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8 Easy Ways to Avoid Payroll Fraud

Payroll fraud is a costly issue that any employer needs to be concerned about. According to a 2010 report by the Association of Certified Fraud Examiners (ACFE), payroll fraud comprises 8.5% of occupational fraud worldwide and averages $72,000 per case. It’s a very real concern, but, with a little planning, it can be avoided.

We recently sat down with Tom Heinzmann, executive vice president at CompuPay, and discussed how businesses can avoid payroll fraud.

Q: How can a company keep payroll information secure?

A: There are several easy ways to ensure that you payroll data is secure. The first is to limit access to payroll data to only those who absolutely need to have access to that information for their work. Each of those employees should have their own login and password for access to electronic data and there should be a policy against login and password sharing. In addition, all documents should be stored in a secure area and destroyed when disposed, not thrown away in the trash where the information can be recovered.

The second is to have a dual-control process, where one person prepares the payroll and a separate person reviews the payroll. Bank accounts should be reconciled with every payroll and should never be done by the same person who processes the payroll. Additionally, whoever manages or runs the payroll should not be signing the payroll checks.

Another measure that many payroll companies and software vendors offer is masking of sensitive data. There is clearly a need to be able to review all information on some reports, but on many others you should consider masking Social Security numbers and bank account information.

Q: What preliminary steps can a company take to ensure that people handling payroll are qualified to do so?

A: I recommend a background check before hiring anyone who will be responsible for payroll or who will have access to bank accounts. Background checks should include federal and state criminal checks, a credit check, an alias search, motor vehicle report, Social Security number trace, as well as education and employment verifications.

Q: How often should records be reviewed to eliminate fraud and errors?

A: You’ll want to review payroll reports each and every pay period to check for errors in calculations and additional “fictional” employees listed in reports. Being proactive goes a long way in ensuring accuracy. If anything appears to be incorrect on the payroll, the reviewing person should contact the processing company immediately.

Q: Are there anti-fraud tools available to companies?

A: Yes. As checks are the most likely target for fraud, most banks offer a “positive pay service,” an automated fraud detection tool. This service matches the account number, check number, dollar amount, and sometimes payee information, against a list issued to the bank by the company. If all these components are not an exact match, the bank notifies the appropriate company representative who then reviews the item and instructs the bank to pay or return the check.

Q: What safeguards are available for electronic payments?

A: Businesses that make electronic payments or allow vendors to debit their account should set up an Automated Clearing House (ACH) filter with their bank. This allows an organization to send the bank a list of companies authorized to debit their account and the bank only allows debits from vendors on the previously approved list. Some banks also allow you to set a limit on how much can be withdrawn as part of the ACH filter or send a file of the entries that are allowed, very similar to the positive pay service described above.

Q: What are the benefits to using direct deposit over a traditional check?

A: Electronic payment through direct deposit eliminates the risk of payroll check fraud for the employer. And because there is no check to steal or alter, payments to employee accounts are secure. It also eliminates the cost of replacing lost checks.

About the author: Tom Heinzmann is the executive vice president of CompuPay. His responsibilities include overseeing the tax filing division, treasury services and After Payroll Solutions®. He is currently a member of the Board of Directors of EastPay, Inc., which, along with 18 other associations, makes up the backbone of the National Automated Clearing House (NACHA). 

The material contained in this document is for informational purposes only and is current as of the date of publication. CompuPay is not a tax, legal or financial advisor and makes no claims as such. For tax, financial or legal advice, please consult a professional.



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