The most common method of payroll fraud and how to detect it

When a company lacks internal controls or financial oversight, payroll is an easy way to commit fraud. The trusted employee does not have to alter checks, create fictious vendors, or submit fraudulent invoices. Within a payroll system, each employee has a salary rate or hourly rate that is input. Every two weeks, when running payroll, any or all those amounts can be altered for that specific payroll run and then the original and correct amounts can be reinput.

Example: A bookkeeper’s annual salary is $40,000 or $1,538.46 biweekly. However, they have the ability to alter their biweekly pay from $1,358.46 to $5,358.46. Then after that payroll run, they return the amount back to the correct amount. This is very hard to notice when looking at “Year to Date” wages or in the payroll system since the amount is altered only for a few minutes. They may also be confident enough to just add a one-time bonus of $5,000.00. But with employee fraud, I have never seen this occur just one time. If they do it once, they will do it again and again. The average length of employee payroll fraud is 24 months.

How to detect this method of payroll fraud:

Simply download the last payroll run detail into Stray Dot Analytics. Set how many pay periods in a year. (Generally, 12, 24 or 26) and then set what payroll run the data came from. It may be the 6th or the 16th.

The system then divides the year to date amount and multiplies by total amount of pay periods. The “Difference” is the amount between annual amount and annualized amount. In the example shown, $8,017 is amount that would be paid over annualized salary. It may relate to overtime, it may be bonus, but it also maybe fraud.

This test also shines a bright light on commissions, bonuses, and overtime. Its helps find fraud, waste, and abuse and it very powerful. Overtime may not seem like much when looking at it during one pay period. However, when you take that amount an annualize it, you quickly understand how overtime puts cash-flow stress on your business.

This method also identifies employees that have higher than usual commission payments. This may be perfectly acceptable because you have one or two employees that are exceeding their sales quota. However, it may relate to employees that are outliers not because they are great performers, but because they are taking credit for sales that may not truly be attributed to them. An example would be marketing leads or sales that are attributed to the company’s other sales efforts. Stray Dot’s payroll analysis provides a list of employees worth investigating.

Most companies have just one person or employee entrusted with running payroll and the business owner, or business partner may think this task is too confusing to understand. However, it remains an easy way for employees to commit fraud. Trust but monitor. Don’t leave the payroll function to one person.