Mitigating Internal Payroll Fraud

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Protecting the financial interests of yourself, the company and the employees has become more important than ever.  Knowing what to protect against can help the team prepare for the worst while expecting the best.  In this hour, we will explore and discuss best practices for mitigating the risk of payroll fraud while maintaining compliance with payroll laws.

Six Key Learning Objectives:

  • Basic understanding of the Fraud Triangle
  • Employee rights and responsibilities
  • Identifying and resolving risks
  • How to stay compliant
  • Ability to educate others about payroll fraud
  • Best practices for protecting against payroll fraud
  1. Introduction
  2. Agenda 00:02:36
  3. The Fraud Triangle 00:04:58
  4. Identifying Risk 00:10:24
  5. Payroll Process Flow Chart 00:21:16
  6. New Hires. Timecards, Payroll Input, Preview Approval, and Reconciliation 00:24:38
  7. Compliance 00:36:37
  8. Audit Preparedness 00:48:56
  9. Educating Others 00:55:37
  10. Creating Competencies and Understandings 00:55:59
  11. Best Practices 01:05:44
  12. To Prevent Against Fraud 01:06:47
  13. Case Study 01:20:49
  14. Employee Fraud 01:22:50
  15. Con… Scam… Cheat… 01:25:50
  16. Attendee Questions 01:27:03
  17. Presentation Closing 01:42:02
  • Christine Stolpe

    Christine Stolpe

    Passionate about furthering an understanding of payroll, Christine Stolpe, CPP has been working in some fashion of payroll for the past 30 years and enjoys watching the profession blossom through emotional intelligence and personal fortitude.  In 2019, she opened her own payroll consulting busi [...]

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ATATX Credit

Aurora Training Advantage is offering continuing education points designed to recognize dedication to training and excellence in accounting.

ATAPR Credit

Aurora Training Advantage is offering continuing education points designed to recognize dedication to training and excellence in payroll.
  • ACH Debit 01:21:21
  • Audit 00:36:56
  • External Audits 00:42:37, 00:45:27
  • Internal Audits 00:42:00
  • Payroll Process Flow Chart 00:21:33, 00:49:03
  • Reconciliation 00:28:07
  • SOX 00:14:23, 00:21:36, 00:39:17
  • The Fraud Triangle 00:02:42, 00:05:17
  • Vendor 01:21:09

ACH Debit : An ACH debit transaction occurs when the originator of a transaction authorizes the recipient to “pull” funds from his or her account. For example, say a customer wants to pay an electric bill via ACH debit.

Audit: A formal examination of an organization's or individual's accounts or financial situation

External Audit: An external audit is an examination that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification is required by certain investors and lenders, and for all publicly-held businesses. The objectives of an external audit are to determine:The accuracy and completeness of the client's accounting records; whether the client's accounting records have been prepared in accordance with the applicable accounting framework; and whether the client's financial statements present fairly its results and financial position.

Internal Audits: Internal audits evaluate a company's internal controls, including its corporate governance and accounting processes. These audits ensure compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection.

Payroll Process Flow Chart: A payroll flowchart visualizes the process of running payroll, withholding deductions, and distributing paychecks to employees. In short, it breaks down the process bit by bit.

Reconciliation: Payroll reconciliation is when you compare your payroll register with the amount you're planning to pay out to your employees to confirm those numbers match. The simplest way to think about it is double-checking your math to ensure that you pay your employees correctly. Payroll reconciliation should happen frequently.

SOX -Sarbanes Oxley Act: The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping auditing and financial regulations for public companies. Lawmakers created the legislation to help protect shareholders, employees, and the public from accounting errors and fraudulent financial practices.

The Fraud Triangle: The Fraud Triangle outlines three elements that are typically present when an individual commits occupational fraud – Pressure, Opportunity, and Rationalization. All of these elements are typically present, so effectively addressing any one of them will help minimize the fraud risk. “Pressure” refers to the motivation of the employee. “Opportunity” to commit fraud is a risk factor that is heightened where internal controls are weak or non-existent. “Rationalization” is the final factor and it is how the perpetrator justifies his or her fraud.

Vendor: A vendor is a person or business that supplies goods or services to a company. Another term for the vendor is the supplier. In many situations, a company presents the vendor with a purchase order stating the goods or services needed, the price, delivery date, and other terms.

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Webinar Survey Overall Rating

This webinar received a total of 4 survey responses. Attendees have given an average rating of 4.8 stars out of a possible 5, reflecting the quality and value of the content presented.

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4.8 / 5
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4.5 Stars
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4.5 Stars
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4.8 Stars

Reviews From Webinar Survey

Our webinars are crafted to deliver exceptional value and insight to business professionals. Below, you'll find genuine feedback from attendees.

Amy A.
December 6, 2021
5.0 / 5
Webinar Rating:
5.0 Stars
Speaker Rating:
5.0 Stars
Do you have any other comments, questions or concerns?
Excellent training in Payroll fraud and what to watch for.
Paul M.
December 6, 2021
4.4 / 5
Webinar Rating:
4.3 Stars
Speaker Rating:
4.5 Stars
Do you have any other comments, questions or concerns?
Overall a great refresher on to watch for internal fraud in addition to external.
Kelsey L.
December 6, 2021
4.6 / 5
Webinar Rating:
4.3 Stars
Speaker Rating:
5.0 Stars
Do you have any other comments, questions or concerns?
no comment
Rebecca B.
December 6, 2021
5.0 / 5
Webinar Rating:
5.0 Stars
Speaker Rating:
5.0 Stars
Do you have any other comments, questions or concerns?
I appreciated the insight and explanations the presenter contributed. They helped me look at things from a few different angles that I believe can help me greatly improve our current payroll processes.

Frequently Asked Questions

The Fraud Triangle is a framework developed by criminologist Donald Cressey to explain the conditions under which an employee commits occupational fraud. It identifies three elements that must typically be present simultaneously: Pressure (the employee's motivation—financial difficulty, gambling debt, substance abuse, or lifestyle strain), Opportunity (access to assets or systems with weak or absent controls), and Rationalization (the perpetrator's internal justification—'I'll pay it back,' 'They don't pay me what I'm worth'). In the payroll context, the Fraud Triangle is particularly relevant because payroll systems involve large, recurring cash flows and are often trusted implicitly. Opportunity is the element employers can most directly control through internal controls and separation of duties. When one person has access to enter new employees, approve timecards, and authorize payments—without independent review—the opportunity element is maximized. Organizations that eliminate single points of control, implement robust reconciliation processes, and conduct regular payroll audits effectively reduce the opportunity leg of the triangle, significantly lowering their fraud exposure regardless of the pressure or rationalization factors that may exist in their workforce.
Internal payroll fraud takes several forms, each exploiting different vulnerabilities in the payroll process. Ghost employee fraud involves adding fictitious employees to the payroll and directing their paychecks to accounts controlled by the fraudster—most common when a single person controls both employee setup and payment authorization. Timecard fraud occurs when employees falsify hours worked, often in environments with manual timekeeping or insufficient supervisor oversight. Wage rate manipulation involves unauthorized changes to pay rates, overtime multipliers, or commission structures by someone with system access. Benefit and deduction manipulation diverts employee benefit contributions or company-paid benefits to fraudulent accounts. Unauthorized payroll disbursements bypass normal approval workflows to generate extra payments. Check tampering intercepts physical payroll checks. ACH redirect fraud changes direct deposit routing information to fraudster-controlled accounts—an increasingly common scheme. Commission and bonus fraud inflates performance metrics to generate higher variable pay. Understanding these fraud typologies is essential for accounting and payroll professionals designing controls: each scheme requires different preventive and detective measures, and a comprehensive anti-fraud program addresses the full spectrum of vulnerabilities across the entire payroll process flow.
Preventing payroll fraud requires a layered system of internal controls that eliminates single points of failure across the entire payroll process. Separation of duties is the foundational control: the person who adds new employees should not be the same person who approves payroll; the person who approves timecards should not be the same person who processes payments. Implementing a multi-level approval workflow for all payroll changes—new hires, terminations, pay rate changes, direct deposit modifications—ensures that no single employee can make and execute a fraudulent change undetected. Regular payroll reconciliation compares the payroll register to prior periods, flagging unexpected additions, deletions, or unusual changes. Pre-payroll reviews by managers confirm that their direct reports' hours and pay are accurate before processing. Post-payroll audits by someone independent of payroll processing verify that what was paid matches what was approved. Physical controls for paper-based processes—locked check storage, dual signatures for large disbursements—address older fraud vectors. SOX-compliant organizations have additional documentation and testing requirements for payroll controls. Together, these controls dramatically reduce both the opportunity for fraud and the time between occurrence and detection, minimizing losses when fraud does occur.
A payroll fraud audit is a systematic examination of payroll records, processes, and controls designed to identify anomalies that may indicate fraudulent activity. Begin with a payroll process walkthrough: document the end-to-end process from employee setup through final disbursement, identifying every control point and every individual with access to make changes. Review the employee master file for irregularities: look for employees with no payroll tax withholding (possible ghost employees), duplicate bank account numbers or Social Security numbers, employees with post-termination pay, and recently added employees with unusually high pay rates. Analyze payroll data statistically: compare current payroll to prior periods by department, look for unusual spikes in overtime or bonus payments, and identify any payments made outside normal payroll cycles. Test access controls: confirm that user permissions match job responsibilities and that terminated employees' system access was revoked promptly. Verify that separation of duties controls are functioning as documented, not just on paper. Review direct deposit change logs for unauthorized modifications. A well-executed payroll fraud audit both detects existing fraud and identifies control gaps that create future risk—providing the information needed to strengthen controls before the next fraud opportunity arises.
A comprehensive approach to payroll fraud protection addresses prevention, detection, and response across three dimensions: people, processes, and technology. On the people side, ensure that all payroll staff understand their ethical obligations and the consequences of fraud; conduct pre-employment background checks for anyone with payroll access; create a confidential fraud reporting hotline that employees can use to report suspicious activity without fear of retaliation. Process best practices include mandatory vacation policies for payroll staff (forcing coverage by a colleague who may discover irregularities), job rotation across payroll functions, and requiring dual authorization for payroll disbursements above defined thresholds. Regular unannounced payroll audits by internal audit or an independent accounting professional detect fraud earlier and create a deterrent effect. Technology controls include system access logs that record every change with user ID and timestamp, automated alerts for unusual transactions, and direct deposit change notifications sent to employee email addresses on file—so employees self-report unauthorized account changes quickly. Organizations that layer all three dimensions consistently demonstrate lower fraud incidence, faster detection when fraud occurs, and stronger compliance postures in external audits—making payroll fraud protection a high-return investment in organizational financial health.