Fraud warning for South African businesses

Payroll fraud and ghost employees cost South African businesses millions each year due to large losses and additional spending on investigations and prosecutions.

In many cases, the companies forgo legal actions and fire the fraudster, who often moves to a new business and restarts their crimes.

“Most companies, unfortunately, only uncover payroll fraud by accident. They don’t realise it’s happening, and it can cost them millions,” said Yolande Schoültz, founder of YSchoültz Attorneys.

Schoültz explained that, fortunately, companies can avoid losing millions by using methods such as monthly checks on hiring changes and annual face-to-face audits.

Modern payroll platforms can help companies reduce fraud risks and organically extend role-based oversight across different departments.

She noted that spotting payroll fraud is not difficult when companies are diligent. With the right processes and precautions, they can avoid the risks of ghost employees and other related crimes.

Schoültz explained that there are several common ways in which payroll fraud occurs. The best-known is adding ghost employees.

This can be fake employees who don’t exist, or employees who were let go but never removed from the payroll. Instead, the payroll administrator keeps them on the books and changes the bank account details.

Another scheme is to find employees who are paid irregularly, pay them monthly and direct the new payments to a different bank account.

While these activities are relatively easy to uncover, companies don’t pay attention because payroll operations are often isolated and arcane.

One issue is who has oversight. Instead of limiting the payroll task to either finance or human resources, Schoültz suggested that both should be involved, with finance being primarily responsible.

However, payroll is often left alone. As long as people are paid, nobody asks questions, creating an excellent opportunity for fraudsters.

How to spot payroll fraud

Schoültz stressed that companies should take an interest in their payrolls, since this type of fraud can be extraordinarily damaging.

A Report to the Nations, released by the Association of Certified Fraud Examiners (ACFE), revealed that 5% of company revenue is lost to employee fraud.

Schoültz cited a case where a company lost over R7 million across several years through roughly 13 ghost employees.

“It’s like a slow bleeding wound. The fraud usually extracts small amounts across multiple fake employees and over many years.”

In this case, the payroll administrator’s lavish lifestyle gave them away, with investigators asking how they could afford luxury cars, holidays, and other perks on their salary.

Schoültz warned, however, that a natural distrust of payroll staff is not healthy or productive, as there are better ways to find and prevent payroll fraud. The most effective method is to require employees to present themselves physically.

“An annual face-to-face audit is very effective. Have people come with their ID books and match them to a payroll list.”

“This must ideally be through an independent person, not from the company, because some payroll fraud is done in cahoots with several people.”

According to Schoültz, an independent annual face audit is the best way to know if a company has any ghost employees.

“It also works to check employee movements every month, to check the terminations and new hires,” she added.

Responsibility and technology

Schoültz explained that it is also crucial that a company’s finance department takes payroll oversight seriously.

“People don’t know what they don’t know. A lot of times, when I get called in to do risk assessments, it’s very rare that I meet the head of finance. But payroll is a finance-driven department.”

Despite often being the company’s biggest expense, payroll is neglected. Many companies are unsure whether payroll oversight is the responsibility of finance, HR, or someone else.

Isolated payroll systems don’t resolve this issue, but payroll platforms facilitate role-based permissions, allowing access to different teams, said Sandra Crous, MD of payroll provider Deel Local Payroll.

“There are amazing capabilities in modern payroll systems, such as automated reporting, remote administration, and alert systems that inform different stakeholders.”

“You can expand and streamline payroll processes so that people in finance or HR have passive visibility over payroll events.”

On the other hand, Crous said that legacy payroll systems typically sit in a corner somewhere, with few people even knowing what’s going on there.

Not knowing has a price tag. According to the Chartered Institute of Payroll Professionals, local companies lose upwards of R100 million annually through payroll fraud – more than cash transit heists.

But Schoültz said a little diligence can avoid such damage. “People just don’t check. They don’t have the know-how because payroll is really a very underestimated department in a company.

Most employees simply receive salaries without any understanding of how the company’s payroll system works.

“The last thing people actually have time for is the payroll. They just want their employees to get paid, but they don’t understand what is inside that system, and it continues like that.”