Preventing Payroll Fraud When Using a Payroll Company

The court case outlined in the link below deals with the issue of liability when payroll fraud is attempted when using a payroll company.

OPHTHALMIC SURGEONS, LTD. v. PAYCHEX, INC. http://www.leagle.com/xmlResult.aspx?xmldoc=In%20FCO%2020110131088.xml&docbase=CSLWAR3-2007-CURR

Is this case, the payroll manager at a small business would call in the company payroll to the payroll company. The payroll manager would call in multiple payrolls each week (instead of just the one normal payroll), and issue herself multiple direct deposits. The payroll company was not liable to reject the payroll manager's request since she was listed as a contact on the account who could call in payroll.

The business tried suing the payroll company for the amount the business' payroll manager embezzled through payroll fraud.

The court found that the payroll company was not liable as they had issued financial payroll reports to the company and that the company owner did not review the reports for discrepancies.

The opportunity for payroll fraud can be more limited when using an outside payroll company because of these payroll reports. Payroll reports from in-house systems have the potential to be modified (a payroll check issued and then wiped off or left out of the payroll reports). Payroll reports from payroll companies are canned - so when an employee gets two pay checks it will be there in plain sight.

Most payroll companies can have reports courier delivered and received by signature only. They can also separate the reports from the live checks and have them delivered to separate locations. Even one step further, some payroll companies can deliver electronic copies of the reports via email.

One or all of these options could be taken by the owner/CEO/CFO of the company as a checks and balances system to eliminate these kinds of payroll fraud opportunities from happening - provided the reports are reviewed, of course.

2011 Form W-4, important dates and regulations

The following are a list of dates and regulations accompanying the 2011 Form W-4. (Information taken from IRS Publication 15 - 2011)

By February 15

Request a new Form W-4 from exempt employees. Ask for a new Form W-4, Employee’s Withholding Allowance Certificate, from each employee who claimed exemption from income tax withholding last year.

On February 16

Forms W-4 claiming exemption from withholding expire. Any Form W-4 claiming exemption from withholding for the previous year has now expired. Begin withholding for any employee who previously claimed exemption from withholding but has not given you a new Form W-4 for the current year. If the employee does not give you a new Form W-4, withhold tax based on the last valid Form W-4 you have for the employee that does not claim exemption from withholding or, if one does not exist, as if he or she is single with zero withholding allowances. If the employee furnishes a new Form W-4 claiming exemption from withholding after February15, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place.

Before December 1

New Forms W-4. Remind employees to submit a new Form W-4 if their marital status or withholding allowances have changed or will change for the next year.

Using Form W-4 to figure withholding. To know how much federal income tax to withhold from employees’ wages, you should have a Form W-4, Employee’s Withholding Allowance Certificate, on file for each employee. Encourage your employees to file an updated Form W-4 for 2011, especially if they owed taxes or received a large refund when filing their 2010 tax return. Advise your employees to use the Withholding Calculator on the IRS website at www.irs.gov/individuals for help in determining

how many withholding allowances to claim on their Forms W-4.

Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances.

Electronic system to receive Form W-4. You may establish a system to electronically receive Forms W-4 from your employees. See Regulations section 31.3402(f)(5)-1(c) for more information.

Effective date of Form W-4. A Form W-4 remains in effect until the employee gives you a new one. When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. For exceptions, see Exemption from federal income tax withholding, IRS review of requested Forms W-4, and Invalid Forms W-4, later.

Why Automated Payroll Check Signing Makes Your Life Better

I had a client, a small business owner, who told me he chose to sign each one of his employees paychecks because he liked to 'confirm the amounts of the paychecks he was issuing.'

He had 15 employees and paid them every other Friday.

Believe it or not, this is a very common practice. 

Because of this practice, this business owner was tied to his office every two weeks. Come rain or shine, wedding or childbirth, every other week he had to be there or his employees didn't get paid.

It doesn't have to be this way.

Most outsourced payroll services have a Payroll Check Signing service. They can have the business owner's signature (or multiple signatures) pre-printed on the checks when they are issued. The owner can be miles away, on vacation, with family, or conducting revenue generating business, and the payroll checks can arrive pre-signed and sealed in envelopes ready for handout.

But what about a signature stamp safe-guarded by a trusted office employee? Won't that work too?

A good point. A signature stamp does solve the problem of having to be in the office to sign checks. But then it potentially creates another problem - Check Fraud.

Phantom employees can easily be created by in-house bookkeepers or other office staff. And signature stamps can be used to authorize those checks without owner notice. Trusted staff member or not, most check fraud perpetrators are first-time offenders.

See the attached article from the Association of Certified Fraud Examiners on Ghost Employees and in-house payroll fraud. http://www.acfe.com/resources/view.asp?ArticleID=21

Not only can most Payroll Outsourcing Services pre-sign and seal paychecks, but most can produce electronic payroll registers that can be viewed by the business owner from any remote location. They can then verify the pay amounts before the checks are even sent from the payroll company.

This also makes it very difficult for in-house employees to hide ghost employees on the payroll.

This way, the owner:
1. has the same piece of mind of verifying their employees pay
2. drives down the chances of check fraud, and...
3. gains the personal satisfaction and empowerment of being a business owner who comes and goes as they please

...the way it was meant to be.