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Get tough on payroll fraud

Payroll is one of the biggest expenses in any small or medium-sized enterprise (SME), yet it is also one of the areas of the business most likely to be neglected when it comes to risk management. As a result, incidences of payroll fraud are growing at an alarming rate among SMEs in South Africa.

Yolande Schoültz, Risk & Fraud Management Division Manager at Sage VIP Payroll & HR.

That’s according to Yolande Schoültz, Risk & Fraud Management Division Manager at Sage VIP Payroll & HR. She says that payroll fraud hurts the bottom-line at many South African businesses, with SMEs suffering the most from this form of white-collar crime.

According to research conducted by Alexander Forbes in 2011, payroll fraud costs South African business more than cash-in-transit heists. The growing number of clients asking Sage VIP for help with forensic investigations after falling prey to payroll fraud suggests that the crime is on the rise, says Schoültz.

“Payroll fraud happens most to businesses with less than 100 employees, and it can seriously hurt their ongoing sustainability. It usually takes 18 months to detect payroll fraud, and it is usually uncovered by accident. By that time, a business could have lost a vast amount of money,” she says. “Yet we don’t have accurate statistics because so few businesses prosecute employees for this crime.”

Payroll fraud is committed in numerous ways. One example is a corrupt payroll manager paying him or herself through a ghost employee. Another common scam sees the fraudster adjust overtime or leave for other employees in exchange for a kickback. More recently, there have been cases of employees selling payslips to criminals for use in identify theft.

Opportunity and motivation

Motivation, opportunity and rationalisation – the three components of the classic fraud triangle – come together in the SME’s payroll to create enormous risks for smaller businesses, says Schoültz.

Motivation is the reason an employee might have to try to defraud his or her employer – for example, he or she might need money to feed a gambling or drug habit, or could be short of cash for school fees or medical expenses.

Even when an organisation carefully screens employees to avoid hiring those with poor credit histories or criminal records, it cannot be certain that its employees will not have a motive for theft. And once people have been tempted to commit payroll fraud, they can usually rationalise their behaviour to themselves, for example by telling themselves that they’re underpaid or that they’ll pay the money back when they can.

For these reasons, SMEs should assume that anyone working with money in the business needs oversight, says Schoültz. People’s motivations and rationalisations for payroll fraud cannot be eliminated, but you can significantly reduce their opportunities to act on the temptation to commit the crime.

Small businesses often do not have the controls in place to reduce the opportunities for employees to commit payroll fraud, she adds. Risk management is often low on a SME’s list of priorities because it is so busy with sales, product development, and customer service. Yet safeguarding the business from payroll fraud is relatively simple and needn’t cost much money, says Schoültz.

One simple step

The most important thing to do, she argues, is to enforce segregation of duties in the payroll department. For example, a clerk could capture payroll data, while the payroll manager could manage access to the system as well as add and remove employees from the payroll. Then, a financial person could be tasked with checking that the numbers add up.

Even a small business should be able to assign different people to the responsibilities of processing the payroll and signing it off. Payroll software can also help to reduce the risk of fraud by giving managers better visibility into transactions, providing an audit trail, and providing a set of controls and checks.

Schoültz calls upon SMEs who are victims of payroll fraud to prosecute the offenders, even though it is expensive, time-consuming and difficult to do so. The Bribery and Anticorruption Act compels organisations to report incidents of fraud of over R100 000 to the authorities, she notes. However, companies often feel it will hurt their credibility to be in the news because an employee has committed fraud. What’s more, it can take R100 000 or more and four years to successfully prosecute someone for payroll fraud. Most SMEs feel they simply cannot afford the time and money.

The result is that payroll fraudsters are often free to move onto a new company and carry on with their behaviour when they’ve been caught and fired by one of their employers.

Schoültz says the following signs that may indicate that a business is at risk of becoming a victim of payroll fraud:

• There is only one person with access to the payroll system and the ability to use it.

• The person responsible for the payroll never seems to want to take leave – that may indicate that he or she has something to hide.

• He or she is at work earlier and leaves later than anyone else in the business – perhaps to do the fraudulent business when there’s no one else in the office.

• He or she is eager to work from home, out of sight.

“Payroll fraud is one of the most common white-collar crimes in the business world. For that reason, every managing and financial director must put in place sound policies and processes to address this growing risk,” says Anton van Heerden, managing director for Sage VIP and Sage Pastel Payroll & HR.

“Automated payroll software can help. A good solution will offer automated ID number and bank account validations, employee credit checks and the delivery of secure salary EFT payments – all of which can prevent paying ghost employees or putting money in the wrong bank account.”

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