Are you 'paying' a fraudster?
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Newer salary elements such as skill premium and spot bonuses are leaving companies vulnerable to payroll frauds.
Companies are using innovative pay packages to retain talent. Salary structures have become more complex, as tax-saving components are introduced alongside plain-vanilla elements like house rent allowance (HRA) and basic salary. However, the newer elements such as skill premium, spot bonuses and other employee value proposition and entitlement schemes are leaving companies vulnerable to fraud risks.
The growing uncertainty in today's business environment has forced many companies to adopt survival strategies. To get recognition and performance-linked incentives, employees have to perform harder than before. Unfortunately, this could leave many resentful that the rewards are not commensurate with their efforts and this, in turn, could lead to payroll fraud.
Although payroll processing has become easier with sophisticated technology, fraud detection has become more difficult, forcing companies to continually innovate and institute controls. For example, in the case of spot bonuses, an employee may edit the email of appreciation from a superior, include a statement for providing a spot bonus and forward it to the Human Resources department for encashment. Thus, companies have to think ahead and take preventive steps.
A strong tone of ethical conduct from the top management, and deterrence measures such as dismissal when fraud is proven.
A clear written policy on ethics and code of conduct, which is communicated to employees.
Segregation of duties to mitigate frauds such as ghost employees and employee entitlement frauds.
Avoid temporary staff in the payroll processing department.
Audit trail/ logging: If audit logging stays on to capture and access the actions of all users, it consumes significant space on the server. So it is usually turned off or kept at minimum level. The best practice is to run it continuously, which can significantly aid investigation into payroll fraud.
Ascertain who can make changes to the pay rates in the payroll master files. Restrict this access and ensure segregation of duties.
Once payroll has been processed, many systems generate a text file that is transmitted to the bank for payment. The number of people who have access to this file should be strictly limited, and it should not be accessible from a shared drive.
The bank file should regularly be compared in detail with the source information in the payroll system, to ensure there is no manipulation prior to processing at the bank. Discrepancies should be investigated promptly. The risk of ghost employees is particularly high for companies that hire workers on a temporary, contract or other transient basis.
The internal audit findings should be strengthened through an assessment by the fraud risk team to identify key vulnerable areas in the payroll function. This would help strengthen controls to mitigate fraud and misconduct.
The author is Leader Forensic Services, PwC India
(This article was published on August 11, 2013)
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