How to Protect Your Business from Payroll Fraud Schemes
Understanding Payroll Fraud and Its Impact on Businesses
Payroll fraud is a significant threat to any business that pays employees or contractors. This type of financial crime can go undetected for months, even years, causing substantial financial losses and damaging the company’s reputation. The Association of Certified Fraud Examiners (ACFE) defines payroll schemes as fraudulent disbursement schemes where an employee causes their employer to issue a payment by making false claims for compensation. According to the ACFE’s Occupational Fraud 2024: A Report to the Nations, payroll fraud incidents generate a median loss of $50,000 (or $2,800 per month) and can take 18 months to detect.
Findings from Recent Study
In the ACFE study, some industries and geographic regions appeared more susceptible to payroll fraud schemes than others. Although 10% of worldwide fraud cases in all sectors involved payroll, about 33% in the transportation and warehousing, retail, and technology sectors involved payroll fraud. In the United States and Canada, 15% of fraud cases involved payroll. The impact of payroll fraud extends beyond direct financial losses. It can also affect employee morale, attract unwanted media attention, unsettle customers, and lead to IRS and regulatory fines and penalties for violating tax and labor laws.
Types of Payroll Fraud Schemes
Payroll fraud can be committed by employees, employers, and third parties. Common payroll fraud schemes include:
| Ghost Employees | Perpetrators add non-existent individuals to the payroll. Ghost employees' wages are deposited in accounts controlled by fraudsters. |
| Excessive Payments | Employees receive overtime pay by inflating their work hours, pay rate, or commission rate. |
| Employer Embezzlement | Employers withhold income for taxes, 401(k) plan contributions, or medical expenses but fail to remit them. |
| Payroll Diversion | Cybercriminals use phishing emails to trick employees into providing sensitive information, such as bank login credentials, and divert payroll direct deposits to accounts they control. |
| Expense Reimbursement Fraud | Employees inflate their expenses, submit multiple receipts for the same expense, or claim nonexistent expenses. |
Ghost Employers
“Ghost employer” refers to employers that issue Forms W-2 to their employees but don’t submit those forms to the Social Security Administration. These employers also fail to file employment tax forms or make federal tax deposits, contributing to the IRS’s tax gap. The Treasury Inspector General for Tax Administration (TIGTA) recently evaluated IRS data from the Ghost Employer Project, estimating that 162,000 potential ghost employers owe $1.7 billion. Successfully prosecuted cases have led to average restitution of $1.3 million per case.
Universal Threat
Payroll fraud poses a threat to businesses of all sizes and industries. Your organization can mitigate the risk by understanding the various forms of payroll fraud and implementing robust internal controls, frequent audits, and employee training. By staying informed and prepared, businesses can protect themselves against the damaging effects of payroll fraud.
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Fraud Detection & Deterrence
Randy leads the firm’s fraud detection and deterrence services, which identifies and mitigates fraud risks, providing clients with a unique layer of protection.