Payroll Fraud – A Big Threat and How to Avoid It

The mere existence of internal control mechanisms in payroll service is not enough; they should be monitored and enforced. Adherence to internal controls is the main weapon to overcome the payroll fraud and minimizing your business venture.

Payroll schemes – much more common than we wish to imagine.

The most common methods of payroll fraud are the creation of fictitious or “ghost”, the presentation of fraudulent or many expenses that did not even exist. This is one of the most common ways to create a payroll source and sometimes payroll outsourcing is a great option. In the Australia area a great company that does such service is

Officials ghosts

Payments to ghost workers are one of the worst frauds that can happen to any business and should be avoided at all costs. Make sure you only have trusted workers in this area, after all those who have access to creating the payrolls might be leaving you behind and creating faking payments that in the future might compromise your company.

Preventive controls and payroll outsourcing

Establish internal controls that require separation of payroll functions. Personnel create or maintain payroll data and lists should not be allowed to make changes or add employees without management approval. Payroll changes must be approved by two designated individuals. People who compute the interest rates and the accumulated hours for payroll should not be allowed to write checks or submit the hours to pay for a payroll service, without the approval of supervision. In case you don’t trust any employee to do that your best shot is to do payroll outsourcing.

Have monthly payroll accounts reconciled and reviewed by management. Payroll audit information to deposit account information duplicated and repeated Social Security numbers or addresses.

Most companies prefer their workers to get their paychecks in person, which is correct. Have them show their ID every once in a while to avoid fraud. Plus, if they receive through the bank, the bank will check their information and greatly reduce the chance of payroll fraud.

Small business should consider out of payroll outsourcing to a contractor, but this does not remove the requirement for a monthly audit of all disbursements made to ensure that only certified employees are being paid. In this case is a good option.

Extra expenses and hours – a real problem.

Report false expenses and falsified time sheets are other types of payroll fraud that require internal control and prevention methods. Make sure you create ways for your employees to show what they really expended in other to get the money back. Require spending more than a sum of money designated to have the approval of advance management. Also require the approval of significant increases in hours worked in excess of normal schedule of an employee, including overtime. Audit these monthly trends. People who work with requests for reimbursement of expenses or overtime should not be allowed to issue checks. Payments for expenses and overtime assignments should also be audited monthly even if you have payroll outsourcing.


By using internal controls to prevent fraud, first assess resources to ensure you have enough employees to achieve separation of functions. If not, consider outsourcing payroll and then set up a system to monitor the performance of internal audits and monthly controls.