Question

Last month, two employees were terminated for submitting fraudulent timesheets which were approved and paid through the accounting system. The leadership team expressed concern that this practice could be widespread. As a financial accounting manager at Waterbag Inc., you were assigned to a project to identify solutions to prevent recurrences.

Using the terms accounts payable fraud cases or payroll fraud cases, find a recent example or examples of cases involving accounts payable or payroll. Based on your research, what recommendations would you share with the leadership team to improve both departments? Explain your answer.

Answer 1

1. Solution to prevent time sheet Fraud.

The Financial Accounting manager should recommend a time management system, which will be integrated with a Human Capital Management system (HCM).

They should install biometric attendance system to record the attendance of the employees. The employees will be using either fingerprint attendance or iris scanner. I recommend having the fingerprint attendance system as the iris scanner is comparatively expensive.

Further, the human capital management system will be equipped with a time card for each employee. There may be employees who work in different shifts as well as the different timing. Also, the time card can manage the employee has the eligibility for overtime payments.

For example; Some cleaners will be working after normal office hours. So the time card for the cleaner will be set after office hour. And time card for a factory worker may vary from the normal working hours for the office employees.

In case an employee is on leave, he should apply for the leave application through the HCM employee portal and the request will go through various approval workflow and finally get the approval. The HR department will scrutinize the time records from the machines to make sure that the purpose is achieved.

In the event, if an employee forgot to record the attendance, he should request for an excuse through the HCM system and his line manager should approve the request to get the excuse in an effect.

During the payroll processing time, the HCM system will calculate the absent days, the late arrival of the employee, early departure of employee and if the event is not supported either by a leave application or excuse request, he will be getting a pay deduction. Warning letters will be issued to employees if such events are recurring in consecutive months.

Important Point to Note; The authority to register the fingerprint and linking with the employee records should vest with an independent party like the IT department. Otherwise, there is a chance of fraud by registering more than one finger of a punctual employee, so the latecomers or absent employees can link their employee records with other fingers of the punctual employee to record the attendance on their behalf.

2. Example of Fraud in the Payroll Department.

Bogus / Ghost Employee

A ghost employee is a fake employee record created by a dishonest employee in payroll division or HR division with the intention to be paid through payroll. Usually, this dishonest employee provides either his bank account details or his close relatives' bank account details in the payroll so he can get paid through the bank account.

The same incident can be there in the supplier payment (accounts payable) division also by creating fake supplier accounts and process fake invoices through this account and be get paid through the bank transfer to the personal bank account.

3. Recommendation to improve the Accounts Payable or payroll department

a) Segregation of Duties

Segregation of duties means a single employee should not perform a complete transaction cycle.

For Example; Employee creation is a transaction. This transaction should be initiated by a preparer, who is normally a data entry clerk in the HR department. Once he prepares the records it goes to a reviewer and he reviews the accuracy of data entry by comparing with approved documents by the management. Then it goes to the approver to finally approve and add the record to the HR records like employee database and payroll.

b) Employee Job rotation

Employee job rotation is a technic adopted by management to benefit employee as well as the employer.

Job Rotation means employees in the same division will perform the job of another employee for a particular period of time.

The benefit of this for the employee is he can improve his knowledge and skills in the other job of another employee in his division.

The benefit for the company or employer is, through the rotation the employee in the new role may detect some wrongdoings or fraud by the existing employee.