According to Yolande Schoültz, Risk & Fraud Management Division manager at Sage VIP Payroll & HR, it is also one of the areas of the business most likely to be neglected when it comes to risk management.
Research conducted by Alexander Forbes in 2011, has indicated that payroll fraud costs South African businesses more than cash-in-transit heists. The growing number of clients asking for help with forensic investigations after falling prey to payroll fraud suggests that the crime is on the rise, says Schoültz.
"Payroll fraud happens most to businesses with less than 100 employees, and it can seriously hurt their ongoing sustainability. It usually takes 18 months to detect payroll fraud, and it is usually uncovered by accident. By that time, a business could have lost a vast amount of money," she says. "Yet we don't have accurate statistics because so few businesses prosecute employees for this crime."
Payroll fraud is committed in numerous ways. One example is a corrupt payroll manager paying him or herself through a ghost employee. Another common scam sees the fraudster adjust overtime or leave for other employees in exchange for a kickback.
More recently, there have been cases of employees selling payslips to criminals for use in identify theft.
Motivation, opportunity and rationalisation - the three components of the classic fraud triangle - come together in the SME's payroll to create enormous risks for smaller businesses, says Schoültz.
Motivation is the reason an employee might have to try to defraud his or her employer - for example, he or she might need money to feed a gambling or drug habit, or could be short of cash for school fees or medical expenses.
Even when an organisation carefully screens employees to avoid hiring those with poor credit histories or criminal records, it cannot be certain that its employees will not have a motive for theft, says Schoültz. And once people have been tempted to commit payroll fraud, they can usually rationalise their behaviour to themselves, for example by telling themselves that they're underpaid or that they'll pay the money back when they can.
For these reasons, SMEs should assume that anyone working with money in the business needs oversight. People's motivations and rationalisations for payroll fraud cannot be eliminated, but you can significantly reduce their opportunities to act on the temptation to commit the crime.
The most important thing to do is to enforce segregation of duties in the payroll department. For example, a clerk could capture payroll data, while the payroll manager could manage access to the system as well as add and remove employees from the payroll. Then, a financial person could be tasked with checking that the numbers add up.
Schoültz calls upon SMEs who are victims of payroll fraud to prosecute the offenders, even though it is expensive, time-consuming and difficult to do so. The Bribery and Anti-corruption Act compels organisations to report incidents of fraud of over R100,000 to the authorities.
The following signs may indicate that a business is at risk of becoming a victim of payroll fraud:
