Payroll fraud costs UK firms £12bn per year

HR has ‘pivotal’ role in combating employee scams, as total cost of business fraud tops £144bn

Businesses in the private sector are collectively losing a total of £144bn a year through fraud, with £12bn being lost through payroll fraud, a report has found.

The Annual Fraud Indicator 2016, conducted by the UK Fraud Costs Measurement Committee with Experian, PKF Littlejohn and the University of Portsmouth’s Centre for Counter Fraud Studies, found the annual total cost of fraud in the UK is as high as £193bn per year.

Simon Dukes, chief executive of fraud prevention organisation Cifas, said HR departments had a “pivotal” role to play in combating fraud and employees should be educated to spot potential scams. “Staff are at the frontline in protecting a business system’s integrity,” he said.

Gary Webb, from Bond Payroll Services, said every business – private and public – is susceptible to fraud. “Payroll fraud goes on quite regularly in businesses without them knowing about it,” he said. “There is high and low-level fraud going on. Low level [fraud] is things like adding on a few miles onto an expenses claim. Then there are people who are genuinely out to defraud a company, such as the ghost employee level [ie the number of people on the payroll who don’t actually work for the company in question] – where people involved in the payroll process actively seek to defraud a company.”

Webb advised implementing an audit system, both for people and systems. “From a people point of view, one of the key things is knowing your people – who is doing the payroll? [Regularly] check there are no duplicate employees or duplicate bank transfers; it is pointers like that which will give you an indication that something isn’t right.”

Dukes recommended that HR teams conduct due diligence on their employees: “HR teams are key in dealing with the issue and ensuring the fraud is reported and acted on. To avoid known fraudsters entering the workplace, we recommend HR teams conduct thorough vetting and check to ensure prospective employees have not been involved in fraud before.”

While payroll was found to be responsible for 8 per cent of losses through fraud in private businesses, the biggest source of loss related to procurement – causing annual losses of £127bn.

The report said some of the most common ways this occurs include legitimate suppliers adding unauthorised costs to invoices; legitimate suppliers colluding with staff to add additional costs to an invoice; fraudulent suppliers and staff submitting false invoices for payment; and fraudulent staff diverting legitimate payments to themselves.

“It is all about having procedures in place, and this applies to payroll and to general payments,” Webb added. “You should have two or three-tier authorisation so you can’t authorise a payment without it being checked by someone else.”

The Annual Fraud Indicator found that, in the NHS, the fraud incurred on £21.9bn of procurement expenditure is estimated to be £1.05bn, while the total loss to payroll fraud is estimated to be £0.56bn. In local government, procurement fraud losses were estimated to be £4.1bn, with payroll fraud responsible for losses of £1.1bn.

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