How to prevent the eight most common types of payroll fraud in 2021

Payroll fraud occurs when a worker defrauds the system to receive a larger paycheck. Payroll fraud is a significant and costly problem that can go undetected for long periods if your corporation does not have the proper procedures in place.

Whether you have ten employees or 20,000, every decision maker’s essential requirement is to mitigate risk, if not eliminate it.

Small businesses are more vulnerable than larger ones because they put more faith in their employees and frequently have lesser safeguards.

The following are six types of frauds and how to prevent them so that you can reduce your risk.

1. Buddy punching 

What is it: This is also known as “buddy clocking,” and it occurs when a worker has someone else punch in and out for them, whether punching in early, punching out late, or punching them when they are not even present.

How to avoid it: The most straightforward way to prevent clocking buddy is to use time tracking software that includes quality inspection such as a fingerprint, an ID badge, password, or facial recognition.

2. Ghost Employees

What is it: Someone who is on the corporation’s payroll but does not work there. When someone with access to the payroll software creates a fictitious employee in the records or fails to delete a terminated employee and then changes the documents to receive direct deposit or cheque.

How to avoid it: Audits of employee lists regularly can detect this—look for ghost names, duplicate addresses, fake National Insurance numbers etc. Also, search for non-contractor paychecks with no deductions. (Generally, the perpetrator wants to get the most money possible.)

3. Changes in Pay Rates

What it is: Just as it sounds, someone changes an employee’s pay rate in the payroll system of its own. It generally necessitates the involvement of somebody familiar with the payroll system, though it could be on behalf of some other employee or somebody hacking into the system. Clever fraudsters will change the rate well before payday and then change it back, or they will do it continuously to reduce the possibility of being caught.

How to avoid it: Begin by ensuring that your payroll software is password protected and that access to the features required by each employee is limited. Next, ensure that the pay rate authorization documents are in sync with the payroll register.

4. Extending Work Hours

What it is: One of the most popular types of payroll fraud cases involves padding timesheets in small increments.

How to avoid it: First, establish a clear policy for punching in and out so that employees understand the rules. The most straightforward next step is to sync your payroll software with your time tracking software, which will immediately feed the data.

Some software requires configuration with predefined rules that prevent employees from punching in or out of a specific time window.

Finally, requiring manual approval of overtime and scheduling payroll audits can help detect problems.

5. Fraudulent Expense Reimbursement

What it is: When a worker is reimbursed for expenses that did not occur, were personal expenses, or were less expensive than the employee reported—and the employee pocketed the difference.

How to avoid it: First, have clear spending policies in place, such as what expenses are deductible and what the limits are. Next, put in place security checks such as micro checks to make sure receipts match the pre-approved charges and macro checks for regular review of reimbursements for any individuals or departments that are unusually above average.

6. Fraudulent Commissions

What it is: When a worker inflates their sales report or has a payroll employee overpay their commission.

How to avoid it: In addition to having clear policies and double-checking numbers and pay vs sales, search for suspicious activity, such as a rise in commissions when sales are declining. Also, keep an eye out for top performers or those who have a sudden increase in commissions.

7. Diversion of Paycheck

What it is: This type of fraud occurs when an employee steals and cashes another employee’s cheque.

How to avoid it: If possible, pay employees via direct deposit or pay card. If you pay by a paycheque, maintain tight control over them by requiring employees to be positively identified before receiving their check (with ID if necessary) and then locking up any unclaimed checks.

8. Failure to Repay Overpayments

What it is: In these cases, an employee requests an advance or is overpaid by mistake and does not repay it. It is sometimes classified as “expenses” by the accounting department and goes unnoticed.

How to avoid it: If you give an advance or discover an overpayment, make sure the employee understands that it must be repaid. Make it clear in the company handbook as well.


The more extended payroll fraud occurs, the more expensive it is for most corporations do not recover their losses. While you can never eliminate the risks of fraud, the steps outlined above should help identify and prevent payroll fraud. If issues arrive, you can find an accountant who will help save your company money and waste management time and reduce employee morale. Sophia is a full-time financial writer at experlu. she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu– are loved, shared & can be found all.

Sophia is a full-time financial writer at she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu Uk– are loved, shared & can be found all over the internet on high authority platforms.

Author: Editorial Team

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