Payroll fraud amounts to more than 9 percent of all occupational fraud and abuse cases, according to a 2012 survey by the Association of Certified Fraud Examiners. One of the greatest hazards in this type of fraud is that payroll fraud can continue undetected for a long time. With a median loss of $48,000 per incident, small-business owners have an incentive to examine payroll controls and auditing procedures to prevent payroll fraud schemes.

Master Payroll Files

Make sure to have adequate control and security over payroll master files or databases. This is where an employee's basic identifiers are kept, along with information concerning work assignment, pay level and other information. Master files should be audited each payroll period for changes, errors or discrepancies by a supervisor who does not prepare payroll.

Cross-check between departments to confirm that personnel actions such as raises are authorized by human resources in writing, communicated to accounting and approved by management. Confirm that former employees are removed promptly from payroll master files. Check human resources documentation on terminations to ensure that applicable statutory requirements or union contract provisions have been followed. Check the payroll master list to confirm that all names correspond to known employees.

Payroll Time Sheets

Information concerning time and attendance must document authorizations for any overtime or schedule changes. Check to see that information contained in time and attendance sheets is accurately inputted and promptly processed during the appropriate payroll period. Look for documentation that supervisory approval of the payroll register is conducted before issuing checks. Ensure that people who calculate payroll are not the same people authorized to write and disburse checks.

Data Comparisons

If payroll checks are distributed, check processed checks for deposit information. Check further if more than one check is being deposited into the same account to ensure real employees made the transaction. If payroll is direct deposit, check the account numbers listed on direct deposit information. Ask the bank for a list of names and account numbers and compare this with the master payroll file and HR listings of known employees. Spot-check questionable identifiers on payroll against personnel files. Consider requiring employees to pick up their payroll checks in person at least once per year and require photo identification. Do not allow any payroll or HR personnel to take part in the disbursement process. Investigate any unclaimed checks.

Reconciliations

Confirm that monthly payroll accounts are reconciled and that balances are not simply being rolled forward by adding the current month's statement of activity to the previous balance to equal the current monthly balance that is shown.

Expense and Reimbursements

Have an established policy on employee expenses and reimbursements. Examine reimbursement records and verify that supporting documentation was submitted to support claims. Verify that management approval was obtained for expenses for amounts requiring prior approval and examine documentation. Identify employees who verified and processed employee expense reimbursements and confirm that these people are segregated from any check approval or disbursement duties.