Last year I received a phone call. The payroll clerk of a local business had been monkeying around with the company’s direct deposits. As employees left the business, the payroll clerk left them in the system. Why? To steal those continuing payments. Auditors refer to this as ghost employee fraud–the employees are in the system, but they are not real.
Knowing no one was paying attention, the clerk changed the terminated employees’ direct deposit bank account numbers to her own. The result?She received multiple direct deposits each payroll. The clerk was able to steal over $800,000 before the theft was detected.
Also, the payroll clerk had not filed tax returns, so the Internal Revenue Service rubbed salt into the wound by levying fines.
The owners trusted the payroll clerk too much and did not monitor her work. The clerk performed all payroll services with no supervision. While the owners were aware of the lack of segregation of duties, they took no steps to prevent the theft. (Even when a business doesn’t segregate its accounting duties, there are ways to lessen the threat of theft.)
Export all direct deposit bank account numbers along with employee names into an Excel spreadsheet and sort the bank account numbers. (The bank account numbers should be in one column and the employee name in a separate column.) Sort the bank account numbers, and the duplicate numbers will appear in adjacent rows. So once you sort the bank account numbers, see if there are any duplicates. If there are, see why.
Another fix is for the owners to review a list of all employees paid (just request a list of all employees paid for one or more payrolls). Since the owners normally know which employees have left, they will know if payroll payments are made beyond the departure dates.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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