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Aug 30, 2022 Saad Alati

3 Types of Employee Payroll Fraud to Look Out For

3 Types of Employee Payroll Fraud to Look Out For

When you think of a scenario involving payroll fraud, you’re likely to imagine a hacker managing his or her way into a client’s payroll software system. That’s not a bad guess considering 43% of cyber attacks are aimed at small businesses, according to a recent study by Accenture.


It’s true that cybersecurity is an ongoing threat to small businesses everywhere. But have you considered the liability of your client’s own employees? It’s a sad reality, but payroll fraud happens every day. How can you protect your clients? 

Are Employees A Liability?

When somebody steals funds from a company’s payroll system, that’s payroll fraud

It’s important to note that your client’s employees are not criminals, and most will never even come close to such an accusation. But these common mistakes–intentional or not–are a threat to business owners. 

Let’s take a look at three types of payroll fraud employees can unfortunately put your client at risk for. 

Paycheck Diversion Fraud

This type of fraud is seen by employers who are still printing checks. It can easily occur if the live check falls into the wrong hands and is cashed illegally. The employee who lost the check will have to wait to be paid again, the payroll administrator will have to resolve the error, and ultimately the business will lose revenue. 

Paycheck diversion fraud can also happen online. . A common phishing scenario occurs when a criminal poses as an employee to trick managers or payroll administrators into adjusting direct deposit information directly in the system. 

HOW TO AVOID IT: The best way to prevent paycheck diversion is by setting up your client’s employees with direct deposit. Your client’s HR department can work directly with the employees to input and then verify banking information. Advanced payroll providers like ConnectPay have a multi-step security system in place for changing direct deposit information and won’t process changes online. 

To avoid cybersecurity breaches, recommend that your client setup all employees on an intensive data security training program. These training sessions are a critical check-up that all employees should renew at least once a year—not just at orientation. 

Time Card Fraud

Clocking-in fraud is the most common type of payroll fraud. More often than not, this occurs when somebody is running late to work and contacts a colleague to “punch in” on their behalf. 

Though some employees may argue that this “favor” is helpful – the action itself is fraudulent, and both parties can be held accountable for the mistake. 

The truth is, the stolen time will affect the company’s payroll system whether it is for a 5-minute period, or worst-case, a full workday or longer. 

HOW TO AVOID IT: Biometric time clocks identify employees based on biological data which nearly eliminates any risk for fraud. If that’s not in your budget, focus on emphasizing the delinquency of this fraudulent behavior during orientation and re-enforce any penalties that employees may face if they consider such behavior. Don’t be afraid to threaten termination! 

Unauthorized Hours Fraud

Unauthorized hours fraud, also known as “time theft” plagues businesses large and small. This type of fraud happens when an employee requests to be paid for hours they did not work. 

This happens when an employee over exaggerates timesheets in small increments of unauthorized time hoping to never get caught. In a recent study, the American Payroll Association concluded that time theft can cost companies up to 7% of their gross annual payroll. 

Time theft can have an especially devastating effect on small businesses because it has a direct, significant impact on cash flow and revenue. 

HOW TO AVOID IT: Similar to clocking-in fraud, biometric clocks are the best way to shield your client’s business from this type of fraud. These tools may pay for themselves for those clients worried about both time theft and clocking-in fraud. 

A Tough Reality

Experiencing payroll fraud is a dangerous reality that most small business owners will encounter at least once, but these tips can help your clients stay ahead of it. 

Consider advising your client to set up a system for checks and balances when it comes to processing payroll. Using a team to review and process timesheets, direct deposit information, and other payroll details can help audit time tracking and guarantee that employees are compensated correctly. 

Helping Your Clients Avoid Payroll Fraud

Business owners can turn to CPAs for trusted advice, and CPAs can turn to ConnectPay for unique, personalized assistance. 

Together we can help you answer your client’s questions about payroll fraud and eliminate fears or doubts they might have. Yours too! Get in touch with us and your Connected Services Rep can quickly get you accurate answers to meet your clients’ needs. Let’s connect today. 

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Published by Saad Alati August 30, 2022