Payroll Fraud
- Arnold Shields
- Nov 6, 2009
- 3 min read
Updated: Jun 24
Payroll is typically the largest expense line for any business, yet it's also one of the most vulnerable to fraud. In fact, 17% of all fraudulent disbursements stem from payroll fraud. It's not just about internal theft, it’s about flawed systems, poor oversight, and complacency. Here’s what to watch for and how to take control.
1. Ghost Employees
A ghost employee is someone who appears on your payroll but doesn’t work for your business.
How It Happens:
A payroll officer creates a fictitious employee or retains someone who has left the company.
Wages are paid into an account controlled by the fraudster.
Sometimes a friend or relative is added to the system to streamline the scam.
Prevention Measures:
Separate duties: Keep hiring, payroll, and HR records in different hands.
Audit regularly: Look for duplicate addresses or bank account numbers.
Departmental checks: Department heads should verify everyone on their team is legitimate.
This fraud is rare but can result in high losses—particularly in smaller businesses where one person has too much control.
2. Overcompensation
This is the most common type of payroll fraud, though often smaller in scale.
Types:
Inflated work hours: False time entries or approved timesheets with exaggerated hours.
Unauthorised pay rises: A payroll processor gives themselves or others a salary bump.
Leave abuse: Employees take time off but fail to record it.
Countermeasures:
Compare actual payroll costs with budget forecasts.
Separate payroll entry from payroll approval.
Conduct random timesheet audits.
Set thresholds for reviewing overtime and pay rises.
3. Bonus and Commission Schemes
When part of an employee's remuneration is performance-based, manipulation is easy and often lucrative.
Manipulation Techniques:
Inflated sales numbers through fake invoices.
Artificial price hikes in records to boost commission.
Product “returns” after bonuses are calculated.
What You Can Do:
Reconcile bonus calculations with actual business data.
Analyse sales trends and flag exceptions.
Audit client returns and unusual sales spikes.
Real-World Cases
A temp filled in fake timesheets undetected after realising her manager didn’t reconcile expenses.
A manager authorised fictitious overtime to “award” a pay rise after being denied budget approval.
A supervisor approved two years' worth of timecards for a senior employee who never turned up, because he was also his boss at another job.
A financial officer paid herself $345,000 using former contractor profiles and her full system access. The scam was only uncovered when cashflow collapsed despite booming sales.
Final Thoughts
Payroll fraud often starts small, an extra hour here or there, but the systems that allow minor abuses also permit major theft. Prevention requires oversight, separation of duties, and regular audits. In our forensic accounting work, we’ve seen firsthand how damaging undetected fraud can be.
Don’t wait for a red flag. Be proactive.
Need Help Reviewing Your Payroll Systems?
At Dolman Bateman, we specialise in forensic accounting and internal control reviews. If you suspect payroll irregularities or want to tighten your controls, get in touch for a confidential consultation.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.