If you are unfamiliar with the phrase “ghost employee” or “ghost payroll” it is definitely a concept all HR professionals should know. The ghost employee is an employee added to your payroll to collect a wage, even though they aren’t employed by your company. It could be a deceased person who is not removed from your payroll by accident, but it far too frequently is a person added purposefully to commit fraud.
Either way, the money continues to flow from your bank account into the account of potential fraudsters who aren’t contributing a minute of their time to your organization. Here’s your guide to auditing, detecting, and eliminating fraud related to ghost payroll.
The Common Element
When it comes to ghost employees the common element is your money paying non-existent employees. The common HR role involved in the appearance of a ghost worker is someone in a position responsible for at least one of these tasks:
- Posting time and attendance information
- Preparing payroll disbursement summaries
- Adding and deleting employee master records
- Approving payroll disbursements and transactions
In the case where such tasks are performed by separate individuals, you can reduce the risk of ghost employees receiving payment. However, it’s as simple as a co-worker discovering someone’s passwords, to allow them to create and pay ghost employees. And this is easier than you might think. They can rifle through authorized employee’s papers, or simply peer over their shoulder when they log into the system.
How It Works
Once an employee has access to payroll files, they can create fake master records to “hire” and pay ghost employees. Their workaround is based on the fact tax deductions are programmed to fall within a given range of employee numbers. By adding the ghost employees with employee numbers higher than that range, when the payroll summary report is run, the ghost workers fall at the end of the list, and they aren’t selected for deductions.
The False Wage Set-up
Making ghost payroll fraud even easier, people in these positions can easily use direct deposit to take the cash. They use their own bank account for the direct deposit with the knowledge that in most cases, financial institutions don’t check the name of the employee with the name of the person holding the account. As well, very few payroll departments look for issues such as matching bank accounts among their employees.
You might be thinking no one can accomplish this thanks to payroll disbursement approvals. However, the larger the company, and the more trusted the fraud, the easier it is for a supervisor’s signature to be obtained for the fake payroll summary. Anyone can easily use an existing summary to copy the information required, type it up with the necessary information and present it for approval. Another trick is to create fake copies of paychecks.
Auditing for Ghost Employees
If you want to detect ghost employee fraud, introducing precautionary steps and audits makes it easier to detect. Some safe policies to adopt include:
- Segregate payroll steps so no one person has authority over payroll preparation, disbursement, and distribution.
- Audit so you can spot paychecks without deductions for taxes or Social Security.
- Eliminate paper paychecks and use direct deposits to make it difficult to forge checks.
- Regularly check payroll records and look for things such as duplicate names, addresses, bank accounts, and Social Security numbers.
- Even if you use direct deposit, try to hand-deliver paychecks every two months and ask for positive identification so you can discover leftover paychecks.
- Run payroll budget reports to spot variations and discrepancies where you see higher-than-budgeted labor costs.
- Reduce the opportunity for fraud by introducing an online paperless system with customizable security levels to keep your most sensitive data protected.
- Use in-house automated audit software to catch suspicious activity related to ghost payroll.
These tips can help you spot potential ghost employees so you can investigate before more money is stolen.
Tax and Payroll Software
The bottom line is you need a payroll system that allows you to avoid mistakes. A system that automatically runs audits every payroll means your payroll is monitored so you identify potential ghost employees before they are paid. Tax and payroll software is proactive allowing you to remain on top of any mistakes or discrepancies as they happen. You won’t have to wait until the end of the year or your quarterly audits but instead are shown issues every time your payroll is run. This occurs prior to the checks being sent, allowing you to stop payment on anything that appears suspicious.
If you would like information on the payroll software available, speak to our team today.
About The Author
Ingrid is the Content Marketing Manager at Paypro, managing both inbound and outbound marketing initiatives for the company. She has 15+ years’ of extensive marketing communications experience, leveraging brand awareness and strategic partnerships to increase sales revenue for a diverse group of B2B brands.