Cybercriminals seek out payroll vulnerabilities and businesses that fail to act quickly leave themselves susceptible to cyberattacks. Protecting sensitive data has never been more critical and requires awareness, vigilance and the right safeguards in place.

As part of an ongoing blog series, “Fraud, Cyber & Security Smarts” and in recognition of National Payroll Week, we asked isolved’s Head of Fraud Prevention Steve Lenderman to provide insights on payroll fraud and threats. His responses highlight common payroll fraud methods and other threats, as well as steps you can take to protect your organization.

Q.        What are the most common ways payroll fraud occurs in businesses today?

Payroll diversion via phishing and pharming is the most common type of payroll fraud, followed by compromised emails and social engineering of administrators. 

Q.        What specific cyber threats are payroll systems most vulnerable to right now?

The continued reliance on passwords, especially in payroll systems, is one of the most significant vulnerabilities facing any industry today. Passwords are outdated, inherently insecure and easily exploited, opening the door to a wide range of attack vectors including phishing, credential stuffing and business email compromise.

Q.        What red flags should business owners watch for that could indicate payroll manipulation or “ghost employees” (fictitious entities or non-working individuals on payroll, typically with intentions to illicitly withdraw funds)?

Common red flags indicating payroll manipulation or ghost employees include:

• Increases in total payroll amounts
• Missing tax liabilities on employees
• Adding new employees or 1099 contractors who are paid immediately without standard onboarding
• Multiple employees added in a single pay period or with identical bank routing number
• Duplicate names, addresses, Social Security numbers (SSNs) or bank details in payroll record

Q.        What red flags should business owners watch for that could indicate payroll-related phishing or business email compromise (BEC)?

Common red flags indicating payroll-related phishing or BEC include:

• Excessive logins
• Unusual logins both day and time
• Missing emails, new rules or auto-forwards

Q.        What access controls, policies or approval workflows do you recommend for making payroll changes securely?

Recommendations for making payroll changes securely include:

• Using a computer that is only dedicated to financial transactions
• Using organizational email rather than emails like Gmail, Outlook, etc.
• Migrating to passkeys instead of passwords. Passkeys provide a secure way to confirm a user’s identity by linking the login process to both the device and the application or website being accessed. Unlike traditional passwords, passkeys use built-in authentication methods such as facial recognition, fingerprint scans or a personal identification number (PIN). Access is only granted when the credentials stored on the device align with those recognized by the app or site, ensuring both sides of the “key” match before entry is approved.

Q.        What should an incident response plan for a payroll-related data breach include?

Here are some important phases of a payroll-related data breach that should be addressed in an incident response plan:

Preparation Phase

1. Define roles and responsibilities across departments: fraud, cyber, product, support and executive leadership.
2. Establish secure communication channels (e.g., Teams war rooms, escalation protocols), as well as a crisis communications plan to confirm all necessary stakeholders are notified promptly and proper processes are followed.
3. Conduct tabletop exercises quarterly to simulate breach scenarios.

Identification Phase

1. Monitor for signs of compromise such as login anomalies, unauthorized direct deposit changes or credential misuse.
2. Use audit trails and fraud detection tools to flag suspicious activity.

Containment Phase

1. Immediately isolate affected systems or accounts to prevent further damage.
2. Disconnect compromised endpoints and preserve forensic evidence.
3. Reset credentials and enforce passkey or multi-factor authorization (MFA) upgrades.

Response Phase

1. Small businesses should designate a Rapid Response Team—a small group of trusted individuals who can act quickly when a breach or suspicious incident occurs.
2. Notify internal stakeholders and affected clients with clear, timely communication.
3. Engage IT and fraud teams for root cause analysis and remediation.

Recovery Phase

1. Restore systems and validate data integrity.
2. Confirm that vulnerabilities have been patched and access controls updated. 
3. Re-enable services only after thorough testing and approval from incident commanders. 

Follow-Up Phase

1. Conduct a post-incident review to assess response effectiveness and identify gaps. 
2. Update the incident response plan and training protocols based on lessons learned. 
3. Document all actions taken and submit a formal incident report to the Chief Information Security Officer (CISO) or designated authority.

Q.        How can companies balance trust in employees with necessary controls to prevent internal payroll fraud?

To help companies foster a workplace of trust and collaboration to prevent internal payroll fraud, here are some considerations:

1. Build a Culture of Integrity: Trust begins with culture. Companies should foster transparency, accountability and open communication, making it clear that controls are not about distrust; they’re about protecting everyone.
2. Implement Segregation of Duties: One of the most effective controls is ensuring no single employee has end-to-end control over payroll. For example, the person who enters payroll data should not be the one who approves it.
3. Use Role-Based Access and Audit Trails: Limit access to payroll systems based on job roles. Audit logs should track every change, and alerts should flag anomalies like off-cycle payrolls or sudden bonuses.
4. Conduct Regular Risk Assessments and Audits: Companies should continuously evaluate fraud risks and update controls accordingly. Regular payroll audits, especially by independent teams, help detect discrepancies early and reinforce accountability.
5. Empower Employees Through Training: Routine training helps employees recognize red flags and understand their role in safeguarding payroll integrity.
6. Use Technology to Automate and Monitor: Automated systems reduce human error and provide real-time monitoring. These tools allow companies to maintain trust while quietly enforcing strong controls.
7. Encourage Whistleblower Reporting: Anonymous reporting mechanisms allow employees to raise concerns without fear of retaliation. 

Q.        What role does segregation of duties play in reducing payroll fraud risk?

Segregation of duties plays a critical role. Most fraud stems from human error and the best way to prevent those types of errors is installing another individual to identify, report and prevent future fraud attempts. The more individual checkpoints, or segregation of duties, the stronger the fraud prevention.

Q.        What’s the most effective way to ensure terminated employees lose payroll system access immediately?

A few ways to effectively protect payroll systems from terminated employees include:

• Automated offboarding workflow
• Real-time credential deactivation
• Centralized identity management

Q.        How can employers ensure that payroll data is secure when working with third-party payroll providers?

Some areas to explore in vetting third-party payroll providers include:

• Adopt a zero-trust security framework requiring identity verification for each user and each device attempting to access data
• Enforce role-based access control (RBAC)
• Data encryption and secure application programming interfaces (APIs)
• Audit trails and workflow approvals
• Third-party vetting and compliance
• Multi-factor authentication (MFA)

Q.        What best practices should be followed when payroll data is accessed remotely or from mobile devices?

The two recommended best practices for remotely accessed payroll data are:

• Using a virtual private network (VPN)
• Using an authenticator app, passkeys or fast identity online (FIDO) keys

Q.        How often should payroll and HR staff receive security awareness training?

Staff should receive monthly communication with quarterly security awareness training.

Q.        What’s your recommendation for how often businesses should audit payroll records for anomalies?

I would recommend businesses audit payroll records every month by different people.

Q:        How can small/medium-sized businesses with fewer resources stay ahead of payroll fraud?

Even basic payroll software can flag anomalies like duplicate entries, unusual overtime or mismatched bank details.

Look for platforms that:

• Require MFA
• Track changes to payroll records
• Integrate time-tracking and approval workflows

Run regular audits, paying particular attention to:

• Payroll vs. employee rosters
• Bank account overlaps
• Unusual payment patterns
• Manual adjustments or overrides

Separate duties as follows:

• A designated individual handles payroll entry
• A designated individual reviews and approves
• A designated individual reconciles bank statements

Lastly, train your team. Fraud prevention is a team sport and requires practice in identifying, reporting and understanding the policies. Important items to teach your employees include spotting phishing attempts, reporting anomalies and understanding payroll policies and procedures.

Q.        How can business owners stay informed about new and emerging payroll fraud tactics?

Business owners can stay informed about new and emerging payroll fraud tactics by follow isolved on LinkedIn and checking out the isolved Trust Center.

Q.        What are the best ways for businesses to stay proactive in preventing payroll fraud?

Prevention is paramount. While it comes with a cost, that investment is far less than the financial loss, operational disruption, reputational damage and frustration that a single fraud incident can cause.

The first step in preventing payroll fraud is building a culture of integrity and diligence supported by appropriate training, tools and processes in place. By teaching employees to identify and report payroll-related threats, you create a powerful defense against costly attacks.

To stay in the know about the latest fraud, cyber and security trends, connect with fellow human resources (HR), payroll, benefits and talent professionals in the isolved People Heroes Community.

_{Disclaimer. The information provided herein is for general informational purposes only and is not intended to be legal, investment or tax advice. It is not a substitute for professional legal, investment or tax advice, and you should not rely on it as such. No attorney-client or accountant-client relationship or any other kind of relationship is formed by any use of this information. The effective date of various provisions, amendments, and regulatory guidance may impact eligibility. The accuracy, completeness, correctness or adequacy of the information is not guaranteed, and isolved assumes no responsibility or liability for any errors or omissions in the content. You should consult with an attorney, investment professional or tax professional for advice regarding your specific situation.} 

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