Payroll Without Panic: How to Prevent Fraud, Errors, and Disruption
- Roberta Edwards
- 18 minutes ago
- 4 min read
Payroll Is Too Important to Rely on One Person
When a single employee processes payroll without oversight, it creates an opportunity for fraud. Informal payroll processes and overreliance on a lone employee pose significant risk. Research and related theories confirm that opportunity is one of the main factors leading employees to commit fraud.
Payroll fraud can take many forms. For example, an employee with payroll access may issue unauthorized bonuses, increase their own pay, or pay another employee more than approved. In other cases, the payroll administrator may add family members to the payroll even though they do not perform any work for the company. These schemes can continue for months or years when payroll reports are not independently reviewed, and pay changes are not supported by proper documentation and approval.
Because the company payroll affects employees, taxes, benefits, financial reporting, and legal compliance, a documented payroll review process and a standard operating procedure (SOP) are critical to preventing fraud, errors and disruption. It is also essential to ensure continuity of payroll processing by identifying and training at least one backup payroll processor.
Be Aware of the Numerous Risks of an Undocumented Payroll Process
Unfortunately, it is common for an employee without a background in accounting to be tasked with processing payroll and often without training in wage-and-hour laws and payroll practices.
Common errors include duplicate payments, deduction errors, improper tax setups, and inaccurate overtime calculations. Tax filings, benefit payments, or payroll deadlines may be missed. Payroll may be delayed if the primary processor is unexpectedly unavailable.
When fraud enters the picture, it can result in unauthorized pay increases, bonuses, reimbursements, or overtime, as well as payments to terminated employees or fictitious “ghost employees.” Red flags to watch for include a payroll administrator who refuses to take vacation, avoids cross-training a backup, or appears to be living beyond their means. Issues on the payroll include employees with the same Social Security number or direct deposit information, payroll totals that exceed budget, and the number of payroll checks exceeding the current employee headcount.
Payroll administrators can also fall prey to “bad actors.” If an employee’s email is hacked, the bad actor sends an email to the payroll administrator requesting a direct deposit change and providing the new account information. The payroll administrator changes an employee’s direct deposit information without proper verification, resulting in the employee’s pay being deposited into a scammer's account.
Take Steps to Separate Payroll Responsibilities
Avoid giving a single person complete control over payroll. Instead, separate responsibility for:
Entering employee and payroll changes, including new hires and terminations
Processing payroll
Reviewing payroll reports
Approving payroll
Releasing payroll funds
Reconciling payroll to bank and accounting records
If staffing is too limited to maintain full separation of duties, establish additional oversight of your payroll administrator to ensure a full review of payroll processing.
Create a Payroll Standard Operating Procedure (SOP)
A thorough SOP should document every step of the payroll process, and employees should be required to follow it. Common steps in a payroll procedure include:
A. Payroll Preparation Processes
The payroll schedule and processing deadlines
How verification of new hires, terminations, pay changes, deductions, and benefit elections are conducted
Collection and approval of timecards/time entries
Review of overtime, leave, commissions, bonuses, and reimbursements
B. Payroll Entry and Processing
Instructions for entering payroll data, including bonuses, commissions, overtime, and time off entries
Required supporting documentation
Procedures for correcting errors
System access requirements and security controls
Steps for generating the preliminary payroll register
C. Payroll Review and Approval
Who reviews the preliminary payroll register
Items the reviewer must verify
Comparison to the prior payroll and expected payroll totals
Review of unusual payments, manual checks, pay-rate changes, and direct-deposit changes
Documentation of final approval before payroll is submitted
D. Payroll Submission and Funding
Outlines employees who are authorized to submit payroll and who may release or approve payroll funds
Lists payroll provider deadlines
Includes procedures for confirming successful submission and funding
E. Post-Payroll Reconciliation
Reconcile payroll reports to the bank account and general ledger
Confirm payroll taxes and benefit deductions were handled correctly
Review rejected direct deposits or returned payments
Retain payroll reports, approvals, and supporting documentation
5. Build Fraud-Prevention Controls into the Process
Require written authorization for all pay changes
Verify direct deposit changes using a trusted method. Typically, employees can enter these themselves via the company HRIS self-service portal
Restrict payroll system access based on job responsibilities and review payroll system access regularly
Avoid sharing passwords; instead, establish separate backup access
Require approval for manual checks and off-cycle payrolls
Compare employee lists to payroll reports
Conduct periodic payroll audits and spot checks
Require employees involved in payroll to periodically step away from the process
7. Review and Update the SOP Regularly
Review the SOP at least annually
Document vendor contacts, deadlines, payroll calendars, and escalation procedures
Update it when systems, vendors, staffing, benefits, or approval responsibilities change
Require payroll personnel and backup processors to confirm they understand the procedures
Document the date of each review and revision
Strong Payroll Controls Protect Both Employees and the Business
Payroll oversight and a written payroll process help ensure employees are paid accurately and on time. Documented reviews, approvals, and clear procedures reduce the risk of errors and fraud while allowing payroll to continue if a key employee is unexpectedly unavailable. Once the SOP has been created, store it securely in a location accessible to authorized backup personnel, and periodically test the backup process. Payroll responsibilities should also be included in the company’s emergency and succession planning. Regularly reviewing and updating the payroll process will help ensure continued accuracy, strong internal controls, and payroll continuity.
Disclaimer: The information provided in this blog is for informational and educational purposes only and should not be construed as legal advice. Laws and regulations vary by jurisdiction and specific circumstances. Employers and individuals should consult with their attorney or qualified legal professional to determine the appropriate course of action for their particular situation.
