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Don’t wait ‘til Halloween to ghost hunt

October 21, 2011

The assistant manager was in charge of inputting hours worked by employees into the back office system. She was very diligent in making sure employees were paid accurately and that the employees were punching in and out correctly. She applied correct discipline to those that forgot to punch in or out. Her supervisor was proud of her that she took such care in the accuracy and discipline of their payroll. He was so confident in her competency that he left it all in her hands.

What the supervisor didn’t know was that the payroll was not as accurate as he thought. Each week, extra hours were submitted and paid to employees that never worked a minute during the pay period. The assistant manager was going through the personnel files of employees that had left employment this same calendar year, and reinstated them as an active employee. She then reported hours worked for the pay period. When the paycheck arrived, she endorsed the check, cashed it from daily proceeds and placed it into the day’s deposit. After a few weeks, she would deactivate the employee’s status and reactivate another ex-employee into the payroll system and repeat her actions. She was creating – GHOST employees. The ex-employees never knew they had been reactivated.

What makes this particularly reprehensible is that the ex-employees were charged with the income and relevant taxes associated with the extra hours that were reported to the IRS. The assistant manager was relying on the ex-employees never noticing the extra income on their W-2 statements at the end of the year.

Fraudulently manipulating payroll by creating “ghost” employees can take many forms and all of them have three elements in common:

1. Creating the “ghost” – The person committing the fraud needs access to the payroll system either by authorizing payroll additions, or has control over adding and deleting employees from the payroll register. In this case the assistant manager has the authority with little supervision and oversight.
2. Submitting false time sheets – The person committing the fraud enters the required information to generate payment. The assistant manager carefully selects ex-employees who left the same year to lessen suspicion of overpayment of wages.
3. Collecting and converting the payment - The assistant manager is familiar with the payroll protocols. The checks arrive at the store in a bundle. She simply removes the paychecks she has fraudulently generated, and has easy access to complete the theft by endorsing the checks and placing them in the daily deposits.

The “ghost employee” scam may produce very small losses with a single event, but over time the losses can be rather significant. They can be relatively hard to find, particularly if they are added and deleted from the payroll system so that no red flags develop. Ghost employees have to be sought out to be discovered. The success of the fraud scheme is dependent upon poor controls and minimal oversight.

Tips in Preventing Ghost Employee Fraud

• Never make wage payments in cash
• Review payroll information on a regular basis
• Rotate the responsibility for inputting payroll information, distributing payroll checks
• Prohibit cashing payroll and personal checks from store funds.
• Secure employee files and limit access only to authorized personnel
• Add and remove employees with verification by a second person in authority
• Randomly audit by physically matching all payroll checks with employees
• Investigate all returned W-2 forms

The assistant manager took advantage of the lack of controls of the store’s payroll processes. It may be a natural behavior to trust others, particularly those that we’ve come to know and like. But when one person has access to processes that can be manipulated for financial gain, with no oversight or auditing processes in place, it may breed fraudulent behavior.

With the Halloween season fast approaching it may serve as a reminder to protect your business from the “ghosts” that may be lurking and fill your goody bag with more treats and far less tricks.