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Protect Your Credit Union from Payroll Fraud

April 30, 2018

Protect Your Credit Union from Payroll Fraud

Synopsis
4 Minute Read

Find out how to protect your credit union from the top three forms of payroll fraud.

Payroll Fraud – Don’t Get Caught Paying Too Much

There are many ways to defraud an employer if the proper processes have not been put in place. From inventing fake employees to making fake claims for commission, employee misconduct can take a massive toll on a business.

Payroll schemes cost an average of $90,000 an incident, according to the 2016 ACFE Report to the Nations on Occupational Fraud and Abuse. Added to the financial cost, fraud of any sort can impact company moral, as well as your reputation in the business community.

MANAGE YOUR FRAUD RISK

In the absence of a proper payroll process, your run the risk of:

  •   Unauthorized payments made to non-existent employees
  •   Unauthorized payroll transactions processed
  •   Improper changes to payroll files and employee information
  •   Duplicate payments
  •   Misappropriation of funds

Here are three of the most common schemes seen around payroll fraud - and what you can do to prevent them.

Ghost Employee: When a person not employed by the company is on the payroll.

Defence: Make sure all payroll-related changes are reviewed and approved by two authorized individuals, ideally the department supervisor and the human resources manager. Payroll reports and registers should also be cross-checked with supporting documents before processing payments. Smaller shops may require direct involvement of the owner / operator.

Overpayment: An employee falsifies hours worked or hourly rates.

Defence: Employees’ immediate supervisor should review, verify and approve timesheets in the tracking system before signing them off. Any changes to pay rates are to be reviewed and approved by the human resources manager and payroll manager to ensure pay rates are backed by supporting documents.

Incentive Pay: The number / amount of sales that were made or the rate of commission is inflated.

Defence: Periodically review your commission policy and make sure commission rates are up to date and accurate. Also, make sure to review commission amounts versus actual sales amounts to ensure the correlation makes sense. Check sales against the commission policy to validate if employee commissions are justified or if the policy is being exploited.

BOTTOM LINE: PAY ATTENTION TO YOUR BOTTOM LINE

By developing a monthly payroll budget, management can review and compare it with actual payroll expenses to identify trends and suspicious changes. Analytics to keep track of include:

  •   Employees with excessive overtime hours
  •   Duplicate direct deposit numbers, employee names, addresses, or phone numbers in Payroll Master File compared to the Payable Master File
  •   Persons on payroll with no time off (or limited to single days off) for vacations or sick leave
  •   Sudden, significant shifts in charging time by time series and pattern analysis
  •   Multiple payroll deposits to the same bank account in a single pay period
  •   Direct journal entries to the general ledger for payroll, cash or payables

To help prevent fraud and errors in the payroll department, split up the tasks and associated privileges for a specific business process among multiple employees so the person preparing the payroll isn’t the same one approving it.

It is commonly believed there are three interconnected factors when employees commit internal fraud: motivation, opportunity and the ability to rationalize the fraudulent behaviours. While organizations can’t control motivation and rationalization, you can contain fraud through policy and process.

ABOUT MNP

MNP is a leading national accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world.

Contact your local advisor to find out how MNP can help.

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