Payroll fraud costing business hundreds of millions

South African businesses lose over R100 million annually due to payroll fraud — more than the cost of cash transit heists. This is according to estimates from the Chartered Institute of Payroll Professionals.

However, organisations can stem the tide of these crippling losses with vigilance and informed procedures, says Yolande Schoültz, founder of YSchoültz Attorneys | Conveyancers | Notaries. An expert with vast experience in investigating payroll fraud, Schoültz says there are systematic methods businesses can deploy to combat this pervasive issue.

She says payroll fraud lurks in the shadows of many organisations, often going unnoticed until it's too late. The economic toll can be catastrophic, leading to millions in losses and hefty expenses for investigations. Unfortunately, many companies discover they are victims of payroll fraud only by accident, unaware of the silent siphoning of their resources.

"Most companies, unfortunately, only uncover payroll fraud by accident. They don't realise it's happening, and it can cost them millions," says Schoültz.

Understanding the mechanics of payroll fraud

Payroll fraud often takes root in environments where oversight is disjointed. Common ploys include the addition of ghost employees — individuals who don’t exist or former employees who haven’t been removed from the payroll — and manipulation of bank accounts to siphon funds from businesses.

"The payroll administrator maintains these ghostly figures and changes the payment details," says Schoültz. Some criminals find pathways through irregular payments, directing these funds to their own accounts.

These schemes are not only easily identifiable with diligent oversight, but companies are frequently blind to them due to their payroll operations remaining somewhat isolated and opaque. Who should oversee payroll — the finance department, human resources, or both? This ambiguity can lead to gaps in control, allowing fraudulent activities to flourish.

The shocking impact of complacency

The repercussions of payroll fraud can start small, but accumulate rapidly. According to the Association of Certified Fraud Examiners (ACFE), employee fraud accounts for approximately 5% of company revenues. In one striking case, a single company lost over R7 million to 13 ghost employees, a slow haemorrhage that went unnoticed until an extravagant lifestyle prompted further scrutiny.

Schoültz highlights the importance of making payroll operations transparent. "An annual face-to-face audit is very effective. Employees should present their ID books to confirm their existence," she says. Such checks ideally involve an independent audit to root out collusion — an essential layer of scrutiny to ensure integrity within the payroll system.

Using technology and oversight

Realistically, payroll oversight should not fall solely on one department. "People don’t know what they don’t know," Schoültz remarks. Typically, the absence of interaction between finance and payroll leads to a lack of comprehensive understanding regarding payroll activities, exacerbating vulnerabilities.

Sandra Crous, Managing Director of payroll provider Deel Local Payroll, notes that modern payroll platforms can substantially enhance oversight. Features like automated reporting and alert systems offer visibility across departments, simplifying collaboration and risk management.

Proactive steps to mitigate payroll fraud

“People just don’t check,” said Schoültz, pointing to a fundamental lack of understanding regarding payroll functions as a major part of the problem.

By remaining proactive and implementing regular audits, organisations can insulate themselves against the threat of payroll fraud. Recognising the necessity for oversight and leveraging technological resources can provide companies with the tools to safeguard their financial futures, she says.