Protect Your Payroll: A Comprehensive Guide for Effective Risk Management

Paying employees is one of the most important financial transactions that a business must carry out. But in recent years, maintaining this has proven more challenging than ever.

In 2018, two former employees of the Indianapolis Bond Bank were accused of taking approximately $400,000 in unreported pay and benefits and were charged with theft and insurance fraud. Although she received a $57,500 annual salary, one of the employees who handled the bank’s payroll received $170,000 in the 12 months prior to her termination.

Although payroll security fraud has become a major issue on a global scale, it is just one of several payroll risks that organizations around the world today face. Payroll risk management, which involves detecting, evaluating, and managing potential risks related to an organization’s payroll function, is becoming increasingly important to businesses as a means of protecting themselves against payroll risks.

In this article, we’ll go over in great detail the greatest security and compliance challenges payroll teams are now facing, as well as what you can do to address them and lessen their potential effects.

Potential Payroll Risks to Be Aware of

• Payroll Security Fraud

Payroll security fraud is the term for any illicit activity involving the exploitation of a company’s payroll system for personal gain. This can involve a variety of fraud schemes, including identity theft, embezzlement, and false claims.

• Holding Back Taxes at the Wrong Rate

Incorrect tax withholding constitutes a violation of the tax code. This may result in financial penalties, court costs, government agency audits, and reputational harm to the business.

• Inadequate Tracking of Payroll Records

The majority of nations have labor laws mandating businesses to maintain records of employee compensation, payroll data, and hours worked. A company may be in violation of the law and be susceptible to fines, penalties, and other legal action if it neglects to maintain certain records.

• Staff Misclassification

Employee misclassification is the illegal practice of classifying workers as independent contractors when they should be categorized as payroll employees, typically to lower labor expenses. As a result, the employer may face sanctions and fines.

• Backdated Security Software

If your security software is out-of-date, your payroll system could be hacked. This could lead to data breaches that expose the personal information of employees, including their addresses, Social Security numbers, and bank account information.

• Over and Underpayments

Underpayments and overpayments are errors in the amount of money paid to employees for their work. This may occur for a number of reasons, including erroneous pay rates, inaccurate timekeeping, omission of overtime compensation, or inappropriate tax withholding rates.

Internal Payroll Controls to Reduce Your Risks

Internal payroll controls are practices and guidelines used to safeguard payroll data and guarantee the reliability, security, and integrity of the payroll process. These safeguards assist in preventing errors, lowering the possibility of fraud and misuse of payroll data, and adhering to legal and regulatory requirements. It’s crucial to have the following internal payroll controls:

• Payroll Audits

A payroll audit is a routine examination of a company’s payroll procedures and documentation to confirm that it is paying employees truthfully, promptly, and legally. Reviewing your payroll process, whether internally or with outside assistance, can help maintain your company’s payroll data organized and improve its financial control.

• Automated Attendance and Time System

Companies utilize an automated time and attendance system, which is a computerized system, to monitor and record the hours worked by employees. This may involve using a computer, a mobile device, or biometric technologies like fingerprint or facial recognition to sign in and out.

An automated time and attendance system can help reduce payroll risk by reducing time theft, also known as timesheet falsification, increasing the accuracy of the data used to calculate employee pay, and ensuring compliance with labor laws and regulations regarding the tracking and reporting of employee hours worked.

• Segregation of Duties

Segregation of duties is the practice of dividing the several jobs required among different people in order to ensure that no one person has complete control over the payroll process. The separation of duties during the payroll process might help organizations spot fraud and follow the law.

• Limiting Access to the Payroll System

Limiting access can reduce chances for individuals to alter payroll records, safeguard private payroll data from being revealed to unauthorized parties, and give oversight to guarantee payroll data is correct and full, all of which can help prevent fraud. Limiting user access to the payroll system and setting up various degrees of access based on the user’s position and duties are two risk mitigation strategies.

• Check Signing Authority

Check signing authority is the procedure for confirming and regulating who is allowed to sign payroll checks and authorize their payment. This is typically accomplished by establishing an unambiguous, well-documented list of allowed signatories and comparing it to the signature on the payroll cheque before it is released.

Another choice is a dual control system, in which the signatures of two approved individuals are required before a payroll cheque may be released. A cheque signing authorization procedure that is in place protects the payroll operation by lowering the possibility that someone may utilize payroll records improperly.

• Verifying Pay Rates

Verifying employee pay rates is crucial due to the multiple adjustments that an employee’s salary undergoes over time (due to promotions, changing schedules, etc.). It protects against errors like overpaying or underpaying employees and helps maintain compliance with labor laws and pay rate limits, such as the minimum wage and equal pay regulations.

Frequently Asked Questions (FAQs)

1. Why is payroll management so crucial?

Payroll management aids businesses in protecting employees’ private financial information, ensuring compliance with tax and labor laws, and enhancing financial stability by preventing errors or fraud in payroll processing. Proper payroll management protects the company’s reputation and raises employee satisfaction.

2. How can one manage payroll more constructively?

One of the two main strategies for managing payroll more effectively is to set up internal controls to protect payroll data and ensure the precision, integrity, and security of the payroll process. The alternative option is to use payroll software or contract with a third party to provide payroll services.