Many workers receive at least part of their compensation from sales-related commissions—and some companies even allow for unlimited commissions in order to attract and retain the best talent.
However, it’s an unfortunate fact that some employees abuse this system by falsifying sales or rates in order to receive higher compensation. Although the specific methods of fraud vary depending on the salesperson’s specific industry and role, it’s important for companies to take the possibility of commission fraud into account—and to take steps to prevent it.
Commission fraud: three common forms
Commission fraud usually takes one of the following three forms:
1. Invented sales
This form of fraud occurs when a retail employee generates a commission by entering a fake purchase at the point of sale (POS). In some cases, employees who are involved in selling business services may also create fraudulent sales contracts.
2. Overstated sales
Workers may also commit fraud by altering internal invoices or sales reports or by inflating sales captured through the company’s POS.
3. Inflated commission rates
A company’s commission records may also be changed to reflect a higher rate of pay. This form of fraud may be used by employees who have access to such records, but employees who don’t have access can also collude with someone who does—including accounting staffers—to alter compensation rates.
Employees may also pursue more sophisticated schemes by colluding with customers or other outside parties.
Using data to detect fraud
Regardless of which method an employee uses, commission fraud schemes create a data and document trail that companies can use to detect fraudulent activity. For instance, conducting a regular analysis of your company’s commission expenses relative to sales can help you discover commission fraud in progress. Once timing differences have been accounted for, there should be a close correlation between the volume of commission payments and your sales revenue.
You should also make regular inspections of the total commission paid to each of your employees. If you have employees whose commission levels are significantly higher than average, it’s a good idea to analyze their sales activity and the associated commission rates to verify that the records are consistent. You can also create commission sales benchmarks organized by employee type, location, and seniority. These benchmarks will make it easier for your company to identify fraud in subsequent periods.
Another method for spotting commission fraud is to randomly sample sales associated with commissions to ensure that you have the relevant documentation for each payment. By disguising your calls as customer satisfaction checks, you can also contact individual customers in order to verify sales transactions.
Some commission schemes also rely on cooperation between multiple employees or between employees and customers—these fraud attempts usually leave a trail of email correspondence. Within the bounds of your company’s policies and procedures, you may be able to identify these forms of fraud by monitoring your employees’ email communications.
Additional fraud-prevention processes
Your business can also implement certain processes to prevent fraud before it occurs in the first place. All of the following may help your company stop commission fraud before it happens:
Formalizing commission fraud policies
In your employee handbook, clearly state the consequences—such as termination or criminal charges—of committing commission fraud. It’s also important to routinely emphasize the measures your company takes to detect commission fraud, such as regularly scrutinizing individual payments for evidence of malfeasance.
Minimizing the possibility of record tampering
Rotating the accounting staff assigned to record commission statements can help prevent your salespeople from accessing accounting records. Segregating all accounting duties will also make it more difficult for fraud schemes to come to fruition within your organization.
Setting achievable sales goals
While many employees commit fraud for personal gain, it’s not uncommon for employees to inflate or falsify sales in order to meet unrealistic sales targets. It’s a good idea to regularly ask your sales staff whether they’re able to meet objectives. You’ll also want to pay close attention when salespeople express frustration or choose to leave your company. If unrealistic sales targets are a common complainant, your company may need to adjust them.
Making fraud more difficult
Commission programs are a great way to boost your company’s bottom line while improving employee compensation and morale—but without the right policies in place, it can be all too easy for dishonest employees to take advantage of these systems. In order to make fraud as difficult as possible, your company may need to increase data analysis or reassess internal controls.
However, many companies find that they don’t have the knowledge or resources to implement these changes—and a CPA or forensic accounting specialist may be able to help. Contact us to get started.