Chapter 8: Payroll and Expense Reimbursement Schemes.
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Transcript of Chapter 8: Payroll and Expense Reimbursement Schemes.
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Chapter 8: Payroll and Chapter 8: Payroll and Expense Reimbursement Expense Reimbursement
Schemes Schemes
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Payroll SchemesPayroll Schemes
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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
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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.
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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%.
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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
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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
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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
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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
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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
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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.
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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
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Falsified Hours and SalaryFalsified Hours and Salary
Overstate hours worked Underreport leave timeOverstate salary/rate of pay
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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
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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
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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
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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
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Commission SchemesCommission Schemes
Salesperson fraudulently increases commissions by overstating sales generatedCreate fictitious salesAlter price on existing salesClaim sales made by other employees
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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
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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
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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
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Expense Reimbursement Expense Reimbursement SchemesSchemes
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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
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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.
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Common Expense Common Expense Reimbursement SchemesReimbursement Schemes
Mischaracterized expensesOverstated expensesFictitious expensesMultiple reimbursements
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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.
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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.
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Mischaracterized ExpensesMischaracterized Expenses
Employee claims reimbursement for non-business expenses by classifying them as business-relatedPersonal travel, vacationsPersonal mealsDates, etc.
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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.