A 2014 fraud report prepared by the Association of Certified Fraud Examiners (ACFE) revealed statistics that should concern every small business owner. While payroll fraud is a huge problem affecting approximately 27 percent of businesses nationwide, small businesses with less than 100 employees are victims more than twice as often as larger companies.

Additionally, the typical payroll fraud scheme continues for 36 months before someone catches the perpetrator and the average loss for small businesses compared to large businesses is $154,000 to $145,000. We discuss some of the most common types of payroll fraud below.

Deliberate Misclassification of Employees

Not all payroll fraud is a result of employee dishonesty. Sometimes employers deliberately game the system for their own benefit as is the case with misclassifying employees as independent contractors. It can be tempting to do since independent contractors are responsible for remitting their own taxes and employers don’t need to offer benefits or pay towards workers’ compensation or unemployment like they do for regular employees. However, this action is still payroll fraud that can land your company in serious trouble with the Internal Revenue Service (IRS).

Timesheet Dishonesty

Padding timesheets or lying by omission is one of the most common types of payroll fraud committed by employees. Clocking in early and then sitting in the breakroom, leaving early and having another employee punch them out, or a payroll clerk padding their own hours or those of a friend are all typical examples of time theft. Using a timeclock rather than a manual system and implementing strict controls about punching in and out can help your company avoid losing money through this common type of payroll fraud.

Payroll Fraud from Outside of the Company

Payroll fraud can originate anywhere and from anyone. One common method of external payroll theft is to have the fraudster contact a business impersonating an executive. He or she will call or email asking someone in payroll to wire money for legitimate business purposes such as paying for a rental car or hotel. No one in your company should ever wire money without going through several levels of checks and balances, including obtaining the signature of the company owner.

Perform Frequent Audits and Rotate Payroll Duties to Help Prevent Fraud

Performing at least one unannounced audit each year allows you to look at the entire payroll system or just certain employees or dates. Not allowing one payroll employee to always complete the same functions avoids giving him or her too much control and access to sensitive data. Duties should rotate among all members of the payroll team to avoid providing temptation to someone with intimate knowledge of how the system works.

Need additional tips on combatting payroll fraud or improving accounting efficiency? Schedule a consultation with Nolan Accounting today.