Question

Write a little scenario explaining a way that you could commit payroll/HR fraud.

Explain what types of internal controls could prevent that fraud from occurring.

Answer 1

Solution

Timesheet Fraud

Timesheet fraud involves paying employees incorrectly for the hours they work. In some cases, companies overpay employees based on falsified timesheet submissions; employees might even have a co-worker clock in and out for them when they aren’t even scheduled to work. In one common timesheet scheme, an employee will “forget” to clock in or out, thus requiring a manual entry, to which they then add extra hours. In other cases, a payroll clerk may be in on the scheme, and manually overriding employee timesheets to increase the number of hours worked, or even the rate of pay.

Timesheet fraud can usually be caught quickly via regular audits and review of employee schedules, and strict policies regarding timesheet submissions and changes.

Internal controls

• A manager must approve any manual entries, and changes to pay rates, employee types, or a manager or human resources must document schedules in writing.

• Audits will reveal anomalies — such as the employee who is normally scheduled to work Monday through Friday suddenly clocking in on weekends — and stop fraud in its tracks.

Ghost Employees

Paying for employees who don’t actually work for the company.

You might be surprised. Ghost employees are the second most common type of fraud, and your payroll staff or manager often perpetrates it. In short, a ghost employee is either a fake employee who has never worked for your company — but who has been “created” by payroll to divert funds, or someone who once worked for the company and has since left, but was never officially terminated in the payroll system.

Consider this scenario: Your payroll clerk is Mary Elizabeth Smith. Mary decided that she doesn’t earn enough, so she creates a “new” employee named Mary Beth Smith. Then, when she runs payroll, she cuts two checks, one legitimate to Mary Elizabeth, and then another to Mary Beth. In another scenario, assume that an employee recently left the company. Your payroll manager Mary Elizabeth decides that she’d like to earn that person’s salary, so she doesn’t terminate his or her pay, but instead diverts that pay with a check made out to Mary Beth Smith.

Much like timesheet fraud, ghost employees can usually be flushed out with

Internal controls

• Regular audits, and comparing your payroll registers to the checks that have been cut or deposits made to locate anomalies like duplicate names, addresses, and Social Security numbers, and the names of employees who no longer work for the company.

• Separation of duties also helps prevent this type of fraud. In other words, the person who processes payroll shouldn’t be the same person who makes changes to employee records.