A recent example was seen at Te Papa Museum of New Zealand where an employee defrauded the museum of more than $120,000. This was achieved by falsifying data for more than 100 casual staff time sheets over more than a year. The employee then diverted the payments into their own accounts, and altered casual employees’ details, including their email address, so they would not receive the fraudulent payslips. 

While small, incremental thefts over a period of time can still result in significant financial loss. It's not clear why fraud has increased in recent times, perhaps they have become easier due to electronic processing and less segregation of duties, or possibly more minor frauds have been identified due to better controls and oversight.

During the 2019 year, the Serious Fraud Office of New Zealand (SFO) had 36 defendants appear before the courts, including appeals, with a total of $1.6 million in alleged value. Although none of these cases were directly related to payroll fraud, a large number were committed by employees of the affected business.

What is Payroll Fraud?

Payroll fraud occurs when the payroll process system is manipulated by employees. It can be difficult to detect early on as since the amounts involved may be minimal at first but often escalate over a period of time if undetected. So it's crucial that entities consider ways to prevent such instances from occurring.

Examples of how the fraud is committed

There are many different ways in which payroll fraud can happen. Here are some common examples:

Creating fake employees (ghost employees): this is when employees are created in the payroll system who do not exist or employees that did exist but no longer work for the company are intentionally left on the payroll

Unauthorised hours: colluding between payroll administrator and employee resulting in increased unauthorised employee hours

Pay rate changes: making unauthorised pay rate changes

Buddy punching: employees getting their co-workers to clock in for them even though they have not worked.

What can you do to reduce the risk of payroll fraud?

There is no single way to reduce payroll fraud. Due to the multitude of ways it is possible to manipulate the system, it's best to take a multi-faceted response approach.

Some suggested forms of effective oversight include: 

• Manager or supervisor approval of all timecards or timesheets, including all overtime
• Mandatory leave for those with payroll responsibilities with another employee performing this function in their absence (the fraud of Te Papa was discovered after discrepancies were noticed by another employee while the employee responsible was on leave)
• Executive approval of all payroll reports and bonus type compensation, including commission
• The ability to modify wage rates, add employees, etc., within the system should be restricted, with access controls periodically reviewed
• Conducting periodic payroll audits and reviews of internal controls
• Use of exception reports and technology
• Implementation of a whistle-blower policy
• In person / verbal confirmation of underlying payroll data such as bank account details.

How can we help you?

Our teams have experience assisting with putting in place best practice controls which will minimise the risk of fraud occurring within your business. We can also undertake a comprehensive review, which includes our team testing the controls within your business and evaluating the appropriateness, effectiveness and relevance of the control environment. We will provide recommendations on any shortcomings that may have been identified during our visit, ensuring these are practical and tailored to your organisation.