Chapter 8: Payroll and Expense Reimbursement Schemes

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.