PAYROLL FRAUD

BY EBY TRADERS

Payroll fraud is when an employer pays an employee or a fictitious employee for

services not performed.

Fraudulent payment schemes fall under three main categories:

1. Ghost employees;
2. Falsified overtime or hours worked; and
3. Fraud related to commissions.

Other types of Payroll Fraud are:

Payroll fraud is the theft of cash from a business via the payroll processing
system. There are several ways in which employees can commit payroll fraud.

They are:

1. Advances not paid back - The most passive type of fraud is when an employee
requests an advance on his payroll and then never pays it back. This works best
when the accounting staff does not record advances as assets (instead charging
them directly to expense), or never monitors repayment. Thus, the non-payment of
advances requires inactivity by the recipient and inadequate transaction recordation
and follow-up by the accounting staff. A monthly procedure to review advances
will eliminate this issue.

2. Buddy punching - An employee arranges with his fellow employees to have

them punch his hours into the company time clock while he takes the day off.
Supervisory reviews and the threat of termination are the best ways to avoid this
risk. A more expensive alternative is to use biometric time clocks, which uniquely
identify each person who is signing into the time keeping system.

1. Pay check diversion - Employees could take the paycheck of another employee
who is absent, and then cash the check for themselves. This can be avoided by

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having the paymaster retain all unclaimed checks in a locked safe, and by requiring
that everyone receiving a pay check prove his identify with a driver's license or
some similar document.

4. Pay rate alteration - Employees collude with the payroll clerk to increase the
amount of their hourly pay in the payroll system. A more clever clerk will then
return the pay rate to its original level after committing this fraud for just a few pay
periods, so that the issue is less easy to spot. This can be detected by matching pay
rate authorization documents to the payroll register.

5. Unauthorized hours - Perhaps the most common type of payroll fraud is the
padding of time sheets by employees, usually in small enough increments to escape
the notice of supervisors. This is a particular problem when supervisors are known
to make only cursory reviews of time sheets. The best control over this type of
fraud is the supervisory review.

"In short, there are many ways in which the amount of payroll paid out can be
fraudulently expanded. This is difficult to spot when the amounts involved
are small, so you must consider the cost of prevention activities in relation to
the amount of savings that will be generated."

"A ghost employee is an employee of a company that doesnt exist. A ghost

employee is the creation of a fraudster for the purpose of collecting that ghost
employees salary. Often a ghost employee might be an employee that recently left
the company that the fraudster didnt remove from the payroll system. It also could
be an entirely made-up persona or a friend or even a relative of a fraudster, who
can cash the pay check by forging the endorsement or collect the envelope of cash
on payday."

"The payroll staff either creates a fake employee in the payroll records or prolongs
the pay of an employee who has just left the company, and alters the payment
record so that the direct deposit or check is made out to them. This works best in
large companies where supervisors have very large staffs and so do not usually
track compensation in sufficient detail. It also works well when a supervisor has
left the company and has not yet been replaced, so that ghost employees can be
inserted into their departments until a new supervisor is appointed. Periodic
auditing of the payroll records is needed to spot ghost employees. Another way to

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spot a ghost employee is when there are no deductions from a pay check, since the
perpetrator wants to receive the maximum amount of cash."

"The third most common type is one that is self-inflicted by the employer through
worker misclassification and workplace fraud. Its the illegal practice of
designating an employee as a "1099 worker" or an independent contractor.
Unscrupulous business owners do this to avoid paying payroll taxes,
unemployment tax or workers compensation insurance and are therefore able to
submit lower bids for projects, undercutting responsible companies."

"When an employer hires an employee, the employee must submit tax forms.
Those tax forms indicate an employees estimated number of deductions, based on
the number of dependants. The employer is then supposed to withhold taxes based
on the information provided. Payroll taxes can include income taxes, social
security and Medicare taxes.Payroll fraud may occur if the employee does not
have contributions kept from their pay. In addition, payroll fraud may occur if the
employer withholds the taxes but does not use those monies to pay the
government taxes owed. In addition to utilizing employee contributions to pay
payroll taxes, employers must match that amount. In other words, employers and
employees share the payroll tax burden. Payroll fraud can happen in a number of
ways. In any case, the result in an improper amount of payroll taxes being paid to
the government."

Sources:

http://lawexplores.com/10-payroll-fraud/
https://dopay.com/blog/the-4-types-of-payroll-fraud
https://www.forbes.com/sites/matthewgarrett/2013/09/10/payroll-fraud-a-big-
threat-and-how-to-avoid-it/#1dc44c3746f2
http://www.accountingtools.com/payroll-fraud
http://fraud.laws.com/bankruptcy-fraud/types/payroll-fraud