Payroll and Personal Expense Frauds
In this month's article, last of a series written on employee frauds, I examine typical payroll and personal expense fraud schemes. Schemes pertinent to payroll and personal expense reimbursements are generally smaller than other fraud schemes. It has been said that an employee who submits a fraudulent expense report is more likely to commit other frauds. Additionally, as offenders become more sophisticated in concealing their acts, fraudulent expense reports may be the only evidence available. Employees of any level of an organization can perpetrate thefts.
There are three basic schemes for payroll fraud: ghost employees, overtime abuses, and withholding tax schemes.
"Ghost" employees are names placed on the company payroll when the individual does not work for the company. The name may be for a real person or may be fictitious. The individual perpetrating the fraud against the company cashes payroll checks issued to the employee. The controller of a small company always prepared the company's payroll. One payroll period he was ill, so his assistant prepared the payroll using the previous payroll as a guide. When the payroll checks were prepared and distributed, one check was remaining. As the assistant did not know the person on the check, it was given to the company president. When the controller returned, the president confronted him and the controller confessed that he had placed his brother on the company's payroll several months before. This "ghost" employee cost the company approximately $30,000. Overtime abuses are especially common when employees responsible for maintaining the overtime records are unsupervised or the records are not reviewed periodically. Members of a prominent police department were caught in a fraud overtime scheme. Review of the actual time cards revealed that each officer had worked an average of approximately 36 hours per day. The officers were responsible for filling out their own time cards and submitting them directly to the payroll department. No one had thought previously to review the time cards for reasonableness.
Withholding tax schemes are similar to "borrowing" company cash in order to earn the interest. It is not uncommon for employees or outside payroll services to request the monies for deposits from the company for the one or two days before they are required to be deposited. Interest is earned on these tax deposits during this interim period. Generally, this timing isn't a problem until the trust account taxes are late or not paid at all. The recently divorced controller for a large construction company devised a scheme whereby he would "borrow" the trust account taxes from the company for the two days between the payroll date and the day the taxes were due to be deposited with the bank. He would place the money in an interest bearing account under his own name. On the day the funds were due, he would transfer the funds from his own account to the tax account. Thus, he would earn interest on over $1 million for two days. He neglected to call the bank one day in time to have the funds to the tax account. Even though the funds were transferred the following day, the IRS sent the company a delinquent notice and assessed a 50% penalty. The penalty was too large to pay and conceal logically so the controller confessed to the scheme.
Another common form of fraud is when employees submit inappropriate personal expenses for reimbursement. Probably the most common area this occurs is in the area of travel and entertainment. Personal expense reimbursement frauds include: false mileage claims for business use of an employee's automobile; submitting personal meals and presenting them as business lunches; playing golf with friends and submitting them as business associates; and the list goes on. In one case, a new employee was sent to a conference in another city and was told that all business related expenses would be reimbursed. Upon arrival, the hotel had over-booked and accommodations were made at another hotel away from the conference site. Rather than be away from the conference site, the employee made arrangements with another participant to share that person's room. Upon returning, the employee submitted an expense report claiming the cost of the hotel room and attached a copy of the other participant's hotel bill. In another case, the general manager of a business monthly prepared and submitted his expense reports including detailed supporting documents. The expense reports included meals, travel, entertainment, and other expenses reportedly paid on behalf of the company. The company's policy required that all expense reports be reviewed and approved by the general manager. Upon analyzing the expense reports, the company learned that the general manager had been submitting falsified expense reports. Photocopies of personal checks submitted for reimbursement were actually made payable to parties for personal living expenses. The checks were photocopied before the payee was entered. The photocopy would then be re-photocopied and submitted. Charge card receipts were submitted when actually incurred. The monthly statement would also be submitted later during the year. The amount of the fraud was in excess of $750,000.
Businesses can minimize the likelihood of thefts through strengthening its internal controls. There are numerous methods to detect payroll and personal expense frauds so if a business finds itself a victim of a fraud, it should consult its legal counsel, accountant, and a competent fraud examiner.
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