Many employees — from retail workers to sales staffers involved in complex business-to-business transactions — receive part of their compensation from sales-related commissions. To attract and retain top talent, some companies even allow employees to earn unlimited commissions.
Unfortunately, some commission-compensated employees may be tempted to abuse this system by falsifying sales or rates. Fraud methods vary depending on an unethical salesperson’s employer and role. But companies need to be aware of the possibility of commission fraud and take steps to prevent it.
3 Forms of Commission Fraud
Generally, commission fraud takes one of three forms:
- Invention of sales. A retail employee enters a fake purchase at the point of sale (POS) to generate a commission. Or an employee involved in selling business services creates a fraudulent sales contract.
- Overstatement of sales. Here, a worker alters internal sales reports or invoices or inflates sales captured via the company’s POS.
- Inflation of commission rates. An employee changes a company’s commission records to reflect a higher pay rate. Employees who don’t have access to such records might collude with someone who does (such as an accounting staffer) to alter compensation rates.
More sophisticated schemes can involve collusion with customers and other outside parties.
Data-Driven Approach to Detection
Regardless of the method used to commit commission fraud, these schemes create data and a document trail your business can use to detect abuse. For example, to uncover commission fraud in progress, you should regularly analyze commission expenses relative to your company’s sales. After accounting for timing differences, the volume of commission payments should correlate to sales revenue.
Also, pay close attention to the total commission paid to each employee. Focus on outliers whose commission levels are significantly higher and analyze sales activity and the associated commission rates to ensure consistency. By creating benchmarks — based on commission sales by employee type, location, and seniority — you can more easily detect fraud in subsequent periods. Randomly sampling sales associated with commissions and ensuring relevant documentation exists for each payment can be effective, too. You can contact individual customers to verify sales transactions by disguising your calls as customer satisfaction checks.
Commission schemes sometimes require cooperation with other employees and customers, which usually leaves an email trail. Consistent with your company’s policies and procedures, monitor employee email communications for evidence of wrongdoing.
Commission Fraud Prevention Processes
There are other processes your business can follow to prevent fraud from occurring in the first place. For example:
Formalize policies prohibiting it. State the consequences (for instance, termination and criminal charges) of committing commission fraud in your employee handbook. Also routinely stress your company’s commitment to detecting commission fraud and explain that management will regularly scrutinize individual payments for signs of malfeasance.
Minimize the potential for record tampering. To help prevent salespeople from accessing accounting records, rotate accounting staff assigned to recording commission payments. Segregation of all accounting duties is important to help prevent other fraud schemes from flourishing in your organization.
Set realistic sales goals. Although some employees commit fraud for personal enrichment, others cheat to meet their employer’s overly aggressive sales targets. Periodically solicit feedback from sales staff about their ability to meet objectives and pay close attention when salespeople complain or leave your company. If you encounter excessive frustration in meeting targets, make them more achievable.
Making Manipulation Difficult
When structured and managed correctly, a commission program can boost employee compensation and morale — and add to your company’s bottom line. But schemes to manipulate a company’s compensation structure often are all too simple for shady salespeople to commit. To make fraud much harder to perpetrate, you may need to step up data analysis and revamp your internal controls.
Many companies don’t have the internal resources to conduct this type of analysis and don’t know how to fix controls that aren’t working. That’s where a CPA or forensic accounting specialist can help. Contact us.