In February 2017, a payroll administrator for Oklahoma’s Arrow Heights Baptist Church was hit with five charges of embezzlement by employee for diverting upward of $245,000 to her own pockets, using the stolen money to pay credit card bills, travel and buy concert and theme park tickets. Her ruse came to light only when the church’s pastor opted to outsource payroll to a firm, which quickly discovered finance discrepancies.
Such a story comes as no surprise to some. In its 2018 Report to the Nations on Occupational Fraud, Association of Certified Fraud Examiners looked at 2,690 cases of fraud worldwide, revealing that the median loss was $130,000 per incident. But small businesses took the brunt of that damage. Researchers learned that companies with fewer than 100 employees suffered a median loss of $200,000, nearly double that of the $104,000 median loss reported for companies with 100 or more employees. Further, payroll fraud and check tampering alone are involved in some 20 percent of occupational fraud cases – one in five.
Statistic Brain Research Institute also reports that employee theft costs US companies some $50 billion annually. Payroll Fraud happens in 27 percent of all businesses, but nearly twice as often in small organizations with less than 100 employees than in large ones – 14.2 percent compared to just 7.6 percent, respectively. When undetected, the average instance of payroll fraud lasts an average 36 months. Making matters worse, ACFE’s report revealed that 60 percent of small business fraud victims never recovered a dime of their losses.
Small businesses are more prone to payroll fraud for three top reasons:
- Lack of annual financial audits: While they’re a given for larger firms, small businesses tend to be lax on having annual financial audits performed. Yet, those audits add value to a small business because they help ensure quality and accuracy of financial statements – something that will prove critical should a business owner decide to apply for a bank loan, seek investors, sell the company or go through an IPO. Audits can uncover potential fraud before it gets costly or simply provide a gauge on how well internal controls are working.
- Staff limitations: In smaller businesses, employees tend to handle multiple duties that, in a larger company, would each be managed by a different person. This makes it easier for an unscrupulous worker to cover or destroy a trail of evidence of fraudulent activities.
- Lack of internal controls and reporting: According to the ACFE, the median fraud loss experienced by companies that have internal controls in place is significantly less than companies without controls. Anti-fraud controls include anonymous hotlines for use by employees, vendors and customers to report observances or suspicions of fraud; surprise audits; fraud training for employees and managers; employee support programs and instituting job rotation or mandatory vacations.
With the right cloud-based software, your payroll service bureau can offer peace of mind to potential clients concerned about fraud. Apex HCM’s comprehensive suite of solutions offers the ability to provide customers with real-time access to hundreds of standardized reports and the capability to create customized reports to assist with financial audits; plus role-based security that affords permissions for accessing certain areas of the system and running reports only to authorized individuals. These alone help to assure protection of sensitive payroll, financial and employee data and provide a transparent view of your clients’ complete payroll picture.
For a free demonstration of any of our proprietary cloud-based payroll solutions, call 877-750-2739 or contact Apex HCM online.
See also: Five Top Types of Payroll Fraud