Payroll fraud

Are you protecting your accountancy business against payroll fraud?

Mitigate the risk of payroll fraud in your business

Annual fraud losses are said to cost the UK economy more than £190bn annually [1] with payroll fraud costing companies around £12bn [2]. These are eye watering figures and should make any business think about fraud prevention more seriously.

Payroll fraud is one of the most common types of corporate fraud and simply explained, is the theft of funds from a business via the payroll processing system. Typically the fraud is carried out by an individual with access to accounting systems.

There are eight different approaches a fraudster can take to commit payroll fraud, which we summarise below:

Payroll fraud

The eight types of payroll fraud

  1. Ghost employee fraud

In this approach an individual will create ‘ghost’ employees, who appear to the payroll system as real people, but in fact they don’t actually exist. Salaries are paid into bank accounts associated with the fake employees, usually belonging to the fraudster.

 

  1. Time sheet fraud

Here the individual clocks in and out at incorrect times, or falsifies the hours they have worked. This allows them to claim for more hours pay than they have actually worked.

 

  1. Sick leave fraud

Sick leave fraud occurs when an employee claims to be off sick, but is actually working in another job, claiming additional salary.

 

  1. Falsifying units produced fraud

In this instance the fraudster makes false claims over the number of units that have been produced. For example, in manufacturing or sales an employee may boost their numbers for higher pay and/or for more commission.

 

  1. False expenses fraud

Here an individual makes a claim for reimbursement from the business when they are not entitled to do so. For example, an individual may claim money from the business for a meal out with clients, when in fact, they went out for a meal with their family or friends.

 

  1. Commission and bonus fraud

This fraud occurs when additional monies are paid to an employee in the form of commission or bonuses, which haven’t been earned.

 

  1. Misclassifying employees fraud

To avoid paying tax bills and to reduce staffing costs, fraudsters may claim that employees are actually contractors.

 

  1. Pay Rate Falsification

This fraud may occur when there is a collaboration between an employee and the payroll department. Additional wages are allocated by one party, paid to the other and then split between the two.

Who is carrying out payroll fraud?

You might be surprised to learn that this type of fraud is typically carried out by persons that have been at their employment for a number of years. According to the Association of Certified Fraud Examiners Fraud Detection Report 2020 for Western Europe (ACFE) [3] 46% of people committing payroll fraud have been with the business from one to five years. They have been at the company long enough to learn the systems and build trust with their employer, so are in an ideal position to commit the fraud without being detected.

Payroll fraud can take from months to several years to uncover, costing the business substantial amounts over this time. If found to be guilty of payroll fraud an individual can face up to seven years imprisonment. If it results in an offence of cheating the public revenue being proven by HMRC, the sentence could be a life term.

Protecting against payroll fraud

As an accountant you will be looking for the tell-tale signs of payroll fraud, for your customers and also within your own business.

Spotting fraud can be difficult, and you may need to work in partnership with your client to identify it. Whilst you will be examining the business figures for numbers that just don’t add up, your client may also be able to assist by identifying employee behaviours that change or are out of character. According to ACFE, 45% of cases of occupational fraud (of which payroll fraud is one) were detected by tips from employees, following fraud prevention training.

If you miss an incident of payroll fraud at your clients’ business, they may bring a case of negligence against you. This is where insurance covers such as Professional Indemnity and Legal Expenses cover may prove invaluable. You could need to engage legal representation, which can be costly. These covers will help you to meet the costs involved in defending a claim, help you to protect your reputation and ultimately the future of your business.

Your own company can be vulnerable to payroll fraud too; from employees moving money into their own bank accounts from your business bank accounts or those of your clients.

In this case, your business would benefit from having commercial crime insurance in place. This insurance is available as an extension to your management liability policy or as a standalone product. The policy arranged will be determined by your particular circumstances, so that it protects against the risks you are facing. Commercial crime insurance protects a company and its clients against direct losses caused by forgery or theft of money, securities or property by an employee or third party. Therefore this cover could prove invaluable should your business suffer an incident of fraud and will help you to prevent similar instances occurring in the future.

Education and prevention tactics

Educating your staff on how to identify fraud is a good way to help identify any instances early and to prevent it. Making sure your employees have undertaken fraud prevention training is relatively straight forward and there are numerous online e-courses that can help.

Having a procedure in place to allow employees to report suspected fraud within your organisation, is also a good idea.

There are also some giveaway signs that may indicate the perpetrator, if you suspect fraud is taking place. The ACFE Western Europe report detailed the top five behavioural red flags you may identify as follows:

  1. The employee is living beyond their means
  2. They are known to be in financial difficulty
  3. The employee has an unusually close association with a vendor or customer
  4. Divorce or family problems
  5. Irritability, suspiciousness or defensiveness traits

76% of all fraudsters displayed at least one behavioural red flag but only 4% had a prior fraud conviction.

Other internal procedures such as Multi Factor Authentication can help and reducing the number of people with access to financial systems.

Get expert risk management advice

If you would like to talk to an expert in risk management for your accountancy business, we’re here to help. Together we can assess the fraud risk areas that your company may be vulnerable to and help you put procedures in place to mitigate them.

We have access to online training courses to help you train your staff in fraud prevention and can work with you to create a programme of insurance covers to protect in the event of an incident or claim.

Our team will be happy to assist, whatever your needs. Contact us on 01480 272727 or send an email to enquiries@barnesinsurancebroker.co.uk and we’ll be in touch.

George Wilkinson

Authored by: George Wilkinson

Business Development Executive

3rd April 2022