Worried About Payroll Fraud? Nine Ways Small Businesses Can Mitigate The Risk
Payroll fraud is a common issue with severe consequences. Whether an employee asks for a pay advance that is never repaid, punches in for a fellow worker who takes the day off or diverts the paychecks of an absent or former employee, there are plenty of ways dishonest staff can conspire to get extra money out of your business. Those stolen dollars can add up quickly, especially for a small business on an already-tight budget.
While you want to believe your workers are trustworthy individuals, you shouldn’t assume that fraud can’t (or won’t) happen to your business. Below, nine Forbes Finance Council members explain how small businesses can mitigate the risk of payroll fraud.
1. Set And Distribute Firm Policies Early And Often
Payroll fraud is most common in instances where employee advances go unreimbursed or administrators adjust their peers’ timecards. By creating, distributing and constantly iterating firm policies and procedures, you avoid unnecessary risk by addressing potential conflicts up front. Also, having dual-approval requirements on payroll prevents rogue administrators from making manual adjustments. - Damian Lo Basso, Compass CFO Solutions
2. Separate Your Payroll Bank Account
Set up a separate bank account for payroll checks and reconcile the account daily. By keeping a close eye on the account you can look for any checks being deposited out of sequence. In addition, by having a separate account you cut off the risk of anyone trying to cash large checks on your business account, which typically has a larger amount of cash reserves in it. - David Gass, Anderson Business Advisors, LLC
3. Set A Checks And Balances System
If you have enough employees, utilize a payroll service. Have someone review payroll versus employee role to look for ghost employees periodically, and look at addresses that are the same for different employees. Separate the person who handles payroll from the person who cuts or signs the checks and the person who handles hiring. And remember, tenure does not always equal trustworthiness. - Chris Tierney, Moore Colson CPAs and Advisors
4. Outsource Payroll To A Reputable Firm
There are many outside vendors that offer payroll services. Small businesses can reduce or eliminate potential payroll fraud by utilizing their expertise. In addition, reputable companies have error and omission insurance to safeguard against any fraud and reduce liability for the business. - Sina Azari, PRESENT Financial Partners
5. Implement Direct Deposits
A considerable percentage of payroll fraud involves the use of checks. By switching all payroll and bonus payments over to direct deposit, this risk is largely eliminated. You can sell your employees on the advantages of direct deposit, such as faster access to cash. Also, there are many reputable firms with stringent security and fraud prevention techniques that you can outsource payroll to. - Ismael Wrixen, FE International
6. Have Multiple Eyes On It
When it comes to matters of payroll and complying with the law we always have our controller check with the payroll company we use to make sure we do things properly. Using a payroll company versus doing it yourself offers a level of security as well as checks and balances. We also have our accounting firm confirm everything on a quarterly basis as a third set of eyes to triple-check everything. - Jared Weitz, United Capital Source Inc.
7. Trust But Verify
When we think of fraudsters, we think of bad individuals, but the reality is that it is often a good employee who turns bad due to unfortunate circumstances. Creating a culture of integrity and communication is great; doing so along with implementing a transactional monitoring system is better. Or rely on your local CPA firm to conduct a basic review of your internal controls. Trust with verification. - Solon Angel, MindBridge Ai
8. Stay Involved In Payroll, Even If You Outsource It
For a small business, payroll is likely the most regulated part of the business. The big bad IRS is a cute kitten compared to the Department of Labor. The best way to avoid payroll fraud and ensure compliance is to employ a third-party payroll company while the owner keeps final approval and oversight to ensure everything is done correctly. - Vlad Rusz, Vlad Corp. USA
9. Reconcile Your Employee List And Payroll Budget
Unintentional errors are regularly made by the most respected payroll companies. Your payroll provider must explain your reports clearly, demonstrating your total payroll obligation and why. Once you understand the amounts needed to cover payroll, match them to the amounts disbursed from your bank account. Compare the employees paid to your employee master list and the totals to your budget. - Perry D’Alessio, D’Alessio Tocci & Pell, LLP