Small Businesses Most Vulnerable to Payroll Fraud, Five Tips to Avoid Costly Fraud Schemes

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Small businesses are often the most vulnerable and easiest targets for occupational fraud and abuse, and particularly payroll fraud, according to Fiducial, an international provider of professional business outsourcing for tax, financial and business services to small businesses.

"Many small businesses think they are less likely to experience insider theft, like payroll fraud, simply because they are small, often friendly little businesses," said Eric Myers, manager of Fiducial's payroll processing center and a Certified Payroll Professional (CPP). "But unless the owner handles all aspects of computing and paying the payroll, there is room for fraud in every small business."

Fiducial's first-hand experience with small businesses is backed up by national statistics from the Association of Certified Fraud Examiners. According to ACFE's "Report to the Nation on Occupational Fraud and Abuse":

  • More than 39 percent of the cases of fraud occurred in businesses with fewer than 99 employees;
  • Payroll fraud schemes accounted for nearly 10 percent of the $600 billion lost to fraud last year;
  • Small businesses pay an average $127,500 in fraud losses per incident, while large companies' losses average $97,000 per scheme.

Among the reasons that small businesses are so vulnerable, Myers said, is their basic lack of accounting controls. "Small companies often have a single employee who writes and signs all company checks, manages and reconciles the bank statement, handles the payroll taxes and keeps the company's books," said Myers. "This puts significant financial control in the hands of one person who may be overworked or lack the specific skills needed to do the job."

The number one complaint Fiducial hears from small business clients is that they are drowning in a sea of back-end office functions like payroll, and often miss the red flags, according to Myers. So how do small businesses recognize payroll fraud techniques and avoid being victimized?

As small business payroll experts and the ninth largest accounting firm in the U.S., Fiducial offers the following advice.

  1. Check employee backgrounds and criminal records. Don't be complacent about employees in the hiring process. Background and criminal record checks are important if you are placing an employee in charge of finances.
  2. Establish quality controls. If you do payroll processing in-house, divide payroll tasks between two trusted employees who are responsible for data input and the review process.
  3. Consider outsourcing payroll processing and administration. A reliable, trusted financial or payroll-processing advisor is a smart investment to prevent fraud.
  4. Choose payroll-processing vendors carefully and provide specific instructions. Vendors should be able to demonstrate they have reputable history, provide secure, quality services and offer a range of expertise in bookkeeping, tax and payroll administration. Make sure to provide specific instructions about who is authorized to act on your company's behalf and has access to payroll information.
  5. Be cybersecurity aware. Often small companies don't think about computer security -- make sure all payroll information is totally secure and password protected. Don't write passwords down or make them too easy to hack.

"Most businesses should be alert to the signs of payroll fraud, but research indicates the signs are often missed for up to a year or more," according to Myers.

Red flags that payroll fraud might be in progress include: unusual spikes in the number of checks being presented for payment; high federal or state payroll taxes; or a payroll provider that is delivering multiple packages during the payroll period. Myers also advised small businesses to review their bank statements very carefully, check for unfamiliar fees charged by third parties, and check bank statements online at least twice a month.

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