Introduction
A ghost employee is someone who belongs to an organization’s payroll but never works for that organization. The ghost employee can in essence be a real human being or a fictitious personality who either knowingly or unknowingly belongs to an organization’s payroll. Fictitious employees are normally fronted by dishonest employees (Wells, 2007). The fraud happens when an organization’s payroll has false employees.
Dishonest employees benefit by collecting these wages. The fraud feeds into the payroll system information on the ghost. The fraud can work independently without the input of an accomplice. However, an accomplice makes it easier for fraud to fine-tune their operations. Occupational fraud has remained a thorn in the flesh of both big corporations and small and medium-sized enterprises from time immemorial (Wells, 2008). Employees undertake to engage in fraud in the course of employment either personally or through accomplices working in the same organization.
Occupational frauds are very rampant and make companies incur big losses than those perpetrated by third parties. Because occupational frauds take place over a protracted period, the frauds can continue unabated as the employees continue to work within the organization. This research paper will focus on an employee who is on payroll records under specific job classification with an employee number, social security number, and direct deposit bank account number but engages in occupational fraud.
This fraudster uses many scenarios to fabricate the ghost employee and commit fraud against the company. The research paper covers different types of employers where this fraud might be applicable and how the fraudster cheats the employer. Some information will also be given on how the scheme is uncovered and the internal controls that organizations should put in place to prevent institutional fraud (Wells, 2002).
This form of fraud is very common in entities with a large number of staff in different physical locations but with a centralized payment unit. Small business enterprises also fall victims in circumstances where payroll register is management is the preserve of one dishonest person. Ghosts are added to the payroll system when the employee gets access to the payroll system. Detecting a fraud becomes difficult when it is your most trusted employees who fuel it.
Who facilitates ghost employee frauds?
It is the dishonest employees who abet this vice because it is them who authorize wage payments and undertake to add or delete employees from the register as they wish. Most of the occupational frauds are done by the staff in the accounting department followed by staff in the management department. Thirty-nine percent of fraud in any organization are done by staff in the accounting department whereas only 18% is hatched by the executives or people high up in the management echelons. Frauds hatched by executives are very costly to organizations contributing to losses to the tune of 853,000 dollars. The majority of fraudsters are first-time offenders.
An insignificant 7% of convicted ghost employee fraudsters had previously been convicted of perpetrating the vice. More than a third of convicted ghost employee fraudsters had previously been terminated by their employers for having abetted or perpetrated the vice asserts the 2004 and 2006 report of the Association of Certified Fraud Examiners. Tampering of the payroll register is normally done depending on the system and workers that handle the payroll process. Manipulation of the payroll register is determined through the payment an organization uses. Regardless of the reviews that are done, once a ghost’s name has been fed into the system payments will always be generated to him. Employees will just sit back and wait for payments to be effected after which they collect the payment.
How frauds are perpetrated
Ghost employee frauds are undertaken using three basic steps. The first requisite is to create the ghost. The generation of false time sheets then follows. Finally, the payments are collected and converted.
The creation of ghosts involves placing them into the payroll system. This is an easy activity in circumstances when a dishonest employee has access to the system. Theirs is to use the ‘Add Employee’ function in the payroll program. If the dishonest employee has no access to the system, they simply forge requisite documents and authorizations to an employee into the system. Large business enterprises and organizations with a large number of employees find it very difficult to differentiate between forged documents from real ones. Moreover, such organizations may not be having checks that verify information submitted to them. How ghosts are entered into an organization’s payroll system depends on the system that the organization uses.
Under certain circumstances, past employees are not deleted from the system after they have left, and their wages are taken by dishonest employees. This is very common in cases where fraudulent workers cannot add employees to the payroll system but can access the termination process. Organizations with a large number of staff are more vulnerable to ghost staff being added to their payroll registers. The vice is fueled by a high degree of staff turnover among whom may be casual or salaried employees. In such a situation chance of noticing a ghost in the payroll becomes very obscure.
When ghosts are salaried, dishonest employees do not have to labor in their uncanny adventures. Their monthly payments will just be standard. However, when ghosts are paid wages, it becomes a little bit difficult for ghosts to benefit from their unscrupulous deeds. The action taken is determined by the method used to compute the earnings. If an uncanny employee access they can feed required information to effect payments to their advantage. If they have no access to the system, they can doctor some information to effect payments to their advantage. The payroll staff will then process the information to generate payment. Dishonest employees normally prefer to have ghosts paid by salary to avert the risks of the fraud being detected especially when timesheets are filled.
An employee normally collects payments. The payments are normally converted into forms that can be easily used. The steps involved here are determined by how employees are paid. In circumstances when wages are paid in cash, it is easier for employees handing them out to take the ghost’s pay. This is only possible when they can finalize this transaction without raising suspicion.
This cash must not be converted to usable. The cash is also very difficult to trace once it is in the employee’s pocket. These make the transaction beneficial to the dishonest employee. If the wages are in form of cheques that must be mailed, the dishonest employee diverts the cheque to the address that he will pick the cheque from. This is only possible if they are the people involved in preparing and mailing the cheques. Under certain circumstances, the cheques end up being mailed to any location that appears on the ghost employee’s record. However, when the fraud is discovered the location of the cheques may be discovered.
The location has to be remote from the fraudster. Cheques have to be converted to be usable. A convenient bank account for the ghost can therefore be provided by an accomplice. Converting a cheque remains a major threat to this method.
Wages paid through direct deposit do not compel an employee to convert the payment or engage in any activity. The fraudulent worker must, however, have a bank account through which they receive payment. This is where the input of an accomplice is highly needed. However, it is very easy to trace the money when the fraud gets detected because bank accounts cannot be opened using fraudulent identification documents. Records held by banks on their clients will ultimately lead to the employee. Fraudulent employees face myriad problems with this scheme because they must have access to bank accounts or forge endorsement on payroll cheques to be able to convert it to cash. The last option may make it easy to trace the fraudster.
The obstacle can be overcome if the ghost happens to be an accomplice. However, the accomplice can be held accountable when the destination of the payments is traced. It can be quite tasking for them trying to explain that they indeed were employees of a given organization. Another difficulty with this scheme lies with staff performance reviews. Ghost workers cannot participate in reviews done in the process of performance appraisal. This obstacle can only be overcome if the ghost only appears in the payroll system but not on any other records. Dishonest employees who have due access to employment records can do a lot of adjustments to the records to overcome this problem especially when the ghost is casual.
Employers where this fraud may be applicable
Occupational fraud is a big problem for small businesses. Daily newspapers report about employees who steal from their employers. A New York newspaper within four days has reported an incident where a woman pretended that her husband was failing to receive medical benefits from her employer. In actuality, the ‘husband’ was a boyfriend. The employer had to dispense 100, 000 dollars towards the treatment of her boyfriend (Construction Business Owner, 2007). In another incident, two employees from a retail shop stole and sold store supplies for profit on eBay. Employers take about 18 months to catch these dishonest employees.
However, employers normally get to know about these thefts by accident. Small businesses are very vulnerable to employee fraud because they are not able to absorb losses compared to bigger organizations. Small businesses can go bankrupt by theft occasioned by one employee. Association of Certified Fraud Examiners in their 2004 report to the Nation on Occupational Fraud and Abuse adduce that small business enterprises incurred losses amounting to 100,000 dollars due to employee fraud. Association of Certified Fraud Examiners in 2008 report estimates that 7% of emerging companies’ annual revenues are lost due to fraud.
This translates to approximately 994 billion dollars in Gross Domestic Product lost to fraud. Other than small business enterprises, banking institutions and financial institutions are also commonly victimized by fraud, followed by government institutions and health care service providers. Fraudulent billing is very rampant in small businesses.
Emerging businesses are vulnerable to ghost employee fraud because of the closer relationship that exists between the managers and the employees hence a higher degree of trust. Trusted bookkeepers can unsuspectingly manipulate the payroll system and add a ghost who will be paid for a very long time before the vice sees the light of the day. Bookkeepers steal money by salting cheques drawn to themselves in a stuck of legitimate cheques that are to be signed by a manager. Because the manager is very busy and trusts the employee, he ends up hurriedly signing this cheque. Emerging businesses are also vulnerable because their financial systems are casual and relatively unsophisticated compared to larger corporations with established security and audit procedures.
Prevention and detection of ghost employee fraud
There are many things that one has to look out for when they want to detect and prevent ghost employee fraud. First, employee files with missing information must be put on the spot as fraudsters tend to place some bit of information on files to try to authenticate them (Shields, 2009). It is quite common to find that personnel files are lacking. One should check out for employees sharing mail addresses. A computerized payroll system should be put in place to cross-check the information given on the mailing address.
Great care should be taken with employees who use one bank account to deposit their wages. A computerized payroll system can come in handy in enhancing cross-checking of information. Management should be cautious about unexplained turnover of staff from one given department. Finally, management should raise alarm over employees’ names that appear on the payroll list but do not have a clear job description. Employees should be people who their colleagues can identify.
To reduce the likelihood of ghost employee frauds, the management should abolish cash wage payments because cash can be easily stolen without a trace. In circumstances when cash or cheque payments are made, a non-payroll person should be present. Employees should sign against their names upon receipt of their pay packet or cheque.
The supervisors should be involved in the processing of payments as they know better those who they work with. Through this process, employees who nobody else recognizes will be highlighted.
The payroll list should be edited with authorization and authentication by an official team preferably drawn from outside the finance department. The person should be a manager who the employees work directly under.
Performance reviews should be at a personal level with the employees on the payroll system. No other avenue should be used apart from this one. It is only unfortunate that not all business enterprises conduct performance reviews.
Payroll functions should not be preserved for one particular employee. It should be rotational. Different people should be allowed to send out bills to collect emails and process bank deposits and cash payments. The management should check the payroll listing frequently to fish out suspicious entries and addresses. The management should take it upon them to randomly meet employees that are on the payroll register. In firms and organizations with a fewer number of workers, individuals that are not on the payroll should be authorized by randomly walking with the payroll list and intermingling with the workers whose names appear on the list. During the interactions, the non-payroll persons can ask clever questions that would help them determine whether the persons on the list are genuine or not.
Another way of averting ghost employee fraud is by thorough screening of job applicants before they are hired. If possible the applicants should be subjected to an integrity test. Their criminal and civil history should be ascertained. Other important information can be derived from driver’s license violations. Their educational records should be ascertained and cross-checked with that on the transcripts. History of their past employment should be delved into and the reason why they left their previous job. Each of the applicant’s referees should be consulted and their authenticity verified. Making phone calls to the given referees is not enough (Bilski, 2010).
It should be verified whether the applicants did work for the given organizations. A credit check should be run on prospective employees because financially unstable people are likely to engage in fraud. However, the job applicant must be informed in writing for this to be done. The applicant must consent to this for it to proceed; if they don’t then no credit check can be run.
Organizations should make it a culture of running irregular scheduled surprise audits. The third-party can also be allowed to audit books of accounts at least once a year. Employees who handle payroll register should take a yearly vacation so that their records can be examined. All incoming cheques should bear for deposit only stamp to prevent dishonest employees from cashing them.
A system should be set whereby employees are in a position to fraud cases anonymously without fear of victimization from their superiors or co-workers. All cheques above nominal amounts should bear two signatures. Blank cheques should not be signed and payroll cheques should be personally signed by the Human Resource Manager. Signature stamps must not be used at any cost (Gericke, 2007).
Small business enterprises must review their accounts payable by closely examining cash payments that have been disbursed and payments made. They should consider putting a system in place to check billing scheme fraud which is very rampant in small businesses and eats into their profits. An unexplained rise in the living standard of an employee should be something to be worried about as he or she may be involved in ghost employee fraud.
Conclusion
Employers must be wary when employee files keep on disappearing and when some employees share bank accounts and mailing addresses as this may be a sign that there is some element of dishonesty among employees. Ghost employee fraud is very rampant in bigger corporations with employees in different physical locations whose payments are processed centrally. Small businesses are also victims of this kind of fraud. Management staff and accountants facilitate ghost employee theft.
Ghost employee fraud is perpetrated by the creation of ghosts, the generation of false timesheets, and the conversion of payments. To control this vice job applicants should be vetted to ensure only those who pass the integrity test are employed. Regular performance reviews should also be done to control the vice. One person should not be allowed to handle payment register repeatedly. This duty should be rotational.
Reference List
Bilski, J. (2010). Payroll fraud: Are you vulnerable to ghost employees. Web.
Construction Business Owner. (2007). An ounce of prevention: Identifying payroll fraud. Web.
Gericke, U. (2007). Ghost employee fraud. HR Future. Web.
Shields, A. (2009). Payroll Fraud. Web.
Wells, J.T. (2007). Fraud Casebook: Lessons from the Bad Side of Business. Hoboken, New Jersey: John Wiley & Sons, Inc.
Wells, J.T. (2008). Principal of Fraud Examination. Hoboken, New Jersey: John Wiley & Sons, Inc.
Wells, J.T. (2002). Keep ghosts off payroll. Journal of accountancy. Volume: 194 Issue: 6, pp.77-80.