroll fraud by accident. By the time they realise it’s happening, it has already cost them millions.
Companies can avoid devastating losses by using methods such as monthly checks on hiring changes and annual face audits – facilitated by modern payroll platforms – they can reduce fraud risks and organically extend role-based oversight across different departments.
Why does payroll fraud happen?
Spotting payroll fraud is less tricky when companies are diligent, and have the right processes and precautions, to ensure that they avoid the risks of ghost employees and other related crimes.
In a recent article, Schoültz highlighted several common ways that payroll fraud occurs. One of the most common ways is the adding of ghost employees, who are essentially fake employees who don’t exist. In addition to this there are also instances when employees who were let go were never removed from the payroll. Instead, the payroll administrator keeps them on the books and changes the bank account details. Another trick fraudsters play is to find employees who are paid irregularly and then pay them monthly, directing the new payments to a different bank account.
Activities like these are relatively easy to uncover, but companies don’t always pay attention because payroll operations are often isolated and esoteric. One of the main issues is who has oversight: is payroll part of finance or human resources? Ideally, it should be both; with finance being primarily responsible. But with many businesses, payroll is often left alone. So long as people are paid, nobody asks questions.
How can you spot payroll fraud?
It is imperative that businesses start taking a closer look at the details, because payroll fraud can be extraordinarily damaging. According to Occupational Fraud 2022: A Report to the Nations, released by the Association of Certified Fraud Examiners (ACFE), 5% of company revenue is lost to fraud committed by employees.
Schoültz also cited a case where a company lost over R7 million across several years through roughly 13 ghost employees. This level of fraud is like a slow bleeding wound, with usually extracts of small amounts across multiple fake employees and over many years.
In this case, the payroll administrator’s lavish lifestyle gave them away, with investigators asking how they could afford luxury cars, holidays, and other perks on their salary. Yet, a natural distrust of payroll staff is not healthy or productive, and there are better ways to find and prevent payroll fraud. The most effective method is requiring employees to physically present themselves.
Businesses can consider an annual face-to-face audit. Have people come with their ID books and match them to a payroll list. This must ideally be done through an independent person, and not from the company, as some payroll fraud is done in cahoots with several people. An annual face audit is the best way to know if there are ghost employees and also works to check employee movements every month, considering any terminations and new hires.
Responsibility and technology
It is crucial that finance departments take payroll oversight seriously. While many companies question if payroll oversight is the responsibility of finance, HR, or someone else, the reality is that isolated payroll systems don’t resolve such questions. This is why payroll platforms like Deel Local Payroll to facilitate role-based permissions allowing access to different teams.
The capabilities of modern payroll systems include automated reporting, remote administration, and alert systems that inform different stakeholders. Businesses can expand and streamline payroll processes so that people in finance or HR have passive visibility over payroll events. However, legacy payroll systems typically sit in a corner somewhere, with few people even knowing what’s going on.
A Little Diligence Stops Major Crimes
Remaining oblivious has a costly price tag. According to the Chartered Institute of Payroll Professionals, local companies lose upwards of R100 million annually through payroll fraud—more than cash transit heists. But a little diligence from businesses can avoid such damage.
Payroll is a very underestimated department in most companies. People receive their salaries, but they don’t necessarily understand how that works. With business owners having little time for concerning themselves with payroll, this function is more than just paying your team – it is a system that can be infiltrated and cost you millions if you look away.
Stop Payroll Fraud Before It Starts.
Empower your finance and HR teams with Deel Local Payroll’s secure, automated payroll platform. Request a demo today and protect your bottom line.