Using Payroll Audits to Detect Errors and Fraud

HR Resource
April 18, 2013 — 2,796 views  
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Payroll fraud is quite rampant. However, it is possible to detect fraud methodology at the time of audit. Payroll fraud can occur in one of the three ways – when payments are shown against fictitious employees, when payments are recorded against employees who have never worked, and when payments are recorded against employees who are no longer on the company’s payroll.

Payroll Processing

If you carefully examine processing of payroll, you may likely detect fraud methodology or error. You may likely detect the error if you carefully examine the payroll manual to see employees’ badge, ID, and other details. Verify the name in the manual and check with that on the payroll, including badge and ID. Payroll processing and authorization should be handled separately. Unauthorized payments can be eliminated if the duties are separated as indicated above. Payroll clerks should make payment checks only after new hires and raises are authorized. Employee master file shouldn’t be accessible to the payroll clerks. 

Payroll Registers

The department manager has access to payroll register. He approves and forwards it to the payroll department. This register should be carefully examined to see the updated data. It ensures that the names of employees, who have left or have been terminated, duplicate names, unusual hours, and duplicate SSNs do not go undetected. The termination dates of employees leaving a company must be entered into the system. This is the task of the HR department. Since the payroll employee cannot access details of a terminated employee after a certain date, they should stop all payments to the employee after that date.      

Canceled Checks

In order to detect payroll fraud, unusual looking payment instruments must be re-examined for signatures and checks that look suspicious. For instance, if the payroll register has the name John Elton Smith as one of its employees and the salary check is payable to J.E. Smith, it should be enough to raise suspicion. Very likely, a fraud methodology of enchasing check could be involved here. It is quite likely that John Elton Smith and J.E Smith are two different persons, and J.E. Smith is not an employee or never was an employee of the company, but works in collusion with an insider.

Role of Accounts and Payroll Clerks

The payroll clerk and accounts department can play a big role in detecting and eliminating payroll fraud. It is the duty of the payroll clerk to record all payment information. The payroll clerk must ensure that pay raises are authorized. The new hires also need to be authorized by the HR department. Many small companies do not have a separate HR department and therefore this task is looked after by the accounts department. Therefore, it is critical that the payroll clerk has a well-defined role and function, and not the combined tasks of processing payments as well as authorizing changes in payroll. This would reduce the chances of fraud.  

Role of the Human Resource Department

The role of the HR department is critical in reducing the fraud methodology. They need to maintain the employee record and keep it constantly updated. They must keep in constant touch with department heads and any input coming from there in respect of employee pay must be recorded immediately. The date of joining of new hires and the date of termination of employees are the two utmost critical data that must be scrupulously maintained in the system. Any lapse in this task paves way for fraud. However, checking payroll fraud is a task that needs coordination.

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