An ounce of prevention: Identifying payroll fraud
Can companies in Hawaii afford to lose 5 percent of their revenue -- not to competitors or a slowing economy but to payroll fraud?
In a recent study, the Association of Certified Fraud Examiners (ACFE) reported that the average company loses 5 percent of its revenue to occupational fraud. It's a problem that impacts most industries.
Payroll fraud or asset misappropriation is one type of occupational fraud, occurring when cash is disbursed in a fraudulent manner. Some common schemes associated with payroll fraud include ghost employee schemes and falsified hours and salary schemes.
The ghost employee is an individual, real or fictitious, on the company payroll who is not employed by the company. There are several ways of adding a ghost employee, typically traced to an individual with access to payroll records and/or payroll software.
Companies should implement internal controls to mitigate the potential for ghost employees, which range from simple precautions to detailed procedures. Possible actions include frequently changing payroll passwords, printing a list of all new employees each week and confirming the names by a senior employee and supervisor. For computerized payroll-systems, customize the module to reject duplicate bank accounts for direct deposit payroll.
Many companies track their employees' time using a time clock or submitting a time sheet. On work sites with a time clock, employees falsifying their time may arrive early and punch in, leave the work site and then return later to punch out. In some instances, a fellow employee may be involved punching the person's time card in and out. The person receives fraudulent wages, and possibly additional compensation that's based on the number of hours worked (for example, vacation, sick time, benefits, etc.). Requiring a supervisor to stand near the time clock at the beginning and end of a shift is helpful oversight.
Companies using time sheets also are susceptible to fraud if the supervisor does not track the hours worked by each employee. Maintaining logs of employees and hours worked -- to compare to the time sheets -- is an effective way of verifying the proper amount of hours are paid.
Workers also may fraudulently, through theft, collusion, or forging a supervisor's signature on payroll, change documents, increase pay rates by accessing the computer system and changing the pay rate, or falsify documents that cause the pay rate to be increased by the payroll department.
Payroll service firms
Your company is not immune to payroll fraud simply because it employs an outside payroll service provider. For example, the service provider does not know whether new employees are real or fictitious, if the wage rate is too high, or if the hours submitted were actually worked.
Most payroll service providers can generate a "payroll audit" report that details employees added to the system each pay period and wage rates or overtime hours that exceed a specified average rate or amount. The larger providers also have a SAS 70, which is an independent report that details the internal controls, the tests performed on the controls, the results of the testing of controls, and the controls the client is responsible for implementing and evaluating.
Unfortunately, occupational fraud can be a real problem in Hawaii and can impact a company's bottom line. Some of the largest payroll frauds have been connected to trusted employees using very sophisticated payroll systems. So heed the warning of the proverb: "An ounce of prevention is worth a pound of cure," and be sure your company has internal controls to guard against payroll fraud.
Dwayne Takeno is an audit senior manager for the Honolulu office of Grant Thornton LLP.
He can be reached at Dwayne.Takeno@gt.com