The damage caused by payroll fraud and ghost employees is often catastrophic: large sums are lost, and additional spending on investigations and prosecutions is required.

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 | Conveyancers | Notaries, and an expert who has investigated many such cases.

Companies can avoid losing millions. Using methods such as monthly checks on hiring changes and annual face audits, facilitated by modern payroll platforms, they can reduce fraud risks and organically extend role-based oversight across different departments.

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 highlights several common ways that payroll fraud occurs. The best-known method is to add ghost employees, which can be fake employees who do not exist, or employees who were let go but never removed from the payroll.

The payroll administrator keeps them on the books and changes the bank account details instead. Another scheme is to find employees who are paid irregularly, pay them monthly and direct the new payments to a different bank account.

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

One issue is who has oversight: is payroll part of finance or human resources? It should be both, with finance being primarily responsible. But payroll is often left alone. As long as people are paid, nobody asks questions.

However, they should take an interest because payroll fraud can be extraordinarily damaging. According to ‘Occupational Fraud 2022: A Report to the Nations’, released by the Association of Certified Fraud Examiners (ACFE), 5% of company revenue is lost to employee-related 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,” stated Schoültz.

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. Yet, a natural distrust of payroll staff is neither healthy nor productive, and there are better ways to detect and prevent payroll fraud. The most effective method is to require employees to be physically present.

“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,” added Schoültz. “An independent annual face audit is the best way to know if there are ghost employees. It also works to check employee movements every month, to check the terminations and new hires.”

It is also crucial that finance departments take payroll oversight seriously, Schoültz noted.

“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,” Schoültz pointed out. “But payroll is a finance-driven department. It is often the company’s biggest expense, yet it’s neglected.”

Many companies have the same question: Is payroll oversight the responsibility of finance, HR, or someone else? Isolated payroll systems do not resolve such questions, whereas payroll platforms facilitate role-based permissions, allowing access to different teams.

“There are amazing capabilities in modern payroll systems, such as automated reporting, remote administration, and alert systems that inform different stakeholders,” said Sandra Crous, MD of payroll provider Deel Local Payroll. “You can expand and streamline payroll processes so that people in finance or HR have passive visibility over payroll events. 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 a little diligence can avoid such damage, Schoültz pointed out.

“People just don’t check. They don’t have the know-how because payroll is really a very underestimated department in a company. People receive their salaries, but they don’t understand how that works,” Schoültz stated. “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.”