Chapter 8: Payroll and Expense Reimbursement Schemes

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Chapter 8 Payroll and Expense Reimbursement
Schemes
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Payroll Schemes
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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 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.

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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.

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Payroll Fraud -Median Losses
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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

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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

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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

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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

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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.

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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

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Falsified Hours and Salary

• Overstate hours worked
• Underreport leave time
• Overstate salary/rate of pay

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Falsified Hours and Salary

• Manually prepared timecards
• Perp overstates hours worked
• Must get timecard approved
• Forge supervisors 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

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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

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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

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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

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Commission Schemes

• Salesperson fraudulently increases commissions by
  overstating sales generated
• Create fictitious sales
• Alter price on existing sales
• Claim sales made by other employees

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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

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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

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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

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Expense Reimbursement Schemes
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What Is Expense Reimbursement Fraud?

• Employees overstate business expenses to generate
  inflated reimbursements
• Very common type of fraud
• Difficult to detect

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Expense Reimbursement Schemes

• 109 expense reimbursement schemes were reported,
  with a median loss of 20,000.

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Common Expense Reimbursement Schemes

• Mischaracterized expenses
• Overstated expenses
• Fictitious expenses
• Multiple reimbursements

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Expense Reimbursements Breakdown of Cases

• Mischaracterized expenses were the most common
  scheme, followed by fictitious and altered
  expenses.

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Expense Reimbursements -Median Losses

• 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 Expenses

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

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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
  employees work schedule

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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

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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

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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

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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 As ticket 400 more)
• Look for department-wide trends of excessive
  reimbursements indicator of slush fund

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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

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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)

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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

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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

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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 requestors department

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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

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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.