Management December 18, 2014 Last updated October 8th, 2018 1,641 Reads share

7 Great Ways to Guard Against Payroll Fraud

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When you hire an employee, the last thing you expect is that they will rip you off. But it happens more often than you may think. And when it comes to payroll fraud, small business owners are particularly vulnerable.


It does makes sense: Small business owners are busy people, and they are likely to hand off all payroll and check-writing tasks to just one or two people. That’s where the trouble can start. And once it does, the fraud can go on for a long time — an average of 36 months. Small businesses also take a bigger hit financially when it comes to payroll fraud, posting median losses of $154,000, compared to the median losses of $145,000 for all businesses.

Employees of accounting departments were implicated in 18% of worldwide payroll fraud cases. That also makes sense, since these employees have access to bank account information, personal employee data, and blank checks. The most common payroll fraud schemes involved creating fictional employees and falsifying wages or commissions.

With these troubling statistics, what can a small business owner do to protect their business? Here are a few ideas.

#1. Conduct background checks

You can take simple precautions to protect against payroll fraud — starting right at the beginning. For example, new employees at my companies are subject to thorough background checks, reference checks, drug screens, and other testing. Having a similar background check process at your workplace may discourage some crooks from applying at all, and assures your customers that you have the highest of hiring standards.

However, you cannot rely on background checks alone to protect you from payroll fraud. The ACFE study found that many embezzlers worked for the company for years before they started taking money, and only 5% had a fraud conviction before the study was conducted.

#2. Look for red flags

Many times, there are clear signs that an employee might be stealing funds. In the study, these red flags were present:

  • An employee living beyond his or her means: 45.8% of cases
  • Money problems: 35.8% of cases
  • Reluctance to share duties with other employees: 20.9% of cases
  • Family problems or divorce: 17.3% of cases

Other red flags can include instability in the employee’s personal life; an unwillingness to take allotted vacation time; isolation from others; addiction problems; unhappiness with pay; past legal or work-related problems; and suspicious, defensive, or irritable behavior.

#3. Establish internal controls

Protect your business from payroll fraud by setting up simple checks and balances. You can control who has access to employee data, and make sure that a person outside the payroll department creates paychecks for the payroll department employees. Don’t remove yourself completely from your business finances. Regularly examine the banking records for your payroll account, and make sure that all checks coming through are legitimate. Make sure the accounts for direct deposit match up to the employees who are actually receiving the checks.

#4. Verify that your payroll taxes are handled properly

As the employer, you must make sure payroll tax deposits are made, even if you have someone else handling the task for you. In some fraud cases, employees stole money that was due to the federal government. When that happens, employers may have to contend with possible interest payments, penalties, and even criminal charges.

How can you protect your business? You can log into using a separate inquiry PIN to verify your employees are doing their job. Keep a separate copy of your EFTPS login information, and review your quarterly tax filings to make sure the deposits match up properly.

#5. Encourage whistleblowers

The study reported that whistleblowers were to thank in 34% of fraud cases revealed at small companies. Your own employees may suspect that something fishy is going on, but may be afraid to tattle on a co-worker. How can you encourage employees to report suspicious behavior? Establishing a simple rewards system may give employees an incentive to share what they know.

#6. Conduct your own audits

When was the last time you audited your own company? In nearly 10% of cases involving small businesses, an internal audit uncovered the fraud, while external audits helped expose 5% of other fraud cases. Employees may be less likely to try to cheat you if they know there is a strong possibility of an audit at some point.

#7. Establish a code of ethics

Of course you want your employees to be ethical, but how often do you remind them?

I have the highest of ethical expectations for my employees, and they know it. Our stringent hiring practices result in a great group of dependable, trustworthy people. We want to keep it that way, so we include our core values as part of our rotating “Way-to-Go” slideshow that appears on large screens in each business.

Our Core Values:

  • I am hard working, honest and caring. I have integrity. I don’t lie, cheat or steal.
  • I’m not a clock-watcher. I always give more of myself (and my time)
    than what is expected of me.
  • I am very focused and use my time wisely.

A code of ethics may not stop an employee who is planning to steal from you, but it reinforces your expectations and highlights the need for integrity.

Don’t let payroll fraud or any other kind of fraud derail the plans for your business. Now that you know what to look for, you can stop payroll fraud in its tracks before you become a victim.

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Mike Kappel

Mike Kappel

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