Discovering payroll fraud in your business is a gut-punch. The betrayal, financial loss, and frustration of realizing someone inside your company manipulated the system—it’s enough to keep any business owner up at night.
Once you’ve handled the immediate fallout, the real work begins: making sure it never happens again. Many business owners tighten controls and assume the problem is solved. But fraud doesn’t just happen due to weak oversight—it happens when businesses unknowingly leave the door open.
Before moving on, address these often-overlooked risks to make your payroll system truly fraud-proof.
Build a Workplace Culture That Discourages Fraud
Most people don’t wake up and decide to commit payroll fraud. It starts with opportunity—maybe they realize no one double-checks payroll reports, or a slight overtime tweak goes unnoticed. Over time, unchecked actions escalate into fraud.
Strengthen your workplace culture by prioritizing accountability. Do employees feel comfortable reporting concerns? Are payroll mistakes addressed with transparency? The stronger your culture, the harder it is for fraud to take root.
Reduce Over-Reliance on One Person
One of the biggest payroll risks is concentrating too much control in one employee’s hands. If one person handles payroll processing, pay rate updates, and approvals, fraud becomes easier—and more tempting.
The fix? Segregation of duties. If you’re doing payroll in-house, have one person enter payroll data and another review and approve it. This built-in accountability makes fraud much harder to hide.
Prepare for Sudden Payroll Staff Turnover
What happens if your payroll manager suddenly quits—or worse, is the one committing fraud? If no one else understands payroll, your business could struggle to recover missing funds, correct errors, or even process payroll on time.
Ensure at least one other team member is cross-trained on payroll functions. This minimizes disruption and helps maintain oversight, even in unexpected situations.
Conduct Regular Payroll Audits
Audits shouldn’t just happen when you suspect fraud. Proactive payroll reviews catch inconsistencies before they become major issues.
What should you check?
- Duplicate direct deposit accounts
- Excessive overtime for specific employees
- Unapproved pay rate changes
Routine audits help spot red flags early, preventing small errors from snowballing into fraud.
Train Employees to Recognize Payroll Fraud
Employees are often the first to notice when something doesn’t add up—but without training, they may not recognize fraud when they see it. A simple payroll fraud awareness program can empower your team to identify suspicious activity. When employees know what to look for, they become your first line of defense. Let’s break down the most prevalent types of payroll fraud that might be happening right under your nose.
Ghost employees
Perhaps the most notorious scheme, ghost employees involve payments to fictitious workers who are no longer with the company. In a recent Chicago case, a nursing home employee orchestrated an elaborate ghost employee scheme that cost her employer over $100,000. The employee created false records for non-existent certified nursing assistants, logged fictitious hours, and then either split the proceeds with accomplices who cashed the checks or simply deposited the forged checks directly into her own accounts. The scheme was so well-executed that it continued until a federal investigation finally uncovered the fraud, resulting in seven counts of wire fraud charges.
Timesheet fraud
Think employees padding their hours is minor? Consider this: if just five employees inflate their time by 15 minutes daily, you’re losing over 325 hours of payroll annually. That’s like paying for an extra employee’s worth of time without getting any work in return.
Commission fraud
A wide range of employees—from retail associates to sales professionals handling intricate B2B deals—rely on commissions as part of their income. To attract and keep high-performing talent, some companies even offer the opportunity to earn unlimited commission.
Commission fraud typically falls into three categories:
- Fake sales: Employees fabricate purchases or contracts to earn commissions
- Inflated sales: Workers alter sales data, invoices, or POS reports to overstate earnings
- Higher commission rates: Staff manipulate pay records or collude with others to increase their compensation
If you notice commissions are up when sales are down, there’s cause for concern.
Prevention Over Reaction
If you’ve been a victim of payroll fraud, you already know the cost—financially and emotionally. The good news? Once you identify vulnerabilities, you can fix them.
By focusing on culture, controls, training, and outsourcing payroll to experts, you can build a payroll system that is significantly more secure and resilient against fraud. The goal isn’t just to detect fraud when it happens—it’s to minimize opportunities for it to occur.
Outsource Your Payroll to Commonwealth Payroll & HR
Managing payroll in-house comes with significant fraud risks, especially when relying on outdated processes or a single person to oversee payroll functions. With Commonwealth Payroll & HR, our platform and processes require multi-level approvals for changes, can flag suspicious patterns, and maintain detailed audit trails of every transaction. Once we automate your payroll processes and assign you a dedicated customer service & support specialist, you’ll gain peace of mind knowing your payroll is secure, accurate, and compliant. Contact us today to learn more.
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