Fraud: motive, opportunity and ability

16th January 2015 by Fiona Hotston Moore

More than a quarter of businesses are subject to payroll fraud, and it is twice as likely in small organisations. These figures should be sobering, as a typical fraud adds about six percent to payroll costs.

But the better news is that it can often be spotted before becoming a severe problem, although identification requires an often-lacking professional scepticism from managers and owners.

For example, consider an employee working long, antisocial hours without extra pay. Selfless professionalism? It is certainly good to believe so, but surely a rare enough virtue to raise eyebrows. Anyone being a ‘professional sceptic’ will at least give that employee some thought.

In my experience, fraud is carried out typically by a trusted, hardworking, loyal employee, who statistics demonstrates is usually male.

A key aid to working out who it might be is the ‘fraud triangle’ that people sent into firms to track down a problem use when they begin their hunt: motive, opportunity and ability are its three corners.

Somebody needs all three to undertake systematic fraud, which is generally what it will be for someone focused on the payroll. They usually get away with it for 36 months.

The most common type of payroll fraud creates ghost employees or tinkers with timecards to pay extra hours, bonuses and sales incentives.

There are other signs too. Most fraud is not the work of a criminal mastermind, but of greedy, sometimes desperate, opportunists. So changes in an employee’s behaviour, typically becoming evasive or defensive, can be a clue. Unusual personal purchases are also revealing.

Taking the fraud triangle as a guide it is obviously hard to identify a motive. Who can truly know the circumstances or habits of all their employees? Some people defraud just because they can.

But it is possible to close off the other two sides, by reducing the opportunity and ability to carry out a fraud undetected.

The first step is a robust risk assessment to identify where the weaknesses are likely to be in your organisation. The end result should always include introducing a whistleblower system. This must be robust enough to allow employees and others to feel secure that they can report suspicions in confidence.

At a practical level, split the inputting of data from the reviewing of it between different people. For smaller companies an external pair of eyes is better protection against the small risk of collusion; a good practice regardless of company size.

Managers must be made responsible for reviewing their section payrolls against staffing levels, work practices and own knowledge.

Ideally, human resources and payroll software systems will be integrated. HR departments must be made responsible for checking all additions and deletions from payroll and headcount.

This should deal with a typical payroll fraud: an employee leaves, but is not removed from the payroll and the bank account details are changed to those of the perpetrator. Clearly, not something that requires a mastermind to work out, but it does require opportunity. A quick check to look for two or more employees being paid into the same bank account is time well spent.

The clocking-in scam involving fake inputs is now dealt with by, for example, fingerprint tip identification systems.

Common sense and oversight are the key. One case of fraud I came across involved a financial controller forging the managing director’s signature. The finance director, who had oversight, simply assumed that as the check had been ‘correctly’ signed, no further scrutiny was required.

Fraud may not usually be clever, but it is often not as stupid as the people whose negligence allows it to occur.


Fiona Hotston Moore

Fiona Hotston Moore

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