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Chapter 8: Payroll and Expense Reimbursement Schemes

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Chapter 8: Payroll and Expense Reimbursement Schemes Payroll Schemes What is Payroll Fraud? Employee fraudulently generates overcompensation on his/her own behalf ... – PowerPoint PPT presentation

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Title: Chapter 8: Payroll and Expense Reimbursement Schemes


1
Chapter 8 Payroll and Expense Reimbursement
Schemes
2
Payroll Schemes
3
What is Payroll Fraud?
  • Employee fraudulently generates overcompensation
    on his/her own behalf
  • Three common schemes
  • Ghost employees
  • Falsified hours and salary
  • Commission schemes

4
Payroll Schemes
  • Payroll frauds make up 17 of fraudulent
    disbursements 8 of all occupational fraud
    cases.
  • 121 payroll frauds were reported, with a median
    loss of 50,000.

5
Payroll Fraud Breakdown of Cases
  • 121 payroll fraud cases were reported in the 1993
    study. Over half of these involved the
    falsification of hours worked or pay rate.
  • Ghost employee scams made up approximately 10.

6
Payroll Fraud - Median Losses
7
Ghost Employee Schemes
  • Ghost employee someone on the company payroll
    who does not actually work for the company
  • Four steps to ghost employee scheme
  • Add ghost to payroll
  • Document time worked
  • Issue paycheck
  • Deliver paycheck

8
Ghost Employee Schemes
  • Adding the ghost to the payroll
  • Perp either has hiring authority or access to
    payroll records
  • Common methods
  • Add completely fictitious person
  • Leave former employee on payroll
  • Add relative or friend of current employee

9
Ghost Employee Schemes
  • Documenting time worked
  • Only required for hourly employees
  • Time must be calculated and approved
  • Perp usually has authority to approve timecard
  • Approval can also be forged
  • Once timecard approved, paycheck issued

10
Ghost Employee Schemes
  • Delivery of paycheck
  • On-site delivery of paychecks perp physically
    misappropriates check
  • Checks mailed perp uses home address or mail
    drop for ghost
  • Direct deposit perp uses own account or shell
    account to collect deposits
  • If ghost is an accomplice, checks delivered
    directly to ghost

11
Ghost Employee Schemes - Countermeasures
  • Separate hiring function from other payroll
    duties
  • Maintain personnel records independently of
    payroll, and periodically compare the two
  • Look for employees with no ssn, withholding
    taxes, or other deductions from paychecks
  • Periodically check for employees with same
    address, ssn, bank account, etc.

12
Ghost Employee Schemes - Countermeasures
  • Keep paychecks secure until distribution
  • Distribution of paychecks should be independent
    of those with hiring authority
  • Investigate any returned paychecks with dual
    endorsements
  • Conduct proper background and reference checks
    for all new hires

13
Falsified Hours and Salary
  • Overstate hours worked
  • Underreport leave time
  • Overstate salary/rate of pay

14
Falsified Hours and Salary
  • Manually prepared timecards
  • Perp overstates hours worked
  • Must get timecard approved
  • Forge supervisors signature
  • Conspire with supervisor, kickback
  • Supervisor rubber stamps timecards
  • Poor custody procedures
  • Perp gets timecard back after it is signed
  • Alters timecard to reflect extra hours

15
Falsified Hours and Salary
  • Automated timekeeping systems (usually very
    simple schemes)
  • Accomplice clocks in absent employee
  • Employee clocks in, then leaves work
  • Instead of overstating hours, employees may
    increase rate of pay
  • Requires alteration to payroll records
  • Perp or accomplice has access to payroll

16
Falsified Hours and Salary Countermeasures
  • Separate functions of payroll preparation,
    distribution, and reconciliation
  • Transfer of funds from general accts to payroll
    should be handled independently of other payroll
    functions
  • Look for individuals with excessive overtime
  • Look for payroll expenses that exceed budget
    projections or prior years

17
Falsified Hours and Salary Countermeasures
  • All wage rate changes must be verified by
    designated official and administered through
    central hr department
  • No sick leave/vacation without management
    approval
  • Compare payroll to production schedules

18
Commission Schemes
  • Salesperson fraudulently increases commissions by
    overstating sales generated
  • Create fictitious sales
  • Alter price on existing sales
  • Claim sales made by other employees

19
Commission Schemes - Countermeasures
  • Verify linear correlation of sales to commission
  • Look for high levels of uncollected sales
  • Track commission earned per salesperson
    investigate unreasonably high levels
  • Randomly contact customers to verify sales
  • Commissions should be handled independently of
    sales department

20
Payroll Controls
  • Separate the following duties
  • Payroll preparation
  • Payroll disbursement
  • Payroll distribution
  • Payroll bank reconciliation
  • Human resources
  • Payroll accounting should be independent of
    general ledger function

21
Payroll Controls
  • Background checks on all new hires
  • Appropriate approval for time worked, overtime,
    rate of pay, commission rates, etc.
  • Employee payments should be classified to
    appropriate expense accounts
  • Individual employee earnings should be tracked
  • Cancelled payroll checks should be compared to
    payroll, personnel records

22
Expense Reimbursement Schemes
23
What Is Expense Reimbursement Fraud?
  • Employees overstate business expenses to generate
    inflated reimbursements
  • Very common type of fraud
  • Difficult to detect

24
Expense Reimbursement Schemes
  • 109 expense reimbursement schemes were reported,
    with a median loss of 20,000.

25
Common Expense Reimbursement Schemes
  • Mischaracterized expenses
  • Overstated expenses
  • Fictitious expenses
  • Multiple reimbursements

26
Expense Reimbursements Breakdown of Cases
  • Mischaracterized expenses were the most common
    scheme, followed by fictitious and altered
    expenses.

27
Expense Reimbursements - Median Losses
  • Median loss for expense reimbursements as a whole
    is 20,000, among the lowest for any category of
    occupational fraud.

28
Mischaracterized Expenses
  • Employee claims reimbursement for non-business
    expenses by classifying them as business-related
  • Personal travel, vacations
  • Personal meals
  • Dates, etc.

29
Mischaracterized Expenses Countermeasures
  • Clearly communicate company policy on
    reimbursable expenses
  • Require detailed expense reports with date, time,
    purpose for expense
  • Independently spot-check with customers
  • Compare dates and times of expenses with
    employees work schedule

30
Mischaracterized Expenses Countermeasures
  • Compare expense reimbursements to budgeted levels
    and to prior years
  • Analyze expense reimbursements per employee
  • Require all expense reports to be approved by a
    supervisor

31
Overstated Expenses
  • Employee pads reimbursement by overstating actual
    business expenses.
  • Common way to funnel to slush funds
  • Common scenarios
  • No support required for reimbursements
  • Employee alters receipts

32
Overstated Expenses
  • Overpurchasing
  • Variation of overstated expenses scheme
  • Buy two plane tickets,
  • One cheap, one very expensive
  • Fly on the cheap ticket
  • Return expensive ticket, keep receipt for expense
    report

33
Overstated Expenses Countermeasures
  • Require original support for all reimbursements
    no photocopies
  • Obtain vendor records to verify questionable
    expenses
  • Compare the cost of similar expenses incurred by
    different employees (e.g., A B both fly to
    Atlanta As ticket 400 more)
  • Look for department-wide trends of excessive
    reimbursements indicator of slush fund

34
Fictitious Expenses
  • Employee submits nonexistent expenses
  • Produce fictitious receipts
  • Obtain copies of blank receipts from restaurants,
    bars, etc.
  • Claim expenses paid by clients or other parties

35
Fictitious Expenses - Countermeasures
  • Track expense reimbursements per employee look
    for
  • Expenses that always end in round numbers
  • Expenses consistently for same amount
  • Expenses that tend to fall just below
    reimbursement limit
  • Employees who pay cash for high-dollar items (no
    audit trail)

36
Fictitious Expenses - Countermeasures
  • Compare credit card statements to employee
    expense reports
  • Look for counterfeit receipts poor quality, no
    phone or address, no logo, etc.
  • Compare mileage claims to travel actually
    incurred
  • Look for consecutively numbered receipts in
    support of expenses

37
Multiple Reimbursements
  • Employee requests more than one reimbursement for
    the same expenses
  • Submit several types of support for same expense
    (e.g., travel agency invoice and airline ticket
    stub for same flight)
  • Submit several copies of the same support through
    different departments or budgets
  • Submit expense, wait a month, submit it again

38
Multiple Reimbursements Countermeasures
  • Do not accept photocopies as support
  • Run reimbursement reports per employee, look for
    duplicate amounts, support, etc.
  • Do not reimburse old expenses (e.g., 60 day
    limit)
  • Investigate expense reports approved by
    supervisors outside requestors department

39
Expense Reimbursement Controls
  • Expense reports should require the following
    information
  • Original support documentation
  • Explanation of business purpose
  • Time and date
  • Place of expenditure
  • Amount
  • Any deviations require independent verification

40
Expense Reimbursement Controls
  • Detailed review of all expenses by a supervisor
  • Regular comparison of expenses with historical
    and budgeted amounts
  • Spot-check expenses with employee work schedule,
    client records, service provider,etc.
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