Chapter 8: Payroll and Chapter 8: Payroll and Expense Reimbursement Expense Reimbursement

Schemes Schemes

Payroll SchemesPayroll Schemes

What is Payroll Fraud? What is Payroll Fraud?

Employee fraudulently generates overcompensation on his/her own behalf

Three common schemes: – Ghost employees– Falsified hours and salary– Commission schemes

Payroll SchemesPayroll Schemes

Fraudulent Disbursements

Other8.1% Register

2.7%

Payroll16.5%

Check Tamp24.5%

Expense14.9%

Billing33.3%

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.

Payroll Fraud – Payroll Fraud – Breakdown of CasesBreakdown of Cases

Commis.14.0%

Work Comp.5.0%

Ghosts9.9%

Hours & Salary55.4%

Other15.7%

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%.

Payroll Fraud -Payroll Fraud -Median LossesMedian Losses

$35,000

$155,000

$200,000

$30,000

$275,000

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000

Other

Workers Comp.

Commission

Hours/Salary

Ghost Employees

Ghost Employee SchemesGhost 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

Ghost Employee SchemesGhost Employee Schemes

Adding the ghost to the payrollPerp either has hiring authority or access to

payroll recordsCommon methods:

– Add completely fictitious person– Leave former employee on payroll– Add relative or friend of current employee

Ghost Employee SchemesGhost 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

Ghost Employee SchemesGhost 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

Ghost Employee Schemes - Ghost Employee Schemes - CountermeasuresCountermeasures

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.

Ghost Employee Schemes - Ghost Employee Schemes - CountermeasuresCountermeasures

Keep paychecks secure until distributionDistribution of paychecks should be

independent of those with hiring authorityInvestigate any returned paychecks with

dual endorsementsConduct proper background and reference

checks for all new hires

Falsified Hours and SalaryFalsified Hours and Salary

Overstate hours worked Underreport leave timeOverstate salary/rate of pay

Falsified Hours and SalaryFalsified Hours and Salary

Manually prepared timecards Perp overstates hours worked Must get timecard approved:

– Forge supervisor’s signature– Conspire with supervisor, kickback – Supervisor “rubber stamps” timecards– Poor custody procedures:

Perp gets timecard back after it is signedAlters timecard to reflect extra hours

Falsified Hours and SalaryFalsified 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

Falsified Hours and Salary – Falsified Hours and Salary – CountermeasuresCountermeasures

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 overtimeLook for payroll expenses that exceed budget

projections or prior years

Falsified Hours and Salary – Falsified Hours and Salary – CountermeasuresCountermeasures

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

Commission SchemesCommission Schemes

Salesperson fraudulently increases commissions by overstating sales generatedCreate fictitious salesAlter price on existing salesClaim sales made by other employees

Commission Schemes - Commission Schemes - CountermeasuresCountermeasures

Verify linear correlation of sales to commission

Look for high levels of uncollected sales Track commission earned per salesperson;

investigate unreasonably high levelsRandomly contact customers to verify salesCommissions should be handled

independently of sales department

Payroll ControlsPayroll 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

Payroll ControlsPayroll Controls

Background checks on all new hiresAppropriate 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

trackedCancelled payroll checks should be compared

to payroll, personnel records

Expense Reimbursement Expense Reimbursement SchemesSchemes

What Is Expense What Is Expense Reimbursement Fraud?Reimbursement Fraud?

Employees overstate business expenses to generate inflated reimbursements

Very common type of fraudDifficult to detect

Expense Reimbursement Expense Reimbursement SchemesSchemes

Fraudulent Disbursements

Other8.1%

Register2.7%

Payroll16.5%

Check Tamp24.5%

Expense14.9%

Billing33.3%

109 expense reimbursement schemes were reported, with a median loss of $20,000.

Common Expense Common Expense Reimbursement SchemesReimbursement Schemes

Mischaracterized expensesOverstated expensesFictitious expensesMultiple reimbursements

Expense Reimbursements – Expense Reimbursements – Breakdown of CasesBreakdown of Cases

Altered27.5%

Fictitious27.5%

Multiple10.1%Mischar.

34.9%

Mischaracterized expenses were the most common scheme, followed by fictitious and altered expenses.

Expense Reimbursements -Expense Reimbursements -Median LossesMedian Losses

$22,500

$20,000

$12,500

$11,500

$0 $5,000 $10,000 $15,000 $20,000 $25,000

Mischar.

Fictitous

Multiple

Altered

Median loss for expense reimbursements as a whole is $20,000, among the lowest for any category of occupational fraud.

Mischaracterized ExpensesMischaracterized Expenses

Employee claims reimbursement for non-business expenses by classifying them as business-relatedPersonal travel, vacationsPersonal mealsDates, etc.

Mischaracterized Expenses – Mischaracterized Expenses – CountermeasuresCountermeasures

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 employee’s work schedule

Mischaracterized Expenses – Mischaracterized Expenses – CountermeasuresCountermeasures

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

Overstated ExpensesOverstated Expenses

Employee pads reimbursement by overstating actual business expenses. Common way to funnel $ to slush fundsCommon scenarios:

– No support required for reimbursements– Employee alters receipts

Overstated ExpensesOverstated 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

Overstated Expenses – Overstated Expenses – CountermeasuresCountermeasures

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; A’s ticket $400 more)

Look for department-wide trends of excessive reimbursements – indicator of slush fund

Fictitious ExpensesFictitious Expenses

Employee submits nonexistent expensesProduce fictitious receipts Obtain copies of blank receipts from

restaurants, bars, etc.Claim expenses paid by clients or other

parties

Fictitious Expenses - Fictitious Expenses - CountermeasuresCountermeasures

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)

Fictitious Expenses - Fictitious Expenses - CountermeasuresCountermeasures

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

Multiple ReimbursementsMultiple Reimbursements

Employee requests more than one reimbursement for the same expensesSubmit 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

Multiple Reimbursements – Multiple Reimbursements – CountermeasuresCountermeasures

Do not accept photocopies as supportRun 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 requestor’s department

Expense Reimbursement Expense Reimbursement ControlsControls

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

Expense Reimbursement Expense Reimbursement ControlsControls

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.