By: Jay Mittelman
Because payroll involves sensitive data, including employees’ Social Security numbers and direct deposit details, employers must take measures to protect this information against payroll fraud. In a 2017 report by Hiscox Inc., payroll fraud was listed as one of the most common types of embezzlement suffered by U.S. companies. The report also stated that employee theft cost these companies $1.13 million in 2016.
No matter your business size, it’s important to establish robust internal controls that not only safeguard against payroll fraud but also allow you to meet the fundamental objectives of payroll, such as paying employees accurately and on time. Following are some suggestions.
Separation of duties means assigning different payroll duties to different individuals to minimize the risk of payroll fraud. For example, separation of duties makes it harder for payroll employees to engage in “ghost employee” fraud, such as setting up fake payroll accounts or fraudulently paying employees who no longer work for the company.
Large businesses usually have a more sophisticated separation of duties structure than small businesses. In a large business, you may find multiple payroll specialists and payroll supervisors plus a payroll director or payroll manager. Payroll system access is given to each of these employees based on their job duties, with the payroll director or payroll manager having the highest level of access.
A small business may have only one payroll employee, who’s responsible for reviewing timecards, making timecard edits, and processing and distributing paychecks. Your lone payroll employee should be closely supervised to ensure that payroll funds are appropriately distributed. Also, he or she should not be unilaterally responsible for issuing stop payments and manual checks.
In addition to separating payroll duties, general internal controls can help your business establish important safeguards. Your business should do the following:
Whatever the size of your business, if you need help establishing internal controls and safeguarding against fraud, contact our specialists today.