1st May 2018

How to use integrated HR and Payroll software to reduce fraud

Did you know that more than 11 percent of workplace frauds involve payroll? In fact, it effects over a quarter of businesses at some point and is twice as likely in small organisations.

A typical fraud adds about six percent to payroll costs and takes 36 months to uncover. So, it's important to know how to spot it and more importantly...how to prevent it happening in the first place. Your HR software could be the key.

1) Keep an eye on the hours your employees are working

Who is going to be the one to defraud your business? A trusted, hardworking, loyal employee and statistically most likely male. Their motivation could be desperation, greed or ill-defined. But the most important characteristic is that they will have the ability and opportunity.

Your management need to look out for unusual behaviours. Someone working long hours and not taking holidays without being paid extra is, quite possibly, too good to be true. If they're making unusual personal purchases too then it's definitely time to get suspicious.

If you're capturing employee working times with a time and attendance system or online timesheets then data on unusual working times and holidays will be readily available and anomalies or patterns easier to spot.

2) Use auditable and obvious authorisation processes

The most common type of payroll fraud creates ghost employees or tinkers with timesheets to pay extra hours, bonuses and sales incentives. Therefore, do a risk assessment to identify where the weaknesses are likely to be in your organisation and then take steps to reduce the opportunities.

The processes listed above can all be actioned via an employee and manager self-service portal where a business uses a good integrated HR and Payroll system. As these systems can support a requirement for additional authorisation steps, even for senior management, they create obvious visibility and an auditable trail that can prove a powerful incentive for people not to fiddle figures.

If online timesheets and authorisation processes are not right for your environment then a time and attendance system may be a better alternative. A clocking-in scam involving fake inputs is easily dealt with by using biometric identification systems.

In all instances managers must be made responsible for reviewing their section payrolls against staffing levels, work practices and own knowledge. They need to carefully review and approve a summary of who’s getting paid and how much, prior to being forwarded to the payroll department. Things to pay particular attention to are:

  • Names of terminated employees
  • Duplicate names
  • Duplicate mailing addresses
  • Duplicate NI numbers (although this should be picked up by payroll software automatically)
  • Unusual hours worked.

3) Integrate HR and Payroll

Another typical payroll fraud: an employee leaves but is not removed from the payroll and the bank account details are changed to those of the perpetrator. Clearly, not something that requires a mastermind to work out, but it does require opportunity. A quick check to look for two or more employees being paid into the same bank account is time well spent - again technology can assist you here.

HR departments must be made responsible for checking all additions and deletions from payroll and headcount. This is straightforward where integrated HR and payroll software systems are used. Human Resources can then enter a leave date and the integrated payroll software will allow payment up to but not after it without further investigation.

Many small companies don’t have a formal human resources department, so this first step is handled by the accounting department. Even so, some sort of separation in duties should exist so that one payroll clerk isn’t responsible for both authorising payroll changes and processing payroll.

4) Split the inputting of data from the reviewing of it

At a practical level, split the inputting of payroll data from the reviewing of it between different people. The sad truth is that you are at risk of various dishonest activities if you manage your own payroll department. Whereas, outsourced payroll providers have technologies that track payroll processes and will alert you if suspicious activity is uncovered or suspected.

For smaller companies an external pair of eyes may well be a better protection against the small risk of collusion; but it is also a good practice from time to time regardless of company size.

Where payroll is processed in-house implement develop processes that will help prevent fraud. For example, the payroll checking process at Civica HR & Payroll, where we process our own payroll but also run a payroll bureau for many other organisations, is a strict one, which involves multiple stages and people.

One member of our bureau team completes the payroll changes and produces the reports required. Then another member of the team checks these reports against the original payroll information. Only once these checks have been completed are the reports sent to the customer - for a final checking.

The Civica employee who processed the payroll then produces the BACS file but another member of the team processes the BACS file to the BACS provider for payment and checks against the reports.