1. Chapter 8: Payroll and Expense Reimbursement Schemes

2. Payroll Schemes

3. What is Payroll Fraud?
Employee fraudulently generates overcompensation on his/her own behalf
Three common schemes:
Ghost employees
Falsified hours and salary
Commission schemes

4. Payroll Schemes
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.

5. Payroll Fraud – Breakdown of Cases
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%.

6. Payroll Fraud - Median Losses

7. Ghost 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

8. Ghost Employee Schemes
Adding the ghost to the payroll
Perp either has hiring authority or access to payroll records
Common methods:
Add completely fictitious person
Leave former employee on payroll
Add relative or friend of current employee

9. Ghost 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

10. Ghost 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

11. Ghost Employee Schemes - Countermeasures
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.

12. Ghost Employee Schemes - Countermeasures
Keep paychecks secure until distribution
Distribution of paychecks should be independent of those with hiring authority
Investigate any returned paychecks with dual endorsements
Conduct proper background and reference checks for all new hires

13. Falsified Hours and Salary
Overstate hours worked
Underreport leave time
Overstate salary/rate of pay

14. Falsified 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 signed
Alters timecard to reflect extra hours

15. Falsified 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

16. Falsified Hours and Salary – Countermeasures
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 overtime
Look for payroll expenses that exceed budget projections or prior years

17. Falsified Hours and Salary – Countermeasures
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

18. Commission Schemes
Salesperson fraudulently increases commissions by overstating sales generated
Create fictitious sales
Alter price on existing sales
Claim sales made by other employees

19. Commission Schemes - Countermeasures
Verify linear correlation of sales to commission
Look for high levels of uncollected sales
Track commission earned per salesperson; investigate unreasonably high levels
Randomly contact customers to verify sales
Commissions should be handled independently of sales department

20. Payroll 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

21. Payroll Controls Background checks on all new hires
Appropriate 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 tracked
Cancelled payroll checks should be compared to payroll, personnel records

22. Expense Reimbursement Schemes

23. What Is Expense Reimbursement Fraud?
Employees overstate business expenses to generate inflated reimbursements
Very common type of fraud
Difficult to detect

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

25. Common Expense Reimbursement Schemes
Mischaracterized expenses
Overstated expenses
Fictitious expenses
Multiple reimbursements

26. Expense Reimbursements – Breakdown of Cases
Mischaracterized expenses were the most common scheme, followed by fictitious and altered expenses.

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

28. Mischaracterized Expenses
Employee claims reimbursement for non-business expenses by classifying them as business-related
Personal travel, vacations
Personal meals
Dates, etc.

29. Mischaracterized Expenses – Countermeasures
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

30. Mischaracterized Expenses – Countermeasures
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

31. Overstated Expenses
Employee pads reimbursement by overstating actual business expenses.
Common way to funnel $ to slush funds
Common scenarios:
No support required for reimbursements
Employee alters receipts

32. Overstated 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

33. Overstated Expenses – Countermeasures
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

34. Fictitious Expenses Employee submits nonexistent expenses
Produce fictitious receipts
Obtain copies of blank receipts from restaurants, bars, etc.
Claim expenses paid by clients or other parties

35. Fictitious Expenses - Countermeasures
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)

36. Fictitious Expenses - Countermeasures
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

37. Multiple Reimbursements
Employee requests more than one reimbursement for the same expenses
Submit 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

38. Multiple Reimbursements – Countermeasures
Do not accept photocopies as support
Run 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

39. Expense Reimbursement Controls
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

40. Expense Reimbursement Controls
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.