Payroll fraud is a common problem that affects businesses of all sizes. Ghost employee payroll fraud is one of the most pernicious variants, causing significant financial losses, and often going unnoticed for months. 

Ghost employee payroll fraud occurs when a non-existent employee is added to the payroll system. The fraudster collects the paychecks made out to the non-existent employee. In the sections below, we will discuss five tips that can help business owners detect and prevent this costly form of payroll fraud.

1. Improve Your Internal Control System

To create an effective internal control system, start by segregating high-risk duties. Dividing responsibilities in this way reduces the risk of fraud because no single employee will have access to all aspects of the payroll process. The person who enters employee data into the payroll system, for example, should not be the same person who authorizes disbursements. 

Remember that automation can play a part in this segregation. For example, the best fingerprint time clock system can ensure only those employees who sign into work biometrically are eligible to be paid. 

2. Conduct Background Checks 

One of the best ways to prevent ghost employee fraud is to conduct thorough background checks on all new hires. Your background checks should include: 

• Verifying their identity;

• Confirming their employment history; 

• Checking the validity of their educational qualifications; 

• Looking for any inconsistencies between the information available online and what they shared in their resume, cover letter, and job interviews. 

A comprehensive background check can identify red flags that indicate a propensity for fraudulent activity. By implementing rigorous background checks, you can protect the integrity of your existing team and defend your business against payroll fraud.

3. Engage in Regular Audits  

Regular audits are an effective way to detect and prevent ghost employee scams and other forms of payroll fraud. To conduct an effective payroll audit, you’ll need to review your payroll records to confirm who’s being paid and what they’re receiving. Keep an eye out for any anomalies, unexpected expenses, or (worse still) unexpected names in the records. 

It’s worth bringing in an independent third party to ensure objectivity and impartiality. Doing so can help you catch payroll fraud before it becomes a multi-month, money-sucking nightmare. Your employees will know that they can’t get away with anything shady, and you’ll have peace of mind that everything is in order. 

4. Use Reliable Payroll Software 

The quality of your payroll software is a crucial factor in determining whether you’re at risk of payroll fraud. If you’re working with high-quality, cutting-edge software that’s constantly improved and updated by the provider, it will automate the payroll process, reducing your risk of human error and fraud. 

However, if you’re working with legacy software that hasn’t seen an update in years, you could be in trouble. Legacy software may not alert you to unusual payroll activity, such as payments to non-existent employees. So, if you’ve been holding off on updating your payroll software, now may be the time to suck up the expense – it could save you in the long run.

5. Conduct Employee Training 

Whether you’re operating a small business or a major international enterprise, employee training is an essential element of fraud prevention. Your team needs to know how to identify fraudulent activity, including ghost employee fraud. Crucially, they need to feel comfortable reporting it. Training can give them the grounding they need to speak up if they see something untoward happening in the workplace. 

Ghost employees can be a major drain on the resources of any business. However, the tips above can help you protect the integrity of your payroll system.