DID YOU KNOW: Payroll Fraud occurs in 27% of all organizations? It is also the number one source of accounting theft. (Source: Association of Certified Fraud Examiners).
Let’s explore payroll theft in relation to hourly pay.
The Components of an Hourly Employee’s Pay
Hourly employees are compensated based on two variables: number of hours and rate per hour. Number of hours is the easiest of theses two to manipulate. Therefore it is something employers should be on the lookout for.
One of the biggest challenges for many organizations with hourly employees is maintaining balance between giving employees the respect and trust they deserve to enter their time appropriately, while managing the risk of abuse.
Meet Sean Mason, Hospital Supervisor
“Sean Mason’s” department operated on a timesheet system where employees recorded their hours. Every week, these timesheets required sign-off by the supervisor. The supervisor (Sean) then took one copy of the approved timesheets to the floor manager for filing, and the originals to payroll for processing.
Timesheet ‘Error’ Becomes an ‘Opportunity’
While taking the timesheets to Payroll, Sean took a quick look at his own timesheet and realized he had made a minor arithmetic error. He made the revision and submitted the timesheets to Payroll, without taking a copy of the revised timesheet.
Sean’s intention was to go back to his manager and make the same edit on the copies of the timesheets provided. However, Sean got distracted and forgot all about the revision.
The floor manager never called him on the discrepancy between the copy and the original. Sean concluded this meant that the floor manager did not even look at the copies! Sean continued to make copies of the timesheets and THEN made the revisions to the originals that were being submitted to Payroll.
Sean’s scheme is just one example of how employees could manipulate hours worked.
How to Prevent Manipulation of Hours:
- Manager and supervisor accountability
Managers and supervisors who are responsible for reviewing timesheets and/or timecards MUST be held accountable for such reviews. If there are errors, omissions or unapproved overtime being claimed, it is incumbent upon the manager/ supervisor to catch it.
- A monitoring process
Anomalies in overtime claims should form part of the regular review. Employees’ hours should be compared to their colleagues within and outside of their departments for possible inconsistencies.
- Look for red flags
Hours recorded should periodically be reconciled to productivity. For example, during a slower period of production in a manufacturing facility, one would expect hours and overtime claims to decrease rather than increase.
For more Information:
For recommendations on keeping track of your employees’ hours worked and their pay, check out our whitepaper, “Optimize the Deployment of Your Workforce here.
Guest blogger Edward Nagel, CPA,CA●IFA, CBV isPrincipal and founder of nagel + associates, Forensic and Investigative Accountants.