Payroll Schemes

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Payroll Schemes

• Presented by
• Jennifer Miller
• March 26, 2003

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Payroll Schemes

• Perpetrators of these schemes produce false
  documents which cause the victim company to
  unknowingly make a fraudulent disbursement
• Payroll Schemes consist of 4 types
• Ghost Employee Schemes
• Falsified Hours Salary
• Commission Scheme
• False Worker Compensation Scheme

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Ghost Employee Scheme

• ghost employee refers to someone on the payroll
  who does not actually work for the company. (p.
  367, Occupational Fraud Abuse)
• It is not the most common scheme but does
  generate the largest losses among payroll frauds
• The ghost may be fictitious
• No accomplice needed
• The ghost may be real
• Accomplice is needed
• Spouse, girl/boyfriend, friend, co-worker

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Ghost Employee Scheme

• Four-Step process in creating a successful ghost
  employee scheme
• Add the person to the payroll
• Collect the time keeping information
• Issuing the Paycheck
• Delivery of the Paycheck

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Adding Ghosts to the Payroll

• Likely Suspects
• Person who controls the function of adding the
  new employee to the payroll
• Payroll Accounting Usually managers that have
  this opportunity because payroll is a restricted
  area and authorization is necessary

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Collecting the Time Keeping Information

• Required paperwork
• Proves fictitious employee worked over the last
  pay period
• KEY Obtaining approval of the fake timecard
• Need supervisors approval
• Forge supervisors signature, bypassing the
  supervisor completely

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Issuing the Paycheck

• The paycheck is based on the bogus information
  provided
• The payroll department prints the check
• Fraudster is not usually involved

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Delivery or Distribution of the Paycheck

• Hand delivered
• Mailed to the employee
• Directly deposited

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Falsified Hours Salary Scheme

• Whenever a paycheck is altered in a way not
  coherent with the companys policies and
  regulations
• By far the most common of the four payroll
  schemes
• Accounts for 55.4 of the payroll frauds

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Falsified Hours Salary Schemes

• Based on 2 key elements
• Hours worked
• Rate of pay
• 3 items used to procure this scheme
• Manually prepared timecards
• Automated time clocks
• Changing rate of pay

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Manually Prepared Timecards

• Employee fills out how many hours worked and gets
  an approval from the supervisor
• Forge a supervisors signature
• Collusion with their supervisor
• Rubber Stamp supervisor
• Generally lazy supervisors that dont review the
  timecard

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Automated Time Clocks Changing Rate of Pay

• Much more complicated and less frequent
• Time Clocks example A friend will clock in an
  absent worker for the days work
• Changing the rate of pay you need access to the
  payroll records

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Commission Schemes

• Commission is a form of compensation calculated
  as a percentage of the amount of transactions a
  salesperson generates
• The scheme occurs when the commission is falsely
  represented.
• Two ways to falsely represent their commissions
• Alter the amount of sales generated
• Change the of commission received

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Commission Schemes

• Three ways to Falsify Sales
• Create fictitious sales
• Alter the prices listed on sales documents
• Claiming the sales of another employee

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Workers Compensation Schemes

• When an employee fakes an injury and collects
  payments from the victim companys insurance
  carrier

• Primary victim is the insurance carrier
• Will affect premiums

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Payroll Scheme Statistics
Comparison of Median Losses
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Payroll Scheme Statistics
Comparison of Total Cases
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The Turner Case

• Background
• Payroll specialist for a non-profit Florida
  company
• Sick man with a hidden disease, he was HIV
  positive
• Disease hidden from his employers and his
  insurance company
• Not a greedy man, he needed the money for his
  medication yet he was too ashamed of his disease
  to ask for help

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The Turner Case

• Duties as a payroll specialist
• Posted time and attendance information
• Prepared payroll disbursement summaries

• Good controls by the company
• Adding and deleting employee master records done
  by another employee
• A supervisor approved all payroll disbursements
• Payroll disbursements deposited directly into the
  employees personal bank accounts

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The Turner Case

• How he did it
• Found out the user ID and password for the
  co-worker who added and deleted master employee
  records
• Used this to add ghost employees to the master
  payroll records

• How he circumvented other internal controls
• He made the employee numbers higher than average
• Avoided being caught by the payroll summary report

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The Turner Case

• Entered false wage information for the ghost
  employees
• Arranged for the paychecks to be deposited to his
  bank account
• He knew it would work because of past dealings
  with the financial institution

• Turner finally prepared his own fake payroll
  summary for the supervisors signature
• Done using different typeface
• Rubber Stamp supervisor because Turner was an
  exemplary employee

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The Turner Case

• Final Step
• Created phony file copies of the ghosts paycheck
• Printed on white paper

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The Turner Case

• Turners Demise
• An observant accountant immediately singled out a
  white copy of the paychecks
• Legitimate copies printed on yellow paper
• Considered it very suspicious and reported it
• Began investigating further and found
• Three more names in the payroll register that
  werent in the master register
• All 5 paychecks were being directly deposited
  into one bank account
• They interviewed various accounting department
  employees
• Determined Turner was acting alone

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The Turner Case Summary

• Over the course of two years Turner stole
  112,000 for his expensive medications
• Charged with embezzlement, plea bargain was
  arranged
• Turner pled guilty
• Served no jail time but was sentenced to 15 years
  probation and was ordered to pay restitution

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The Turner Case Opportunity, Pressure, Rationale

• What was Turners Opportunity?
• Being able to steal the user ID and password from
  a fellow employee
• What was Turners Pressure?
• He had HIV and needed money for his medications
• What was Turners Rationale?
• He was a sick man and was not spending the money
  on frivolous things, he was using it for his
  medication

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The Turner Case The Red Flags

• What were some of the red flags in Turners case?

• Each ghost employee contained a dead persons
  social security number
• Ghost employee ID numbers were much higher than
  the rest of the employees
• None of the ghost employees had taxes or social
  security withholdings
• The fake paycheck summaries were not created in
  the same typeface as the legitimate ones
• Multiple direct deposits were made to the same
  bank account but under different names

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Other Red Flags of Payroll Schemes

• Look for paychecks without deductions for taxes
  or social security
• Be wary of budget variations in payroll expenses
• Examine paychecks with dual endorsements
• Duplicate employees on the payroll
• Duplicate bank accounts in the payroll
• Excessive overtime
• Look for excessive holiday or vacation leave
• Double check post office box addresses, cross
  check those names with payroll lists

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Investigating Payroll Schemes

• Check payroll records for the presence of
  duplicate names, addresses and social security
  numbers
• On occasion hand deliver paychecks to employees
  and require positive identification
• Review the change of reports
• Match master information from the payroll file
  with the master personnel file
• Ensure each employees salary is between the
  maximum and minimum for their position
• Audit the accuracy of personnel records
• Reconciliation of personnel records with payroll
• Check records for any unclaimed payroll checks
• Audit all policies, practices, procedures and
  systems, looking for discrepancies
• Review entire payroll register, checking for
  unfamiliar names, unusual pay rates or hours, or
  anything else unusual

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Preventing Payroll Schemes

• Controls over input and reviews of output are
  critical controls which, when designed and
  implemented properly, can provide effective and
  inexpensive means of detecting and, through
  employees knowledge of their presence,
  preventing frauds.

http//www.audimation.com/PayrollFraud.html
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Prevention

• Do NOT make cash payments to employees
• Have employees personally know their immediate
  management
• Ensure performance reviews occur personally
• Rotate responsibility for payroll functions from
  time to time
• Have stricter control over all overtime
• Have overtime authorized before hand
• Utilize an outsider vendor for payroll handling
• Separation of duties for the different functions
  of payroll
• Ensure the payroll preparation, disbursement and
  distribution functions are segregated
• Use direct deposit for paycheck delivery
• Serially numbered payroll checks, pay envelopes,
  make sure they are all accounted for.

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Who has the first question?