Misappropriation Schemes – Payroll Fraud

Overview

Common indicators, resources and prevention tips for misappropriation schemes executed by stealing company inventory or property.

Description

An employee submits false documents or manipulates the payroll system to cause the company to make improper payroll disbursements. The perpetrator may or may not have access to the company’s personnel or accounting records. A common form of payroll scheme is the overstatement of employee hours worked. In the absence of adequate internal controls, this scheme may not require a supervisor’s involvement as a co-conspirator. Other types of payroll schemes include making improper increases to an employee’s rate of pay, alteration of data used for bonus or commission calculations, creation of and generation of payments to “ghost” (i.e., non-existent) employees, and taking possession of payroll checks related to terminated employees.

Indicia

Materials
• An individual removes inventory or other physical assets from the organization’s facilities and transports them to an offsite location

• The individual either makes personal use of the assets or resells the items, typically at a discount, to another third party

Variances and Trends

• Actual payroll expenses by department that exceed budgeted and prior period amounts

• Trends and anomalies in overtime hours

Indicia

Detailed

• Activity reports that list changes made to employee master file data, such as position title/level, rate of pay

• Multiple employees in the employee master file with the same employee tax ID number

• Payments to employees outside payroll system and expense reimbursement

• Payments made to employees for periods after termination date

Validation Resource(s)

• Trace hours paid to approved timesheets

• Trace employee pay rates to human resources records

• Compare commission calculations to data from approved sales reports

• Review changes to payroll master file and compare to source documents to determine if the changes were properly approved

Prevention Tips

• Review employee master file activity/exception reports to assess the appropriateness of employee pay-rate changes, effective dates of new employee additions and effective date of terminated employees removals

• Physically distribute payroll checks or payroll remittances to employees

• Ensure that department supervisors approve hours reported by employees in their departments

• Ensure that there is adequate segregation of duties regarding access to process payroll activity (approving hours reported and payroll payments to employees) and human resource activity (creating new employees and removing terminated employees)