DID YOU KNOW: 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)? (Source: The Association of Certified Fraud Examiners).
Let’s talk about unauthorized changes in rate of pay.
Potential Drivers of ‘Intentional’ Payroll Errors
Salaried employees are paid based on a fixed base rate and possible bonus. For many organizations, salary increases, occur at the same time each year. Some exceptions to this may include mid-year salary increases, promotions, new hires and transfers.
Introduction to James Sinclair, Payroll Clerk
“James Sinclair” was responsible for processing his firm’s bi-weekly payroll in an organization with about 100 employees. James was going through a messy divorce and the professional bills were adding up. He felt pressure to keep up with the money he owed.
Rationalizing Illicit Activity
James wrongfully exploited his company for his own personal gain. He rationalized to himself that he would make some changes to payroll, settle the divorce and then admit to the company what he did and pay them back. He thought of it as a short-term loan.
The next time James was asked to apply pay increases to two employees, he took the opportunity to give himself an unauthorized pay increase.
James increased his base pay, as well as the salaries of the other two promoted employees, and uploaded payroll for processing. James’ extra pay came too easy and he never came clean to his employer about his scheme. It was only two years later when James was off sick that the Director of Finance stepped in to do payroll and noticed James’ higher base rate.
Preventing Intentional Manipulation of Rate of Pay
- Continuous monitoring of changes to pay
Use of an automated tool to conduct ongoing monitoring of changes to payroll and reviewed by someone in another department would have undoubtedly detect this scheme within one pay period.
- Ensure ongoing communication between HR and Payroll
Clearly, a lack of supervisory oversight led to this ‘intentional’ error. Consider performing periodic reconciliations of rate of pay to HR files to ensure consistency.
- Fraud awareness training
Employees should be provided with ongoing fraud awareness training. Not only does training help employees understand what is fraud and what are the potential indicators, it also advises the potential fraudster to watch out, as everyone around them has been trained to catch this sort of thing.
Thank for tuning into my six-part series on unintentional and intentional payroll errors. I hope you found value in the series and have a better understanding of the audit control measures every small business needs in place.
How Ceridian Can Help:
Learn how your company can experience the advantages of a Managed Payroll Solution by downloading this whitepaper, “Freedom from Payroll”
Guest blogger Edward Nagel, CPA,CA●IFA, CBV isPrincipal and founder of nagel + associates, Forensic and Investigative Accountants