Blog Post

5 Top Types of Payroll Fraud


Clinical laboratory giant Quest Diagnostics learned  the hard way when a criminally shrewd manager  swiped $1.2 million from the company via bogus expense invoices. A Delaware school district took a $150,000 hit when its finance director padded his own paycheck for eight years. And a Washington, DC postal worker netted himself $40,000 in unearned wages by fabricating a claim that he was serving jury duty in an extended federal trial.


Statistic Brain Research Institute recently reported that employee theft costs US companies some $50 billion annually and, according to the Association of Certified Fraud Examiners, payroll fraud alone accounts for 8.5% of all occupational fraud globally. Consider these statistics:

  • Payroll Fraud happens in 27% of all businesses.
  • Surprisingly, payroll fraud occurs nearly twice as often in small organizations with less than 100 employees than in large ones – 14.2% compared to just 7.6%.
  • When undetected, the average instance of payroll fraud lasts an average 36 months.
  • The average case of payroll fraud can cost upward of $70,000.


Your payroll software firm or service bureau can help protect clients by knowing and watching for potential cases of payroll fraud, including:

  1. Timesheet padding: It’s perhaps the most common type of payroll fraud and it works because it’s just a smidgeon at a time – five minutes here, 10 minutes there an occasional hour. Employees add unworked time to their time sheets in increments small enough to escape the notice of supervisors, particularly busy ones who make only cursory reviews of time sheets. But those small amounts can add up quickly.
  2. Buddy punching: The old “thick-as-thieves” adage applies here. An employee will arrange with a fellow worker to secretly punch his hours into the company time clock while he takes a long lunch break or even a day off. Some companies with the financial resources are battling this type of fraud with biometric time clocks systems with facial or fingerprint recognition capabilities.
  3. Ghosts in the machine: Typically committed by a payroll department staff member, this type of fraud involves the payroll software system to create fake employees or prolonging the pay of an employee who recently left the company. The culprit then alters payroll records so that the payroll software issues a check or direct deposit paymentdirectly to their account. This happens most often in bigger companies with large staffs.
  4. Commission schemes: Most often committed by sales employees, these schemes exploit weaknesses in an employer’s commission policies and payroll software monitoring. For example, if commissions are paid on sales and not adjusted for credits, sales with subsequent credits may start stacking up. A major weakness is commissions being paid out at the time of the sale, but never reimbursed if a sale is cancelled or the contract reduced.
  5. Unrepaid advances: A passive, yet potent form of payroll fraud occurs when an employee requests a paycheck advance but never repays it. This happens most often when payroll staff records advances as an expense rather than an asset and fails to follow up with the indebted employee.


If you’re headed to Apex HCM’s Align 2018 Apex Users Conference in Atlanta September 20-21, be sure to attend the Keynote Address on payroll fraud prevention, presented by Earline Stennis, Stakeholder Liaison for the Internal Revenue Service’s Communications and Liaison Division. A graduate of New Orleans’ Loyola University with degrees in business and public administration, Earline joined the IRS in 1988 and works closely with industry associations and tax practitioner organizations to provide information regarding tax law changes, federal tax products and services. She also serves as the practitioners’ initial point of contact when they’re unsure where to turn for federal tax assistance.


If you’ve not yet registered for Align 2018, there’s still time. Call 877-750-2739 or register online, here.