Businesses open themselves up to being victims of fraud and theft by being too trusting of those who have control access over their electronic payroll systems.

This is according to Yolande Schoültz, risk and fraud management division manager at business software firm Sage VIP in South Africa.

Payroll fraud involves an intention by a member of a business or organisation to misappropriate funds. Payroll fraud schemes vary from ghost employees to false payslips and leave balance manipulation that involve kickbacks or bribes within companies.

And in South Africa, businesses by law have to report fraud cases of over R100,000 to the police.

But Schoültz told a media briefing in Johannesburg on Tuesday that she knows of businesses that have failed to report payroll fraud either for fear of harming their reputation or because they try to avoid lengthy and costly litigation processes that can take up to four years.

Subsequently, payroll fraudsters at these businesses are typically asked just to resign, meaning they risk moving onto another company to commit the same crime rather than being criminally prosecuted

The only statistics available on payroll fraud in South Africa are dated 2011 from Alexander Forbes. At the time, Alexander Forbes said that payroll fraud costs South African companies more than cash in transit heists: R100 million is lost in SA annually to these heists.

Up-to-date statistics then on payroll fraud in South Africa are hard to come by because of a lack of reporting by businesses, said Schoültz. However, she is of the opinion that figures for payroll fraud “are now even worse” than in 2011.

“People in your payroll environment are the people you should trust the least,” said Schoültz.

“Most fraud is uncovered by accident, and that’s usually when someone goes into a new department, like in finance, and then all of a sudden they pick up the funnies,” Schoültz added.

She explained that the average payroll fraud can occur for up to 18 months before being uncovered.

Schoültz further explained that these cases; though, can be prevented if businesses pick up on certain “red light” signs.

These signs include payroll system access control that is not aligned to segregation of duties and excessive control of the payroll system by one user.

Other danger signs include payroll users that either start work late or early to commit misappropriation of funds. Payroll users that conduct processes from home should also be a concern.

Schoültz further said that finance departments must be involved in payroll processes to help curb the problem and keep a close eye on any irregularities.

But challenges exist for smaller businesses to pick up payroll fraud owing to a lack of human resources to help; for instance, segregate duties.

“Payroll fraud happens more in small businesses than in large. And when I talk about small, we are referring to less than 99 employees,” Schoültz said.

Pavlo Phitidis, who is the chief executive officer of the Aurik Business Incubator in South Africa, said, “I’ve never yet met an entrepreneur who’s started a business who has built a sufficient back-office.”

“On this very early phase of the lifecycle, you (entrepreneurs) focus excessively on getting sales in,” Phitidis said.

“As you move into the growth phase, that is when you start to employ people in your business,” Phitidis said.

Yet, Schoültz said businesses of all sizes should have a few key measures in mind to help curb this problem when they take on more staff.

Advice regarding a payroll system:

• Access control should be aligned to segregation of duties
• When checking and signing off the payroll, print your own reports
• Activate a “stop further entry” function after the payroll has been processed by the administrators, but before checking
• Bank account and ID number validation and verification should be done
• Income verification should be linked to South Africa’s four major banks

Advice regarding the payroll, human resources and finance departments

• Segregation of duties should be clearly defined
• The bank statement should always be reconciled back to the payroll system
• A senior manager in finance should be responsible for payroll sign off