Make no mistake. Payroll Fraud is real. According to the Association of Certified Fraud Examiners, it’s the number one source of accounting fraud and employee theft. Check out these statistics:
- Payroll Fraud happens in 27 percent of all businesses.
- Payroll fraud occurs nearly twice as often (14.2 percent) in small organizations with less than 100 employees than in large ones (7.6 percent).
- The average instance of payroll fraud lasts about 36 months. That’s three years of paying ghost employees or overpaying existing ones. In Delaware, a School District Finance Director paid himself an extra $150,000 over eight years. He also underpaid several school administrators a combined $50,000 in one school year.
The reality is payroll fraud is not preventable, but is catch-able. Anyone can steal at any time. The key is catching it and minimizing the risk. The best way in doing so is to reconcile your payroll at least quarterly with someone other than the person who runs your payroll. Yes, it is that simple, and it probably costs you no more than a few hundred dollars each quarter.
There are two common types of payroll fraud, the first being time-card falsification, which can be easily caught through the reconciliation and employee review process I just mentioned. The second most common type of payroll fraud is “ghost employees.” Ghost employees are just that. They are employees that do not exist. In one case that I heard about, the bookkeeper was paying herself a duplicate paycheck through the name “XYZ” and having the money deposited in her checking account. Nobody said criminals were creative.
The third most common type is one that is self-inflicted by the employer through worker misclassification and workplace fraud. It’s the illegal practice of designating an employee as a “1099 worker” or an independent contractor. Unscrupulous business owners do this to avoid paying payroll taxes, unemployment tax or workers’ compensation insurance and are therefore able to submit lower bids for projects, undercutting responsible companies. Unfortunately, many other business owners may be misclassifying workers without even knowing it, such as if they designate tasks or set time with the contracted employee, if the 1099 employee works only for one company or if he or she is paid a regular amount each week or month. In these instances the company may be misclassifying a W-2 employee as a 1099 employee. In the State of California, worker misclassification will cost an organization $25,000 per occurrence plus back payroll taxes and penalties. Many states have similar harsh penalties.
In all cases, it is simply not worth it. A business can survive and thrive while they classify workers properly. Most importantly, you’ll sleep well at night knowing that they don’t have to worry about the IRS or State taxing authorities knocking on their door.
Are you still not convinced that payroll fraud needs your attention? Here are some headlines I picked off the Internet in less than 15 minutes:
April 14, 2013 – Upper Macungie company loses $54,000 to possible payroll fraud
June 19, 2013 (Reuters) – Three women pleaded guilty on Wednesday to criminal charges arising out of what prosecutors say was a corrupt New York City payroll project that cost the city more than $600 million.
June 19, 2013 – The hearing of former Monroe city engineer Sinyale Morrison has been reset to July 23.
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