What is payroll fraud?

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It’s an unpalatable fact, but payroll fraud is on the rise. To protect your business, you should put measures in place to prevent it happening to you.


MANY CONSTRUCTION BUSINESSES run small admin teams, perhaps only 1–2 people in the office with the rest of the team out on site. While this makes for a minimal overhead wage bill, it also means that sometimes there is not enough oversight of trusted employees.

Fraud is on the rise

In recent years, there has been an unfortunate marked increase in payroll-related theft and fraud across New Zealand.

A recent example was seen at Te Papa Museum of New Zealand where an employee defrauded the museum of more than $120,000. This was achieved by falsifying data for more than 100 casual staff timesheets over more than a year.

The employee then diverted the payments into their own accounts and altered casual employees’ details, including their email address, so they would not receive the fraudulent payslips.

While small, incremental thefts over a period of time can still result in significant financial loss. It’s not clear why fraud has increased in recent times. Perhaps it has become easier due to electronic processing and less segregation of duties, or possibly more minor frauds have been identified due to better controls and oversight.

During the 2019 year, the Serious Fraud Office of New Zealand had 36 defendants appear before the courts, including appeals, with a total of $1.6 million in alleged value. Although none of these cases was directly related to payroll fraud, a large number were committed by employees of the affected business.

What is payroll fraud?

Payroll fraud occurs when the payroll process system is manipulated by employees. It can be difficult to detect early on as the amounts involved may be minimal at first. However, it often escalates over time if it is not detected so it is crucial that entities consider ways to prevent such instances from occurring.

Payroll fraud committed in many ways

There are many different ways in which payroll fraud can happen. Here are some common examples:

  • Creating fake or ghost employees – employees who do not exist are created in the payroll system or employees that did exist but no longer work for the company are intentionally left on the payroll.
  • Unauthorised hours – collusion between a payroll administrator and employee resulting in increased unauthorised employee hours.
  • Pay rate changes – making unauthorised pay rate changes.
  • Buddy punching – employees getting their co-workers to clock in for them even though they have not worked.

Reducing the risk of payroll fraud

There is no single way to reduce payroll fraud. Due to the multitude of ways it is possible to manipulate the system, it’s best to take a multi-faceted response approach.

These are some suggested forms of effective oversight:

  • Manager or supervisor approval of all timecards or timesheets, including all overtime.
  • Mandatory leave for those with payroll responsibilities with another employee performing this function in their absence. The fraud at Te Papa was discovered after discrepancies were noticed by another employee while the employee responsible was on leave.
  • Executive approval of all payroll reports and bonus-type compensation, including commission.
  • Restricting the ability to modify wage rates and add employees within the system, with access controls periodically reviewed.
  • Conducting periodic payroll audits and reviews of internal controls.
  • Use of exception reports and technology.
  • Implementation of a whistle-blower policy.
  • In-person and verbal confirmation of underlying payroll data such as bank account details.


This is an overview and is not a substitute for obtaining advice before making decisions. Contact your advisor or Baker Tilly Staples Rodway.

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