Payroll Fraud Runs Amok in Small Business

With more than 39% of the payroll fraud cases in the United States concentrated in smaller companies, the impact is significant. Small businesses pay an average $127,500 in fraud losses per incident, while large companies’ losses average $97,000 per scheme, according to Fiducial, an international provider of professional business outsourcing for tax, financial and business services to small businesses.

Fiducial points to the basic lack of accounting controls as one of the reasons small firms are so susceptible to payroll fraud. “Small companies often have a single employee who writes and signs all company checks, manages and reconciles the bank statement, handles the payroll taxes and keeps the company’s books,” said Eric Myers, manager of Fiducial’s payroll processing center . “This puts significant financial control in the hands of one person who may be overworked or lack the specific skills needed to do the job.”

The problem is also one of misguided trust. “Many small businesses think they are less likely to experience insider theft, like payroll fraud, simply because they are small, often friendly little businesses,” continued Myers. “But unless the owner handles all aspects of computing and paying the payroll, there is room for fraud in every small business.”

On Alert

It goes without saying that small businesses could do more to increase their awareness of this type of activity, especially since Fiducial says most payroll fraud goes unnoticed for more than a year. To this, Fiducial says companies should be aware of “red flags” that payroll abuses are going on:

• spikes in the number of checks being presented for payment
• high federal or state payroll taxes
• a payroll provider that is delivering multiple packages during the payroll period.

Of course sometimes the best defense is a good offense, and to help avert continued payroll malfeasance, Fiducial offers a few tips to small companies:

• Check employee backgrounds and criminal records.
• Establish quality controls such as dividing payroll tasks between two trusted employees who are responsible for data input and the review process.
• Consider outsourcing payroll processing and administration.
• Be diligent in the company’s choice of payroll processing vendors carefully and provide specific instructions. Vendors should be able to demonstrate they have reputable history, provide secure, quality services and offer a range of expertise in bookkeeping, tax and payroll administration. Make sure to provide specific instructions about who is authorized to act on your company’s behalf and has access to payroll information.
• Be cyber security aware, such as making sure all payroll information is totally secure and password protected.
• Review bank statements very carefully, check for unfamiliar fees charged by third parties, and check bank statements online at least twice a month.