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Criminals Target Accounting Professionals for Payroll Fraud

How You Can Protect Yourself

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One kind of payroll fraud hits practitioners and is up 200 percent, says Mike Magness, Intuit's manager for Small Business Payroll Risk. Here he sets out the nine questions you can ask to protect yourself from becoming the next victim.

Part of my job at Intuit is tracking trends in a certain kind of payroll fraud that targets accounting professionals. Unfortunately, the criminals are busier than ever.

Over the last year we've seen a 200 percent increase in this payroll fraud. Even the rate of growth in the fraud is increasing. A year ago this time, this kind of payroll fraud was also on the rise, but had only risen 50 percent.

In this kind of one-time fraud, criminals pose as legitmate companies, pull out payroll checks, and then disappear.

Good News
There is some good news, too. First, we are able to stop over 98 percent of the fraud attempted. Second, there is a lot you can do to protect yourself from becoming embroiled in such fraud, simply by taking a few precautions.

Protect against Fraud with Nine Key Questions

Here are nine questions you can use as a kind of checklist to identify these flags of potential fraud when you are setting up a new payroll client.

1. Did the client send over a temporary or bank counter check? Does the check look like it has been altered?

Bank counter checks are issued when an account has just been opened up. You can tell that it is a temporary check because the name, address, and phone number are handwritten in the upper left-hand corner of the check.

2. Did the client provide a personal check instead of a business check to set up their account?

Another red flag is raised when new clients use a personal check instead of a business check to have their account set up. Most legitimate business will separate personal accounts from business accounts.

3. Does the payroll being run match the type of business the client has?

It is unusual when a small business wants to pay several employees large sums of money. For example, a lawn care service paying each employee $7,500 a week is highly unusual.

4. Is the client overly persistent in getting their account set up?

Many business owners are in a hurry, but that is no reason to run payroll before the account is completely set up.

5. Has the client just started the account and wants a "special" payroll run?

Look for "special" payroll runs. If a client sets up an account and then calls a couple of days later and wants to run a "special payroll" to pay a few employees a "bonus," this should also be reason for caution.

6. Is the client using a generic email address from a free service provider?

Just because a client has a free email account with Yahoo, Hotmail, or Google, it doesn't necessarily mean that fraud is involved. However, if such an account occurs with some of the other indicators shown, it is wise to be wary. Very little is required in the way of identity or security to set up most free accounts.

7. Does the person setting up payroll only want to do business over the phone?

If the person you have been dealing with refuses to meet in person or seems to be hard to get a hold of, this could be a flag that something might be wrong.

8. Is the client a brand new business or currently applying for an EIN (Employer Identification Number)?

If yes, this means that the company has no prior tax information.

9. Does the new client use pay cards or pre-paid debit cards to pay a large number of employees?

This practice too is often used by criminals looking to scam the system.

Nature of the Scam

This scam takes several forms, and to avoid training future scamsters, we won't be going into more detail here on how the scam is perpetrated. But in general, criminals try to quickly set up a payroll account for a bogus company - and then cash payroll checks while funds are still being floated. They work fast to pull the cash out, before the lack of sufficient funds to cover the payroll is discovered. And then they disapper.

Awareness the Best Protection from Scamsters

Accountants who assist in such scams are potentially liable. Awareness is the best protection from such scamsters. That's why using your common sense - and keeping in mind the nine questions above - can save you from a lot of headaches. No practitioner benefits from bogus clients.

Editor's Note: We ran an earlier version of this article about this time last year. The rise in frauds prompted us to update the article now to make sure more practitioners are equipped to protect themselves.

Michael Magness is Manager of the Small Business Payroll Risk Management group at Intuit. As part of his job he identifies emerging payroll fraud and looks at ways to minimize risk for payroll practitioners.

Last Updated: 09/10/2008