The effectiveness of payroll system in the public sector to prevent fraud
| DOI | https://doi.org/10.1108/JFC-08-2017-0075 |
| Published date | 18 June 2020 |
| Date | 18 June 2020 |
| Pages | 404-419 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Zulkarnain Yusuf,Anuar Nawawi,Ahmad Saiful Azlin Puteh Salin |
The effectiveness of payroll
system in the public sector to
prevent fraud
Zulkarnain Yusuf
Malaysian Armed Forces, Ministry of Defence, Kuala Lumpur, Malaysia
Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia, and
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy, Universiti Teknologi MARA,
Perak Branch Tapah Campus, Tapah, Malaysia
Abstract
Purpose –The purpose ofthis paper is as follows: first, to analyze the opinion of the civil servantor payroll
personnel towards the payroll system that currently used by the government. Second, to investigate the
control measures currently existin the payroll system and third, to examine any loopholes that may create
opportunitiesfor fraud to occur in that payroll system.
Design/methodology/approach –This study involves a survey of questionnaires to the department’s
personnel that act as respondents. One government department has been selected as a case study in this
research. This study was focussing on the payroll administration unit that responsible for all personnel
payrolloperation and administration.
Findings –The study concludes that payroll system has equipped with the security and control
characteristic. However, thereis still a risk of fraud due to some internal control weaknesses in the system.
Thus, the awareness about the controland security of the system should be given priority so that the staffs
will understandand aware about it.
Research limitations/implications –The study provides some evidence to indicate a weak and
ineffective control measurein the payroll system that may lead to the fraud. Thus, by detail examinationof
the problems, the prevention and corrective action can be done in combating fraud. However, this study
sufferedfrom the small number of samples and limited access to the relevant documents due to confidentiality
of the data.
Practical implications –This study reveals that there are a few key internal controlpoints that can be
enhanced to facilitatebetter protection of payroll expenses in combatingfraud in the government department.
These include clear segregation of duties, stricter approval process and highly protected personnel
information. In addition, adoptionof whistleblowing channel, established internal audit function and severe
punishmentto the wrongdoers also can be implemented.
Originality/value –This study is original as it examines fraudand malpractices issues that specificfor
payrolldepartment in the government department that rare in literature.
Keywords Malaysia, Accountability, Ethics, Governance, Integrity, Malpractices
Paper type Research paper
1. Introduction
Fraud has increased considerably over the recent yearsand this trend is likely to continue.
According to Brink and Witt (1982), fraud is a threat to the effective utilizationof resources
and it will always be an important concern of management. Globally, amount of loses
JFC
30,2
404
Journalof Financial Crime
Vol.30 No. 2, 2023
pp. 404-419
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-08-2017-0075
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
recorded due to fraud was $2.9tn from 1,822 cases reported (Association of Certified Fraud
Examiners (ACFE), 2012). One of the most popular fraud and commercial crime that
frequently faced by organizations of all types, sizes,locations and industries is occupational
fraud. Based on 2012 Global Fraud Study: report to the nation on occupational fraud and
abuse conducted by the association of certified fraud examiners,the median loss caused by
the occupational fraud cases was $140,000. More than one-fifthof these cases caused losses
of at least $1m.
This phenomenon also impacted Malaysia. KPMG Malaysia Fraud Survey Report 2009
reported that a significant numberof respondents believe that fraud is a major problem for
businesses in Malaysia. In total, 61% of respondents expect the level of fraud to increase
over the next two years. In addition, 89% believe that the trend of fraud and financial
statement fraud (78%) will significantly rise as a result of the current economic crisis
(KPMG, 2009).
While many survey and research on fraud have been conducted in private sector, not
many research pay attention to public sector which also vulnerable to fraud. Recently,
Malaysian was shocked withthe exposure of the fraud and abuse of power committed by an
executive councilor(EXCO) in one of the state in Malaysia. He with the other two people was
slapped with 33 corruption-related charges over land and property involving sum of RM
30.3m.
Wells (2005) suggest that for non-profit sector, payroll and check-tampering fraud were
the common fraud occurred. This is supportedby Greenlee et al. (2007), who also found that
payroll fraud are one of the top five major types of fraudulent disbursements in the non-
profit organizations. Based on their study, payroll fraud occurs when a payroll check is
issued based on overstated hours worked or to fictitious “ghost”employees. Beside, Moyes
and Hasan (1996) found that payroll is one of the top audit cycles associated with the
likelihood of detectingfraud during the audit of financial statements.
Based on this, it is interesting to examine thecurrent state of public sector mechanism in
preventing and combating fraud to occur. In short, this study attempts to answer the
following researchquestion:
RQ. How effective the payroll system in the government department in preventing
fraud to occur?
Specifically, there are threepurposes of this study. Firstly, to analyze the opinion of the civil
servant or payroll personnel towards the payroll system that currently used by the
government. Secondly, to investigate the control measures currently exist in the payroll
system and thirdly, to examine any loopholes that may create opportunities for fraud to
occur in that payroll system.
One government department has been selected as a case study in this research.
Malaysian public sector such as ABC Department (not a real name) also no exception and
may also exposed to occupational fraud. This study was focussing on ABC Department
payroll administration unit that responsible for all ABC Department payroll operation and
administration.
There are a few reasons why ABC Department was selected as a case in this research.
Firstly, the emoluments paymentto ABC staff was huge, contribute approximately to RM4–
RM 5bn of the federal budget. This large amount was view as an opportunityby fraudsters
to commit fraud. In general, ABC has internal control placein their organization. However,
like other organization in the private sector and public listed companies, the established
internal control may not enough to prevent fraud and abuse of power. This is simply
because the policies and procedures that havebeen implemented were omitted by the staffs
Payroll system
in the public
sector
405
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