Top 5 Cases of Payroll Fraud and Why SMEs Are Most at Risk

By Zac Ma – Associate Director, SEA Sales, Links International Singapore

I recently attended a seminar on combatting occupational fraud. Given the sensitivity of payroll data and the importance of security involved in payroll processing, this sparked my interest to dig more into the subject from a payroll management standpoint in Singapore. I discovered a lot of interesting statistics.

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Image source: ACFE, 2016 Global Fraud Study

  1. The 2016 Association of Certified Fraud Examiners (ACFE) report looked at over 2,400 instances of fraud across the world and discovered that payroll fraud and cheque tampering popped up in 19.9% of cases.
    1. Cheque tampering, which can be related to payroll fraud in some instances, is the most costly, with the median cost of approximately USD158,000 per instance.
    2. Payroll fraud occurs at a median cost of approximately USD90,000 per instance.
    3. In Southern Asia, payroll fraud and cheque tempering makes up about 8.2% of cases.
  2. The ACFE also reported that cheque tampering and payroll fraud were twice as common in small organisations as in larger organisations.
  3. According to the latest Annual Fraud Indicator in 2016 by The University of Portsmouth, it is estimated that payroll fraud losses alone could cost the UK more than £15bn every year.
  4. PwC’s 2016 Global Economic Crime survey reported that more than one fifth of organisations based in Singapore experienced some form of fraud in the past 24 months, with 61% of occurrences in Asset Misappropriation, a category to which payroll fraud and cheque tampering belong.
    1. Within Asia Pacific, 30% of organisations reported having suffered from fraud over the last 24 months.

Forethoughts on Payroll Related Fraud

So, what do these statistics mean?

The percentage of payroll related fraud occurrences might appear low, particularly in Asia Pacific, but it is still ultimately a threat to all organisations; more so, for small organisations.

The 2016 ACFE Global Fraud Study revealed that 12% of fraud detection in small businesses came from an internal audit, whereas in larger enterprises this was 18.6%. For SMEs, the detection of fraud is less frequent than in larger organisations, but this does not mean that the probability of it happening is lower. Rather, it could mean that fraudsters are simply not detected or caught due to slack preventative measures. ACFE performed a series of analysis and concluded that small businesses have fewer anti-fraud controls in place than large organisations. For example, they have no internal and external audit, lack of proactive data monitoring/analysis, reviews, policies etc., making them especially vulnerable to fraud.

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Image source: ACFE – Fraud in Small Business 2016

Assessing the Impact

According to ACFE, 60% of small business fraud victims didn’t recover any of their losses and they suffered the same median fraud loss as large organisations with 10,000+ employees.
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Image source: ACFE – Fraud in Small Business 2016

Top 5 Recent Cases of Payroll Related Fraud

  1. http://www.straitstimes.com/singapore/courts-crime/ex-hr-exec-jailed-for-cheating-employer-of-12m

The Straits Times reported in July 2016, that a former Human Resources executive working for GMC Global committed a series of forgery and cheating offences involving about SGD1.2 million. She was jailed for six years and nine months.

  1. Former Crown Candy worker pleads guilty to USD300K payroll fraud, embezzlement

Reportedly, in January 2017, Katrina McCutchen, a former Crown Candy worker tasked with the company's payroll duties, fraudulently issued payroll cheques totaling nearly USD300,000 to herself and her family in 2012. The prosecution alleged that the theft went on for much longer and could total more than USD800,000.

  1. Mount Airy man sentenced to 15 months for half-million-dollar fraud

Between November 2009 and August 2015, Paul Randolph Beeks Jr., who was responsible for accounting, payroll and tax duties at Mid Atlantic Radiology Services, made around 24 fraudulent transfers from the company to his own companies’ accounts. To disguise the thefts, he claimed that some of the wire transfers were for management fees and bonuses.

  1. Former Broken Arrow church employee charged with embezzling nearly USD245,000

In February 2017, a woman was charged with five charges of embezzlement for money taken from Arrow Heights Baptist Church since 2008 when she was employed as payroll administrator.

  1. Ex-UPMC Health Plan executive pleads guilty in USD846k embezzlement case

Pittsburgh Post-Gazette reported in January 2017 that a former senior director of UPMC Health Plan pleaded guilty to embezzling USD846,000 from UPMC by putting ghost workers on the payroll.

Combatting Payroll Fraud

There are several types of payroll fraud. Organisations of all sizes can suffer from various types of fraud, which can lead to closure of a business, revenue loss, high legal fees and reputation damage. These financial challenges can be particularly difficult for small businesses.
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Image source: EY – Fraud Risks in Recruitment and Payroll 2016

There are many strategies that can be used to combat payroll fraud and payroll outsourcing is one of them. Here are some ways that outsourcing your payroll in Singapore can help to prevent and detect payroll fraud.

  1. Cheque and balance by third party– a payroll outsourcing vendor in Singapore can implement financial process controls and segregate duties to eliminate the natural habitat that must exist for fraud to occur.

  2. HR or payroll analytics reports – a payroll outsourcing vendor can generate audit and analytics reports to assist in spotting fraudulent schemes and ghost employees. For example, analysing monthly overtime pay trends, employees with duplicate Social Security numbers, addresses, or bank accounts.

  3. Cheque management – an outsourced payroll service model traditionally reduces the number of cheques written and has the requirement to establish a cheque issuance procedure.

  4. Direct deposit of salary through vendor – mitigate risks of unapproved and unauthorised wire transfers.

There are of course, other benefits and an established payroll outsourcing vendor in Singapore should be able to explain what it does for fraud prevention.

SMEs Most at Risk

The hallmarks of a typical corporate fraud are a trusted, long-serving employee, superiors who failed on due diligence, exposed loop-holes in system and poor audits.

SMEs are most at risk of payroll fraud, since they might not have established the necessary anti-fraud framework, given that time and capital are usually spent on growing and sustaining the business. Fraud cases might not be reported simply because they were never detected in the first place.

No matter how much you trust your employees, the bottom line to me is that it is imperative for organisations, big or small, to have a control system and procedure in place to prevent and detect fraudulent activities.

Links International is a leading payroll outsourcing provider in Asia and supports 15 countries across Asia-Pacific. If you’re interested to explore the idea of payroll outsourcing, please do not hesitate to contact us.

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Zac Ma

Zac Ma

Sales Director, HRO, SEA at Links International

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