by Jim Marasco, CPA, CFE, CIA
Director, Corporate Services
StoneBridge Business Partners

Reprinted with permission from Fraud Matters Newsletter of CPA America.

In any kind of business that issues payroll checks to employees, the possibility of payroll fraud exists. There are various ways payroll fraud can be perpetrated. The Association of Certified Fraud Examiners 2006 Report to the Nation on Occupational Fraud and Abuse refers to payroll fraud as “any scheme in which an employee causes his or her employer to issue a payment by making false claims for compensation.”

Falsified Wages

How It's Done

Falsified wages involves employees claiming compensation for hours not worked or falsifying their timesheets or timecards in some fashion.

Accounting or payroll personnel with access to the payroll system can manipulate the rates of pay or the hours worked. They may even have the opportunity to pay themselves bonuses when none are warranted. By falsifying their wages, employees have the opportunity to pilfer from an organization and personally profit.

Safeguards To Prevent It

• Sophisticated time clocks or systems that require a unique employee pass code to be entered when clocking in.
• Manager or supervisor approval of all timecards or timesheets, including all overtime.
• Executive approval of all bonus-type compensation.
• Mandatory vacations for those with payroll responsibilities with another employee performing this function in their absence.
• Executive approval of all paychecks.
• The ability to modify wage rates, add employees, etc.,within the system should be restricted to only those necessary. These individuals should have their records periodically reviewed.

Commission Schemes

How It's Done

Commission schemes are most likely committed by sales employees. They can exploit weaknesses in your commission policies.

For example, if commissions are paid on sales and not adjusted for credits, sales with subsequent credits may start appearing. Commissions may be paid at the time of sale versus when payment is made. You may find your receivables and bad debts increasing. Similar to falsified wages, commission schemes directly benefit employees by inappropriately increasing their wages.

Safeguards To Prevent It

• Periodically review your commission policy to determine if it has changed to reflect changes in your business. For example, do you continue to compensate a percentage of revenue when your gross profit has weakened?
• Are you recovering commissions overpaid to employees or paid for cancelled sales?
• Review financial correlations. Are sales commissions increasing when sales are dropping?
• Closely audit some of your top performers. Are their commissions justified, or are weaknesses in the policy being exploited?

Workers’ Compensation

How It's Done

Workers’ compensation fraud can affect all types of industries. Employees can fake neck, back or bone/joint problems to bilk their employer and insurance company out of thousands of dollars. Some organizations are self-insured, so this type of fraud directly affects them, while others find their premiums rising as a result of this activity.

Employees have been found to act in collusion, perpetrating “slip and fall” accidents at work. They might become injured at home, but falsely claim that the injury occurred at work to qualify for the more lucrative benefits offered by workers’ compensation. Unfortunately, the employer is the victim.

Safeguards To Prevent It

• Maintain cameras in your workplace to capture accidents.
• Insist that injuries are reported promptly.
• Receive concurring medical opinions for certain injuries.
• Consider retaining private investigators to monitor employee actions while out on paid leave.

Ghost Employees

How It's Done

This type of payroll fraud occurs when nonexistent employees are added to the payroll and another employee benefits by receiving their wages.

Ghost employees may never have existed, or they may no longer be current employees of the organization, but are intentionally left on the payroll. This fraud is typically more prevalent in larger organizations with large numbers of employees and weak internal controls.

Safeguards To Prevent It

• Conduct periodic payroll audits in which all employees have to physically sign and show proper identification to receive their paycheck or pay stubs.
• Cross-reference the payroll roster for duplicate addresses or Social Security numbers.
• Investigate all returned W-2 forms.
• Verify Social Security numbers with the Social Security Administration.
• Randomly inspect your payroll database for employees with P.O. boxes or those with no deductions (i.e., healthcare, state/fed withholdings).
• Require direct mailing of checks or have management distribute them physically to employees.

If you suspect payroll fraud within your organization or need help safeguarding against it, please call one of our professionals. – James Marasco, CPA, CIA, CFE

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