For example

Company A was a road transport company that conducted a transportation

business. There was no problem with the transportation side of the company.
Company B was an associated company. Company B employed the drivers
and contracted them to Company A. Company B did all of the payroll functions
for those employees and kept all employee records. Each month Company B
would invoice Company A for all of the wages, payroll and group taxes,
workers compensation insurance, etc. that was due. These amounts were all
grouped in one invoice and not dissected by the separate drivers. The amount
of the invoice varied from month to month as work fluctuated.
Company A would send one cheque to Company B covering all of these costs,
who would then pay the drivers in cash and pay all other related expenses.
The directors of the the companies left the recording and making of all
payments to one trusted employee. That employee added an extra part-time
employee to the payroll system, a ghost. The monthly invoice was increased
for this new driver. No one checked the system or noticed the extra name and
the increased amount.
The wages were paid in cash by that trusted employee, after a total wages
cheque was signed by a director. The employee pocketed the cash paid that
was paid to the ghost. The directors did not realize that the listing that they
authorized contained a ghost employee and the names on the list varied as
different drivers were hired and left employment. There were no controls in
place and no review process undertaken.

Managers have the authority (but not the license!) to issue paychecks to
fictitious employees or real persons who have ghostly appearances.

Herman didn't seem to be the type of person who dabbled in the supernatural. But as
a manager for a medium-sized company, he had hired more than 80 ghost
employees to his payroll.

The ghosts were actual people who worked at other jobs for different companies.
The manager filled out time sheets for the fictitious employees and authorized them,
then took the resulting paychecks to the ghost employees, who cashed them and
split the proceeds with him. Herman's authority in the hiring and supervision of
employees enabled him to perpetrate this fraud.1

Simply enough, a ghost employee is someone on the payroll who doesn't actually
work for a victim company. Through the falsification of personnel or payroll records a
fraudster causes paychecks to be generated to a ghost. The fraudster or an
accomplice then converts these paychecks. (See "Ghost Employees" flowchart on
page XX.) The ghost employee may be a fictitious person or a real individual who
simply doesn't work for the victim employer. When the ghost is a real person, it's
often a friend or relative of the perpetrator.

In order for a ghost-employee scheme to work, four things must happen: (1) the
ghost must be added to the payroll, (2) timekeeping and wage rate information must
be collected, (3) a paycheck must be issued to the ghost, and (4) the check must be
delivered to the perpetrator or an accomplice.
A bookkeeper in a New York City condo put a dummy person on the payroll and, for
a year-and-a-half, sent salary checks to a post office box. "There was an actual
person cashing the check and splitting it with the bookkeeper," Glodstein says.

The bookkeeper, however, knew the chance of getting caught was low. She had

worked for the condominium association for over five years, and, since it was

convenient for the board to give one person sole responsibility for paying its bills, she

controlled the checking account.

"Because the board trusted her," says Glodstein, "they thought she would never take

money." But after about three-and-a-half years of this, the bookkeeper, very simply,

added the name of a relative to the list of maintenance employees. Neither the board

treasurer nor the condo's accountants ever tried to verify all the employees'

existences, and there was no red flag since it was slow and consistent.

Eventually, however, "a member of the board came to us because he noticed there

was a person on the books, and he didn't know who this person was," Glodstein

says. Armed with some basic research from this member, the board called in

Glodstein's company. In typical forensic-accounting fashion, an accountant went in

person to the building to look at the condo's books and records, and an investigator

started interviewing staff none of whom were notified beforehand in order to

prevent staff members from colluding and "getting their stories straight."

The scheme began unraveling when they talked to the bookkeeper. "We didn't even

know she was doing anything wrong," Glodstein says. "But you talk to everybody, try

to find out what their responsibilities are, and follow through. She was handling all
the money coming in and going out. That gives you the feeling that something could

go wrong here."

Then they got their break: a name on the employee list suspiciously similar to the

bookkeeper's. Under questioning, the bookkeeper eventually allowed that he was a

relative. They took that information to the board treasurer, who confirmed he didn't

know who the person was. That did it. The sordid scheme was out in the open.

But unlike TV's CSI, the perpetrator profited and didn't go to jail. The condo

association fired her, but since the roughly $15,000 she'd stolen was already spent,

the board felt it would cost more to pursue the case than what might eventually be

recovered. "The sad part in these situations," Glodstein says, "is these people move

on to the next gig, and they know that, in the majority of cases, they're not going to

get prosecuted."
Case 2: The Single-Client Company

At a co-op in the Bronx, some of the maintenance employees set up their own

company to do renovations on the building charging more than double the going

rate for the services. The managing agent knew all about it and, in return for a 10

percent kickback on the company's $50,000 to $70,000 annual billing, let it go on for

five years until they were all caught.

"It was a middle-income building in a middle-income neighborhood," says Kessler. "I

walked in and met the president of the board. She suspected the building was

spending more on certain items than they should. She also told us she suspected

that some of the employees might be corrupt."

In the process of cross-checking vendor invoices against board payments, the

investigators discovered that with one company all the invoice numbers were

consecutively numbered which meant they never had any other clients.

Before making any accusations, however, the investigators had to verify. They

visited the supposed street address of the company and found it was only a mail

drop. They then ran database searches that turned up the fascinating fact that the

wife of a building employee was listed as this renovating company's president.

Kessler's firm broke the news to the board over the phone, giving the president a

head's up about what the final report would detail. "She was taken aback because it

wasn't what she was expecting," Kessler says.

Despite finding the six-figure overbilling, the kickbacks, and the personal betrayal of

trust, however, the board merely fired the employees and discharged the managing

agent. As too often happens, the board, not wanting to draw attention to its own

inattention, did not pursue prosecution. The wrongdoers were free to go back into

the workforce because the board didn't want to look bad.

Which means, of course, they may be in your building right now.