Payroll Schemes | Atlanta Payroll Fraud Auditor
She was divorced, struggling and supporting an adult son. The male business owner at the small company she worked for had given her a job. At times he gifted her money, as she would run personal errands for him. The relationship was personal, but not romantic. After her confession to us, she stated because the owner had given her money in the past, it made it easier for her to commit payroll fraud. How did she do it? She was in charge of entering payroll (including her own) and simply paid herself bonuses she wasn’t due. There were no checks or balances. How did the owner discover the fraud? Like so often…by accident.
Reportedly about 1 out of every 4 organizations has experienced payroll fraud, but the actual numbers are likely higher. This is nothing new but the hits just keep on coming. Simple schemes involve an employee falsifying a time sheet or one co-worker clocks another one in. More costly frauds involve a payroll manager who has direct access to input salary, bonuses and set up new employees. If you’re a small business, pay close attention. While different types of payroll frauds exist, let’s primarily focus on two of the more common and catastrophic methods, again normally executed by a dishonest payroll manager –
Add-On Salary & Hourly Rates | Bonus Schemes
In this payroll scheme, additional money is added to the employee’s paycheck. Like many frauds it usually starts out slowly. There may be a number of pay periods between the initial fraud and the next attempt. The fraudster takes a pause to see if they will be detected. It’s normal for the fraudster to factor in withholdings. Suppose they want to pocket an extra $500.00 per payroll period. Perhaps $530.25 or some similar adjustment (hourly rate / salaried amount) may be entered into the payroll system (to account for taxes, etc.), so $500.00 is the net amount received. Other add-ons may include simply an unauthorized increase of an hourly rate or salaried amount. In these examples, after the unauthorized increases are made, the fraudster often adjusts the payroll system back to their true salary / hourly rate.
The paid bonus scheme is popular. They are usually executed on the organization’s legitimate payout time schedule. The dishonest employee may not be eligible for any bonus at all, but they pay themselves one. It could be in the amount identical to that of a legitimate earner. If they are eligible for a bonus, but did not earn one, they may take an amount equal to that of the most common earner (to avoid detection), or the highest legitimate earner. Or, just add-on unauthorized amounts without any real thought, as offenders can differ.
This is an entry into the payroll system of a non-existent employee of the organization. The “employee” may be a real or fake person. If it’s a real person, it’s normally a family member or friend. The fraudster may avoid using a real person not connected to the scheme, for fear of detection; however, it can and does happen. At times, when the ghost employee is set up, no income taxes may be withheld. Data analytics can be used to scan for employees who have no or little withholdings.
We’ve been critical of payroll companies due to their lack of concern and ownership when payroll fraud occurs. They may become distant for fear of litigation. In their defense, the payroll company may have been pro-active in attempting to provide reports to different members of an organization. Many small business owners avoid examining the payroll reports, or assign responsibility to the offending manager, thus, no segregation of duties exist. In larger organizations, oversight may rest with department managers, who fail to adequately perform reviews or reconciliation. Work with your payroll company to maximize controls and receive alerts for suspicious activity.
Other Payroll Schemes
It’s also common for a manager to collude with a subordinate, approve illicit earnings and split the difference. This is good time to mention the importance of awareness regarding workplace romances. Terminated employees may be kept on the payroll, their checks processed, endorsed and cashed. While direct deposit helps reduce this, most systems permit the issuance of a paper check.
Atlanta Payroll Fraud Auditor
Payroll schemes are especially nasty, tend to creep up on a business and go undetected longer vs. other occupational frauds. Fraud prevention methods should include a segregation of duties, account reconciliation, automation, random audits, analytics, cross checks, dual approvals for the addition of employees, etc.
We assisted a business in a particular troubling matter. Their manager had total control over all the finances with unbridled trust. She paid herself money she wasn’t due, plus added ghost employees to the payroll. She was only discovered after an outside consultant to the business began making inquiries, but not before over $1M was embezzled. Had the scheme gone on for another year, the business would have been forced to file for bankruptcy or take on significant debt just to recover.
While we are driven to provide education and fraud prevention, this is a rarity of where we won’t reveal all the methods of payroll fraud in a written article. Consider a 3rd party to conduct your payroll fraud audit. They often bring a unique perspective to the process. Did we mention how nasty these are?