Tax & Assurance Guidance

Payroll Fraud: What to Look for and How to Prevent it

Posted on February 9, 2021 by

Dave Van Damme

Dave Van Damme

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Fraud is an unfortunate part of business. It can happen anywhere and to anyone, and sometimes can be at the hands of seemingly trustworthy people.

Recently we had an industrial automation client* who was a victim of that very circumstance. Like many businesses, they were suffering at the hands of the pandemic. After state-mandated shutdowns in the spring of 2020 halted operations and limited personnel capacities, and social distancing regulations curtailed sales for the rest of the year, they were well below revenue targets. On top of that, their upstream customers were facing limited demand and cutting orders, forcing the company’s owners to make tough decisions: whose hours they would cut, who they would have to furlough, and who they would have to lay off completely in a job market where no manufacturers were hiring. They made the cuts and planned to send a final round of paychecks to the laid-off employees.

Business Fraud Scenario

Enter Rebecca, an employee of almost two decades and the director of human resources who was like family to the company. Over the years she got to know the owners and many of the employees well. Managing a mission-critical department, Rebecca lost the coordinator who worked with her but kept her own job and was given full responsibility for every part of human resources, including payroll.

As the only remaining human resources personnel and a trusted member of the team, Rebecca was the one to send the final checks. She itemized who the cash would go to and what account it would be sent from. With the click of a button, Rebecca sent the employees their final payments from their former employer.

But as it turned out, it wasn’t as simple as it seemed. Weeks later a former employee reached out for a final pay stub for her records and noticed her year-to-date earnings were slightly higher than what she had received. It was a small string that unraveled an entire thread.

With the unilateral authority to issue paychecks, and owners who had bigger concerns, Rebecca issued two paychecks: one to the employee, and one to herself. She listed the check that was supposed to be the final check (which the employee believed was) as the second-to-last one instead. A week later, when weekly payroll went out as usual, she changed the wiring information on the laid-off employee’s check and sent the cash to her own account.

The employee never knew the difference as she wasn’t expecting the money. Management didn’t either. It was just one additional small check and they were busy trying to keep the company afloat. If it weren’t for the employee asking for a copy of her pay stub, no one would have been any wiser.

Amid the pandemic, we have been gripped with an “in this together” mentality. Each of us has been asked to take on more in both our personal and professional lives, and collectively we are meeting the challenge. Thankfully, the end now seems to be in sight. Businesses have been asked to do the same thing. Reeling from the hangover of shifting from a record economic boom to a pandemic-induced recession almost overnight, companies like our client are being forced to match headcount with demand. The result is that many employees are being asked to handle more responsibilities than ever before, and it is a testament to our collective resolve that 99% are meeting the challenge.

But even as we parrot “we’re all in this together,” the reality is there are always going to be some bad apples in the basket. Rebecca was one.

At Clayton & McKervey we’re fond of the saying, “trust, but verify.” In the fast-paced, ever-changing world we live in, where each of us is being asked to do more, it is easy to fall back on the feeling of trust – and in most situations, that is okay. That said, a quick double-check of company activities and protocols never hurts, and sometimes what the right set of data turns up is very revealing.

Diverting time and financial resources to surveys like this is something most companies think is burdensome. Slowing operations and pulling people from mission-critical functions is something no company wants to do, regardless of how well-resourced they are. What is more burdensome than having cash walk right out the door because an employee knows they won’t be caught? Clayton & McKervey can help you ease those burdens not only by helping to survey the current environment for fraud, but also by reinforcing the best practices for fraud prevention.

Contact Us

Whether payroll, disbursement, or otherwise, having a team of forensic accountants on your side can be an asset to any company, especially in a time where the margin of error matters more than ever. For additional information,  call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.

*The example above is for illustrative purposes only and does not reference a real client situation.

Dave Van Damme

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Dave leads the advisory & assurance practice and is well known inside and outside the firm for being both engaged & positive.

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