David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Payroll fraud, says forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, is one of the most common frauds perpetrated upon businesses and other organizations. This crime can take numerous forms, including:

• Ghost Employees: In this scheme, the fraudster creates a non-existent employee in the payroll system. The fraudster then enters time for the non-existent employee, resulting in production of a paycheck. The fraudster intercepts the paycheck and either deposits it in an account under his/her control or has a confederate either cash the check or deposit it in an account under the confederate’s control.
• Terminated Employees: In this scheme, the fraudster works with a terminated employee. The fraudster keeps the terminated employee on the books and enters time for the terminated employee, resulting in production of a paycheck. As with a ghost employee, the fraudster intercepts the paycheck and forwards it to the terminated employee.  The terminated employee either cashes the check or deposits it in an account under the terminated employee’s control (and shares the proceeds with the fraudster).
• Fraudulent Hours: In this scheme, the fraudster enters a higher number of hours worked either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.  This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
• Fraudulent Pay Rate: In this scheme, the fraudster adjusts either his/her pay rate or that of another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
• Fraudulent Bonus Pay: In this scheme, the fraudster either adds him/herself to the list of employees receiving a bonus; or adjusts his/her bonus amount; adds a confederate to the list of employees receiving a bonus; or adjusts the confederate’s bonus amount. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
• Fraudulent Expense Reimbursement: In this scheme (which applies to companies/organizations that reimburse employee business expenses through payroll), the fraudster enters a higher expense reimbursement amount either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.
• Fraudulent Vacation and/or Sick Leave Hours: In this scheme, the fraudster, who has control over tracking and/or reporting vacation and sick leave hours, takes vacation and/or sick leave, but either doesn’t record the hours taken against the available hours or artificially inflates the number of vacation and/or sick leave hours to which he/she is entitled.  A variant on this scheme has the fraudster doing the same for other employees in return for cash payoffs from the benefiting employee.
• Fraudulent Diversion of Employee Pay: In this scheme, the fraudster, who has control over/access to payroll records, adds a new bank account (over which the fraudster has control) for an employee, artificially inflates the employee’s pay (via hours or pay rate changes), and diverts the excess pay to the new bank account.  The fraudster counts on the employee not tracking total annual pay (most employees only track their weekly/biweekly pay) and not noticing that the employee’s form W-2 wages are higher than the amount the employee received.

So, how can companies and organizations avoid being victimized by these payroll frauds?  They can take some or all the steps identified below:

• Separate the hiring and human resources functions from the payroll function.
• If this is not possible, ensure there is adequate separation of duties so different employees are responsible for different steps in the payroll process. For example, the employee who sets up other employees in the payroll system (including pay rates) should be different from the employee who enters employee time.
• Require two levels of review and approval for timecards and pay sheets.
• Maintain a list of terminated employees and periodically check the list against payroll data.
• Require someone other than the employee’s supervisor to distribute paychecks.
• Require either multiple signoffs for pay changes (especially for manager and executive salaries) and/or for approvals of vacation and sick pay.
• Have either a higher-level manager or a third party, such as a forensic accountant, periodically review payroll, including pay rates, hours/time, and total payroll funding amounts.
• Have either a higher-level manager or a third party, such as a forensic accountant, periodically review accrued and used vacation and sick hours.

Does your company need to enact stronger safeguards against payroll fraud? If so, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. You can do just that by contacting the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.