Final answer:
To mitigate payroll fraud risks, businesses should carry out regular audits, segregate payroll duties, require management approval for payroll changes, enforce minimum level security access controls, and use verified timekeeping systems.
Step-by-step explanation:
The risks for payroll fraud in a payroll system include ghost employees, falsified wages and hours, and misclassification of employees. To reduce these risks, a business should implement controls such as:
- Conducting regular audits and reconciliations of payroll records.
- Segregating duties among staff to prevent any single person from having control over all aspects of payroll processing.
- Requiring management approval for any changes to payroll, including new hires and salary adjustments.
- Utilizing a minimum level of security with access controls to payroll systems to prevent unauthorized changes.
- Implementing timekeeping systems that require employee verification to prevent buddy punching or inflated hours.
Similar to how insurance companies reduce moral hazard by offering lower rates for businesses with a top-level security and fire sprinkler systems, these controls help ensure that a business’s payroll system is protected against fraudulent activity.