EFFECTIVE PAYROLL CONTROLS, RISK MANAGEMENT AND FRAUD PREVENTION STRATEGIES
PARK INN HOTEL, SANDTON
CHARLES COTTER
5 OCTOBER 2016
Applying the payroll risk management process
Applying payroll internal controls – types and process
Payroll fraud prevention strategies
Analyzing and applying case studies
PRESENTATION OVERVIEW
Individual activity:
Complete the statement by inserting one (1) word only. In order to exercise effective control measures of the payroll, I need to/to be .…………………………………..
Now find other learners with the same word as you.
Jot these words down on the flip-chart.
Each learner will have the opportunity to elaborate on their chosen word.
INTRODUCTORY LEARNING ACTIVITY
PAYROLL PROCESS FLOW DIAGRAM (I-P-O model)
PAYROLL MANAGEMENT PROCESS
ILLUSTRATION: PAYROLL RISK MANAGEMENT PROCESS
PAYROLL RISK MANAGEMENT PROCESS
Step 1: Payroll Risk Identification
Step 2: Payroll Risk Analysis
Step 3: Payroll Risk Prioritization
Step 4: Payroll Risk Response
Step 5: Payroll Risk Evaluation
PAYROLL RISK MATRIX
PAYROLL RISK RESPONSE STRATEGIES
Apply the 5-step risk management process to payroll management and administration.
SYNDICATE GROUP LEARNING ACTIVITY 1
Internal control #1: Split duties between the person doing the monthly processing and the person doing the salary payments
Internal control #2: Bring about processes for change and adjustment to payroll systems
Internal control #3: Implement checks and cross-checks to ensure the calculations are done correctly
Internal control #4: Reconcile actual bank account payments to the payroll system on a monthly basis
INTERNAL CONTROLS
INTERNAL CONTROL PROCESS HIERARCHY
TYPES OF CONTROL
APPLYING THE CONTROL PROCESS
Segregation of duties between HR (employee record creation); payroll (prepares payroll) and cashier (disbursement of cash)
Direct deposit (eliminates possibility of cheque fraud)
Review of employee master data for duplicate names and identity numbers
Comparison/reconciliation between actual payroll and budget
PAYROLL SYSTEM CONTROLS
REMUNERATION MONITORING & REVIEW PROCESS
Forensic Accounting utilizes accounting, auditing, and investigative skills to conduct an examination into a company's financial statements.
This provides an accounting analysis that is suitable for a court of law.
FORENSIC ACCOUNTING
The main steps in forensic analytics are:
Step 1: Data collectionStep 2: Data preparation and examinationStep 3: Data analysisStep 4: Reporting
FORENSIC ACCOUNTING PROCESS
Apply the internal control and forensic accounting/auditing processes to payroll management and administration.
SYNDICATE GROUP LEARNING ACTIVITY 2
Payroll fraud involves an intention by a member of a business or organization to misappropriate funds. Payroll fraud occurs when the fraudster causes the organization to issue a payment by making false claims of compensation.
Payroll fraud is most simply defined as employees cheating the payroll system at their place of employment in order to receive funds to which they are not entitled.
DEFINING PAYROLL FRAUD
According to Sage HR & Payroll MD Anton van Heerden, payroll fraud is one of the biggest risks facing companies, with losses bigger than those of cash-in-transit heists. "The worst part about payroll fraud is cases often go unreported by the business, due to embarrassment. Instead of laying a charge against the guilty party, they're simply let go. Without prosecution, the fraudster will go to another company and do the same there, creating a vicious cycle.“
The only statistics available on payroll fraud in South Africa are dated 2011 from Alexander Forbes, who stated that payroll fraud costs South African companies more than cash in transit heists: R100 million is lost in SA annually to these heists.
More than 9% of workplace fraud in the Africa is associated with payroll fraud
It can take up to 36 months to discover a fraud scheme from the time it was first started
Payroll Fraud happens in 27% of all businesses
PAYROLL FRAUD STATISTICS - PLUNDERS AND BLUNDERS
Ghost workers
Time-sheet/Falsified work hours
Commission schemes
Workman’s compensation (IOD) schemes
Leave balance manipulation (that involve kickbacks or bribes within companies)
Re-imbursement fraud
TYPES OF PAYROLL FRAUD
Unusual fluctuations in payroll expenses or hours - anomalies in payroll records
Pay cheques to employees with minimal personnel records
Inadequate payroll checks and controls
Payroll users that either start work late or early to commit misappropriation of funds. Payroll users that conduct processes from home should also be a concern.
No correlation between number of pay cheques and number of employees
Signs of an employee living an overly expensive lifestyle for their earnings
Multiple employees that are not family members sharing an address or bank account
Having a member of staff unfamiliar with the payroll system check records
Payroll audits
PAYROLL FRAUD DETECTION – RED FLAGS
Cross reference list of employees from payroll records to other sources
Review HR records for anomolies
Data mining resources
Identify employees with missing or duplicate master file information
HOW TO DETECT GHOST WORKERS?
4-STEP PAYROLL FRAUD PREVENTION STRATEGY
According to Sage (2015), the most efficient way to mitigate payroll fraud is with an impenetrable series of internal controls, which need to be constantly monitored and consistently applied.
Some methods to implement to reduce the likelihood of payroll fraud happening in your business:
Automate payroll processing Separate payroll duties Monitor financial processes Screen payroll and finance employees Monitor employees for suspicious behaviour
PAYROLL FRAUD PREVENTION
Sage HR & Payroll MD Anton van Heerden suggests the following:
Access control: Controlling who can access what, and restricting what certain users can do on a particular system.
ID verifications online: Checking against the Home Affairs database to ensure IDs are legitimate.
Bank account verification: Verifying bank account details to ensure account number and account holder match.
Direct link to banking system: Instead of imputing an electronic file into the banking system, a direct link to the banking system can be implemented, ensuring no files can be tampered with en route.
PAYROLL FRAUD PREVENTION
Yolande Schoültz, risk and fraud management division manager at Sage VIP (South Africa) recommends the following payroll fraud prevention measures:
Advice regarding a payroll system:
Access control should be aligned to segregation of duties When checking and signing off the payroll, print your own reports Activate a “stop further entry” function after the payroll has been processed by the
administrators, but before checking Bank account and ID number validation and verification should be done Income verification should be linked to South Africa’s four major banks
Advice regarding the payroll, human resources and finance departments:
Segregation of duties should be clearly defined The bank statement should always be reconciled back to the payroll system A senior manager in finance should be responsible for payroll sign off
PAYROLL FRAUD PREVENTION
TAKING ACTION AGAINST PAYROLL FRAUDSTERS
Develop and implement a policy for handling suspected dishonest and fraudulent activities, including termination and reporting to law enforcement.
Communicate such policy to all employees, agents, vendors, contractors, and other interested parties.
Develop and implement a code of ethics for employees, clearly defining acceptable and unacceptable activities.
Develop and implement codes, guidelines, and organizational policies designed to prohibit conflicts of interest. Consider requiring employees to disclose possible conflicts of interest involving other employees.
Require all vendors and contractors to agree in writing as apart of the contract process, to abide by the codes described in points above.
ZERO TOLERANCE – PROSECUTE ALL PAYROLL FRAUDSTERS
Creating a fraud awareness culture
Ensuring that you have appropriate guardians in your business
Be involved and understand what controls are in place
Review and monitor with an element of surprise
Reward compliance
Introduce controls and procedure certification
Employee rotation programs
PRO-ACTIVE MANAGEMENT OF PAYROLL FRAUD
Employee leave policy
Development of code of conduct/ethics
Fraud / corruption control plan
Review annual effectiveness of above-mentioned policies
Vendor tender programs
Consult annually with specialist to review your progress
Consider formal whistleblower arrangements
PRO-ACTIVE MANAGEMENT OF PAYROLL FRAUD
3-PRONG PAYROLL FRAUD PREVENTION STRATEGY
Detection: Identify the most common forms of payroll fraud in your organization.
Prevention: For each of these forms of payroll fraud, develop prevention strategies and/or counter-measures.
Control: Identify feedforward; concurrent and feedback types of control to mitigate payroll fraud.
SYNDICATE GROUP LEARNING ACTIVITY 3
Make sure all employee details are correct
Conduct regular, ongoing audits
Institute a transparent payroll policy
Seek employee input to improve payroll process effectiveness
Don’t ignore payroll requirement deadlines
Know payroll tax policies and rules
Review your reporting process
MINIMIZING PAYROLL ERRORS
Describe the procedure/s to minimize payroll errors and the process of correcting overpayments.
Describe your organization’s policy and procedure regarding payroll fraudsters.
What (disciplinary) actions are taken against perpetrating managers and employees?
SYNDICATE GROUP LEARNING ACTIVITY 4
A Surrey bookkeeper who committed more than £20,000 in payroll fraud has been sentenced to 15 months imprisonment.
Judith Auclair, 60, regularly submitted PAYE tax returns to HMRC on her employer’s behalf. However, she began to add false employee details to the company’s payroll and claimed they were owed tax refunds. She then paid the money into her own bank account.
Auclair falsely claimed £17,254 in tax refunds and pocketed a further £4,927 of tax and National Insurance contributions which had been falsely deducted from other employees’ wages between April 2009 and March 2012.
Auclair also paid herself £14,223, falsely stating the money had been used to pay for goods and services.
After a director became suspicious and the company’s accountant asked for its tax records, Auclair resigned from her job in December 2011.
Auclair was arrested on 7 March 2013 on suspicion of fraud. However, shortly after her arrest she transferred a further £3,398 from her employer’s bank account into her own account.
She was later charged with fraud by false representation and being knowingly concerned in the fraudulent evasion of income tax. She pleaded guilty to 15 fraud charges.
CASE STUDY 4: SURREY BOOKKEEPER
Review the four case studies. Describe what payroll fraud detection, prevention and control lessons can be extracted from these case studies? Try to relate each case study to the Fraud Triangle.
SYNDICATE GROUP LEARNING ACTIVITY 5
Andrew Firth http://www.slideshare.net/rushmoregroup/payroll-fraud (accessed 3 April 2016) – Case Studies 1-3
http://www.dorkingandleatherheadadvertiser.co.uk/Surrey-bookkeeper-jailed-obtaining-37k-tax-fraud/story-22980825-detail/story.html (accessed 3 April 2016) – Case Study 4
http://fspbusiness.co.za/articles/accounting/use-these-4-internal-controls-to-prevent-payroll-fraud-7977.html (accessed 3 April 2016)
http://www.labourguide.co.za/most-recent/1900-employer-deductions-from-employee-remuneration (accessed 3 April 2016)
http://www.sage.com/za/newsroom/sage-hr-and-payroll/2015/06/01/sage-pastel-payroll-and-hr-5-ways-to-detect-and-prevent-payroll-fraud (accessed 3 April 2016)
ACKNOWLEDGEMENTS
Summary of the key learning points
Questions
Conclusion
Good luck with the implementation of effective payroll control measures and risk management processes and strategies.
CONCLUSION
CONTACT DETAILSCharles Cotter
(+27) 84 562 9446
Twitter: Charles_Cotter
http://www.slideshare.net/CharlesCotter