Payroll fraud

Tampering with pay cheques, timesheets, or CVs, creating ghost workers, and other illicit practices

Risk type: Practice

Risk driver: Internal

DESCRIPTION

Large amounts of money flow through an organization’s payroll account. If no control mechanisms are in place, the potential for fraud is very high. Employees can make use of payroll schemes by manipulating the amount on their pay cheque or reproducing the cheque to cash it more than once. Another concern for organizations is their employees who work in the payroll department. If there are no controls in place, these employees can not only inflate their cheques but also grant (or ‘sell’) bonuses and extra vacation time. One method of theft in the payroll department involves creating a ‘ghost’ employee on the payroll. This ‘ghost’ does not exist, or is a relative or friend who does not work with the organization, but receives a salary.¹

Payroll manipulation is common where pay is calculated on any quantitative basis, like time or piecemeal work. The fraud does not need to be hidden as the payments are recorded as legitimate expenses. Verification is often overlooked when more senior employees are submitting claims and it is less likely that the claim will be questioned by a junior employee. The most common forms of the fraud are: falsifying time sheets to increase the hours ‘worked’; having someone else clock you in and out when you are not there; or simply waiting around before clocking off, to increase the recorded hours ‘worked’. If there is no time logging system, employees may work only part time but be paid full time. Other illicit practices include falsifying the type of work done to be paid a higher rate and falsifying qualifications to be placed on a higher wage rate.²

RED FLAGS

Red flags for falsified time sheets:

• Similar employee names entering and leaving the system at about the same time
• More than one employee’s hours increasing for no apparent reason
• Employees doing overtime for no apparent reason and with no apparent result

Red flags for ghost employees:

• Employee files that have missing personnel file information
• A number of employees with the same mailing address, or using post office boxes as mailing addresses
• More than one employee using the same bank account for the deposit of wages
• Employees with no withholding taxes, insurance, or other normal deductions

KEY GUIDING DOCUMENTS

Murphy, P., no year, Employee Theft, Business Practical Knowledge, http://businesspracticalknowledge.wordpress.com/legal-security/employee-theft/, accessed 15.10.2015

Finlay, J., 2010, Payroll Frauds, Worrells Solvency and Forensic Accountants

GENERAL EXAMPLES

Ghost workers³

Location: USA

The Australian Institute of Criminology (AIC) cites an example of a 1970’s case in the United States in which an employee of a welfare department stole US $2.75 million over a nine-month period by entering data about non-existent employees into the department’s computerised payroll system. He then intercepted the salary cheques sent to the “phantom” employees and fraudulently endorsed them to himself.

Timesheet fraud³

Location: n.a.

In 2008, an ICAC investigation revealed evidence of extensive payroll fraud in a large public sector agency in the form of false timesheet entries and travel claims. In one instance, a work gang claimed payment for the period 8 pm to 6 am, despite all having left the site at 12.30 am. One employee dishonestly obtained at least $33,430 in a 15 month period by overstating the hours he worked. Another employee submitted fabricated accommodation receipts for himself and his work team to the value of approximately $50,000 over three years. He believed that these receipts were never checked by anyone and would not be detected. Payroll officers did sometimes detect timesheet irregularities but when they refused to process questionable claims, they were berated by employees and managers.

FULL REFERENCES

1. Murphy, P., no year, Employee Theft, Business Practical Knowledge, http://businesspracticalknowledge.wordpress.com/legal-security/employee-theft/, accessed 15.10.2015
2. Finlay, J., 2010, Payroll Frauds, Worrells Solvency and Forensic Accountants
3. ICAC, no year, Payroll, Independent Commission Against Corruption New South Wales (ICAC), http://www.icac.nsw.gov.au/preventing-corruption/knowing-your-risks/payroll/4906, accessed 11.11.2015