Fraud and Fraud Detection: A Data Analytics Approach, + Website

CHAPTER 10 Payroll Fraud

PAYROLL FRAUD IS WHEN an organization pays an employee or a fictitious employee for services not performed. We are referring to fraudulent payments schemes as opposed to abuse where employees are taking excessive personal time for personal surfing of Internet social media sites, making phone calls, e-mailing, and texting.

Fraudulent payment schemes fall under three main categories: ghost employees, falsified overtime or hours worked, and fraud related to commissions.

Ghost employees may be an actual or fictitious person. Fictitious ghost employees never existed in the organization. Someone with the authority or computer access hires employees by putting in the appropriate documentation or bypassing controls to create new employees in the payroll system. Setting up these nonexistent people with names similar to actual employees increases the chances of avoiding detection. Those classified as temporary or casual workers are at higher risk of being ghost employees who are fictitious. These workers usually have a high-turnover rate and are difficult to track after they leave the organization, making the fraud hard to detect. Further, actual people who at one time worked for the organization may unwittingly be used as part of the payroll fraud. An example would be a supervisor authorizing pay for one or two pay cycles before the employee actually started work. Another method would be failing to remove a terminated employee from the payroll. Participants ...