Chapter 6
Payroll Schemes
1
Payroll
Schemes
Employees
Commission
Schemes
Workers
Compensation
Falsified
Wages
2
Payroll Schemes
• Occupational frauds in which a person who
works for an organization causes that
organization to issue a payment by making
a false claim for compensation
– Ghost employee
– Falsified hours and salary schemes
– Commission schemes
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Ghost Employees
• Someone on the payroll who does not
actually work for the victim company
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fake person
Friend or relative
Accomplice
Other
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Ghost Employee Schemes
• Adding the ghost to the payroll
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Through the personnel department
Through the hiring department
Through the payroll department
Using names similar to real employees
Failing to remove terminated employees from
the payroll
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Ghost Employee Schemes
• Collecting timekeeping information
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Fake timecards
Approval of timecards
Computerized timekeeping systems
Salaried workers vs. hourly workers
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Ghost Employee Schemes
• Issuing the ghost’s paycheck
• Delivery of the paycheck
– Hand delivered
– Mailed to the employees address
– Direct deposited
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Preventing and Detecting Ghost
Employee Schemes
• Separate the hiring function from the payroll
function
• Personnel records should be independently
maintained from payroll and timekeeping
functions
• Personnel department should verify any changes
to payroll
• Background and reference checks should be made
in advance of hire
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Preventing and Detecting Ghost
Employee Schemes
• Periodically check the payroll records against personnel
records for terminated employees and unauthorized wage
or deduction adjustments
• Periodically run computer reports for employees
– With no deductions - withholding taxes or insurance
– With no physical address or telephone number
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Compare payroll expenses to production schedules
Keep signed checks in a secure location
Distribuation person is independent of payrol
Identification to receive
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Falsified Hours and Salary
• Overpayment of wages is the most common form
of misappropriating payroll funds
• Increase number of hours or rate of pay
• Time clocks
• Computer tracking of employee time
• Manually prepared timecards
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Manually Prepared Timecards
• Forging a supervisor’s signature
• Collusion with a supervisor
• Poor internal control procedures
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Preventing and Detecting Falsified
Hours and Salary Schemes
• Preparation, authorization, distribution, and
reconciliation should be segregated
• Transfers of funds from general accounts to
payroll accounts should be handled independently
• No overtime should be paid unless authorized in
advance
• Sick leave and vacation time should not be granted
without supervisory review and should be
monitored for excessive time taken
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Preventing and Detecting Falsified
Hours and Salary Schemes
• A designated official should verify all wage rate
changes
• Timecards should be taken directly to the payroll
department after approval
• Time cards should be secured and monitored
• Run programs to actively seek out fraudulent
payroll activity
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Tests for Fraudulent Payroll Activity
• Review employees who have significantly more
overtime than similar employees
• Trend analysis of budgeted vs. actual expenses
• Run exception reports for employees who have
had a large increases in wages
• Verify payroll taxes equal federal return tax forms
• Compare net payroll to payroll checks issued
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Commission Schemes
• Pay is based on an employee’s output rather than
hours worked or a set salary
• Falsify the amount of sales made
– Create fraudulent sales orders, customer purchase orders,
credit authorizations, packing slips, invoices, etc.
– Ring up a false sale on the cash register
• Fraudulently increase the rate of commission
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Detecting Commission Schemes
• Run periodic reports to show an unusual
relationship between sales figures and commission
figures
• Run reports that compare commissions earned
among salespersons
• Track uncollected sales generated by each
salesperson
• Conduct random samples of customers to verify
that the customer exists
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17
Chapter 7
Expense Reimbursement Schemes
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Expense
Reimbursement
Schemes
Mischaracterized
Expenses
Overstated
Expenses
Fictitious
Expenses
Multiple
Reimbursements
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Frequency of Fraudulent
Disbursements
20
Median Loss
Fraudulent Disbursements
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Expense Reimbursement Schemes
• Employees are reimbursed for expenses paid on
behalf of their employer
– Hotel bills, business meals, mileage, etc.
• Business purpose explained and receipts
attached per the organization’s guidelines
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Mischaracterized Expense
Reimbursements
• Purpose of reimbursement request is misstated
• Fraudster seeks reimbursement for personal
expenses
– Personal trips listed as a business trips
– Non-allowable meals with friends and family
• Perpetrators are usually high-level employees,
owners, or officers
• Common element – lack of detailed expense
reports
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Preventing and Detecting
Mischaracterized Expenses
• Establish and adhere to a system of controls
• Require detailed expense reports with original
support documentation(date,time,method of
payment, description of purpose of expense
• Require direct supervisory review of all travel and
entertainment expenses
• Establish a policy that clearly states what will and
will not be reimbursed and set reasonable limit
and publicized to all employees
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Preventing and Detecting
Mischaracterized Expenses
• Compare dates of claimed expenses to work
schedules
• Compare prior year expenses to current year
expenses and to budgeted expenses trend analysis
• Expenses approved by supervisor inside
department
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Overstated Expense Reimbursements
overstate the cost of actual business expense
• Altered receipts
• Over purchasing
• Overstating another employee’s
expenses(currency not check)
• Orders to overstate expenses(direction of
his supervisor)
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Preventing and Detecting
Overstated Expense Reimbursements
• Require original receipts for all expense
reimbursements
• If photocopied receipts are submitted,
independently verify the expense
• Book travel through company travel agent using
designated company credit card
• Compare employee’s expense reports with coworkers to identify inconsistencies
• Spot check expense reports with customers
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Fictitious Expenses ‫وھﻣﯾﺔ ﺑﺎﻟﻛﺎﻣل‬
• Producing fictitious receipts create bogus
support document ‫ﺑﻌﻣل وﺻل ﻏﻠط‬
• Obtaining blank receipts from vendors
• Claiming the expenses of others ‫ﺣدا دﻓﻊ‬
‫ﻋﻧﻲ اﻻﻛل وﺑﺣط اﻧﺎ دﻓﻌﺗﮫ‬
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Preventing and Detecting Fictitious
Expense Reimbursements
• Look for:
– High dollar items that were paid in cash
– Expenses that are consistently rounded off, ending with
“0” or “5”
– Expenses that are consistently for the same amount
– Receipts that are submitted over an extended time
– Receipts that do not look professional or that lack
information about the vendor
– reimbursement request from an employee that
consistently fall or just below reimbursment limit
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Multiple Reimbursement Schemes
• A single expense item is submitted several times
to receive multiple reimbursements
– Example: Airline ticket receipt and travel agency
invoice
• Submit the credit card receipt for items charged to
the company’s credit card account
• Submitting the same expenses to different budgets
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Preventing and Detecting Multiple
Reimbursement Schemes
• Enforce a policy against accepting photocopies
• Establish clearly what types of support
documentation are acceptable
• Require that expense reimbursements be approved
by the employee’s direct supervisor
• Establish a policy that expenses must be submitted
within a certain time limit
• Company accounting system should be set to flag
duplicate payments
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