Payroll Fraud

Payroll Fraud

INTRODUCTION

A few years earlier from today, the matter of ghost employees costing the exchequer some megabucks of Rs. 1.5 crores during 2016-17, horrified the entire Department of Indian Railways, which then comprised a workforce of 13 lakh people, taking a heavy toll on the railway board. This led to the initiation of the validation exercises in each zonal railway departments. The audit included matching of the database of the employee’s with their service periods, such that any kind of false claims regarding TA, DA, Overtime Allowances, Night Duty Allowances and Arrears could be brought to light. Likewise, payroll fraud has seemed to slam a lot of companies across the globe. According to reports, 30% of the businesses experience payroll frauds annually.

WHAT IS PAYROLL FRAUD?

Payroll fraud is a type of accounting fraud that occurs in businesses and is carried out by individuals working for the company through manipulation of employee details in order to illegally make some extra money in many different ways which will be discussed further below.

Types of Payroll Fraud

1. Timesheet Fraud: This type of fraud involves paying employees erroneous salary rates against the actual hours worked. Many a time, employees themselves or through an authorised individual override the time of work by adding extra hours of work or mark oneself present even in his/her absence.

However, one can get rid of such timesheet frauds by implementing audits at regular intervals of time. The concerned manager must keep in check with the work schedule of the workforce, match them with the already existing workplace policies and identify if they are in compliance with the norms. Additionally, in the case of manual entries, before making any changes in pay rates or any such manual editing, prior approval from the HOD needs to be sought.

2. Ghost Employees: Considered as one of the most common frauds taking place, ghost employees are employees who do not at all exist, i.e. a dummy employee or might be a former employee who had left the company since long but has never been terminated in the company’s book of records. These types of frauds are done in order to earn extra income by diverting funds to the accounts of these dummy employees.

Such anomalies can be wiped out from your business by conducting regular audits each quarter, scrutinizing employee accounts, spotting duplicate accounts having same bank details, Unique Identification Number, etc. or validating the list of employees currently active and striking off the names of employees who are no longer in the service

3. Worker Misclassification: Another on-demand fraud which might or might not be intentional on the part of employers, is the labelling of a part of their workforce as contractual workers and not as permanent workers, therefore enjoying entitlement to employment-related benefits and protection.

A deliberate attempt to tag a set of workers as independent workers are made in most of the cases by employers to avoid payment of payroll taxes such as health insurance premiums, health and safety, working conditions, working hours, minimum wages, social security, which, otherwise will trigger the liability to consider the employee for all the above-mentioned labour and employment laws.

Infosys, India’s topmost IT giant have recently been alleged of misclassification of its foreign workers and tax frauds, thereby, agreeing to pay a substantial fortune of Rs. 56 crores to settle allegations to California. The misclassification of approximately 500 employees had resulted in the avoidance of California’s payroll taxes viz, unemployment insurance, disability insurance and employment training taxes.

Thus, whether it is by accident or with the utmost conscience, either way, worker misclassification is illegal and can levy huge fines and penalties on the company.

4. Outstanding Advances: In some cases, employees ask for pay advances and later do not pay them back to the company, thus, committing payroll fraud. These type of advances often get skipped, a proper follow-up mechanism might help fight against such fraudsters.

PREVENTIVE MEASURES

Payroll fraud might cost you overabundantly, therefore, adoption of diligent measures is vital for the profitability of the organisation. Stating the measures below:

  • A person apart from the payroll or HR department must supervise the disbursement of salaries.
    • Each employee must be identified with their identity cards before paying out the salaries.
    • Regular checks must be done in order to identify active employees, extensive overtime claims, excessive expense claims, etc.
    • Proper maintenance of personnel records regarding payroll and time-keeping should be done.
    • Managing a different account for salary payment.
    • Proper reference and background checks should be carried for new hires.
    • Sick leaves, holidays, vacations must be in compliance with the work policies.
    • Proper attendance tracking mechanism should be set up and integrated with the payroll calculator.
    • Switching to payroll outsourcing provider can be a good deal to ensure you are risk-free, your employees are receiving the accurate payments and you are improving your bottom line.


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