How to spot possible payroll fraud

Payroll fraud is a serious issue for businesses.

Its repercussions can be felt across an organisation. The bottom line is hit, trust is fractured, and holes are created in what would have been legally compliant financial records.

By its nature, fraud is difficult to spot at the best of times. But when it comes to payroll fraud, it can take several forms, making it even harder to track down and prevent. In terms of scope, some can be huge scams and some a more subtle but constant drain on the accounts.

So what do the many forms of payroll fraud look like, and how can we try and prevent them?

“Incorrect” timesheets

Timesheets often live at the beating heart of businesses – and this is why fraudsters will exploit them.

Timesheet fraud is when a worker falsifies reported working hours for the week or month.

The way this happens can seem relatively innocuous to those who are committing the crime. Some might not even think they are breaking the law, but when they get away with it, it becomes habit-forming and will have a long-term, profound impact on the affected business.

It often manifests as “buddy punching”. This is when workers clock each other in or out to let them collect pay for hours they haven’t worked.

Another instance of this fraud is when someone takes liberties with their working hours; these people take excessive breaks while on the clock.

So how can we deal with this? One way is to assign a senior manager or supervisor to sign off on every timesheet. A regular and careful review of overtime pay will not only help your business spot irregularities but also enable you to have a nuanced view of what’s impacting the bottom line.

Salary fraud

Salary fraud is particularly nefarious because the offenders are almost always close to the core of your business. To succeed in what they are doing, they often hold a position of absolute trust.

This fraud sees someone with access to payroll data change the pay rate to inflate their wage payout. When they get the money, they change the payroll back to what it should be, covering their tracks in the process.

So how can you stop something like this from happening at the centre of your business?

It’s essential for your leadership team to take inventory of who has access to the payroll. On each occasion, ask: does that person really need those privileges?

Done monthly, this sense-check keeps the circle of trust small. It makes it easier to track anyone attempting salary fraud, and it keeps opportunists out of the fold. This also has the bonus of being compatible with good GDPR practice; people are not getting access to information they don’t need.

You should also double-check Real Time Information (RTI) submissions to see what was sent to HMRC, comparing it with any internal reports. This shows what actually happened, as opposed to what a criminal might want you to see.

Ghost / fake employees

Okay, when is an employee not an employee? It’s when they have been made up for the sake of defrauding a business.

Unfortunately, it’s no joke. And although it may seem like an elaborate ruse, it’s more common than many would expect.

Like salary fraud, it’s done by staff you trust with private information. Often the company that is exploited has a good number of employees on the payroll. It’s especially tough to spot if you pay more than about 200 staff.

Here’s how this fraud works: someone in payroll or HR creates a fictitious employee, or they keep someone on the books after they have left the company. In both situations, the scammer adds in their own bank details, diverting wages to them.

There are no depths some won’t sink to in the name of lining their pockets: we’ve even seen cases where a dead employee’s details have been used to collect some cash.

Always take time to audit your payroll and verify employee payslips. This goes beyond a cursory glance. As part of this, it’s a good idea to check that National Insurance (NI) numbers match current employee records.

Payroll fraud red flags

Because fraudsters work in the shadows of the company, you won’t know at first who is committing fraud or how. But, even if you are not clear about what it is you’re looking for, or you think that nothing is wrong, the following should be considered red flags:

  • Duplicate addresses or bank account details on the same payroll or across group payrolls. The same goes for duplicate employee NI numbers – look into these and ask yourself each time: why has this happened?
  • Members of the payroll team not wanting to let others help or take over the job. If a single worker is responsible for the company payroll and they never take a day off or share their duties with others, this should ring alarm bells.
  • Address oddities; if two workers who aren’t family members have the same address or banking information, look into this. Dataplan checks this and currently flags it up for review if our clients request it.
  • An employee that’s living beyond their means. For example, they might start turning up with new handbags every month or wearing a particularly flash watch. When a worker is clearly spending more than they earn, this may be a warning sign of workplace fraud. Just be careful before pointing the finger, as they could have a wealthy partner or family.
  • Payroll problems without any reason. Are there regular mistakes or omissions? Odd or unexplained changes in your payroll records? These indicate a complete oversight as well as possible fraud activity.

Help prevent employee payroll fraud

We’ve spoken about the different types of fraud, how you can prevent them, and some red flags, but how do you build all this information into a process for you and your trusted staff?

First, set out a payroll process you go back to constantly. This process will detail how you manage payroll, timesheets or clock cards. As part of this process, make sure you have some trusted people. At Dataplan, we work with those nominated by the leadership of the client business and nobody else.

This means sign-off happens at the appropriate, high tier of a company. At Dataplan, we often set up multi-level authorisation – so certain users have the authority to upload payroll data and check payroll reports, but someone with more seniority has the final sign off of the payrolls.

But it’s not just the senior staff that should be empowered by your business. Employees must feel they can speak up if they see something that feels wrong. They should feel comfortable coming forward even if they might be incorrect. When they do, they should report suspected fraud to a trusted line manager who is not linked with that employee.

Dataplan makes a difference

If you think there’s a lot to keep track of, you’re right. This is where Dataplan’s managed service makes a difference to countless businesses and schools around the UK.

It’s not just the extra checking we provide – all of which is done by DBS-cleared staff who process payroll at arm’s length from your company. It’s the detailed reports we produce that shine a spotlight on anything odd happening.

Our payroll reports can be fully bespoke, allowing you to drill down into any details you need on a regular basis. This means you easily zero in on any potential trouble spots as a matter of course.

We also provide a payroll summary which you can use to see everything before tax, broken down department by department. If anything odd is happening in one team or branch, you’ll see it.

To complement these, we also have a favourite of our clients: the exceptions report. An exceptions report is perfect for pinpointing where something might be amiss. Any changes instantly stand out, such as staff starting or leaving. You can see anything that causes a slight fluctuation in the regular payroll amounts.

Furthermore, our automated systems mean anything that doesn’t seem right can stop money from going out of your company accounts. That way, we can put things right before money goes into the pocket of a fraudster.

We also advise our clients. In doing so, we help them make good use of other existing resources, like BACS reports – so they can get a clear overview of money as it moves through the whole system. We like to think that we do the heavy lifting but that we can teach you anything you need to know.

Want to find out more?

Dataplan has an excellent reputation within the payroll industry because of its people and their understanding of how payroll works. That stretches well beyond the procedure of processing payments and into areas like fraud – as well as other subjects outside the scope of this blog, like HR and new legislation.

We’re here to help, so you can rest easy and focus on what matters: making your business grow. Our outsourcing service means we’ll watch for fraudsters, and you can focus on what makes your business great.

Written by Stewart Waddell
Published on January 26, 2023

Dataplan are one of the UK’s leading providers of specialist payroll and associated services.

From payroll outsourcing and pension service management to ePayslips and gender pay gap reporting; we have a solution for you and your business.