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Now a day’s accounting frauds are on rise to be reported related to Payroll in which a FRAUDSTER manages to create some employees master file which actually do not exists and manage to take away their all benefits by way of FRAUD.

This is not a new kind of accounting FRAUD but due to the significant use of AUTOMTAION processes in businesses, it has become more vulnerable to an every business and become very crucial to find or detect it at early stage and at the same time to implement such safeguards which can actually prevent from these kinds of Accounting FRAUDS.

Automation to process payroll makes it more vulnerable because it is very easy to penetrate WRONG ACTION which easily gets repeated till it’s actually detected by the MANAGEMENT of the Company.

How it works?

FRAUDSTER who can be a member of HR, Payroll process team or an approving authority which might create some GHOST (bogus) employees in the system which might get salaries and other benefits for some time and those payments of salaries are deleted even by doing forging in bank statements.

It is very common in an organization where an employee leaves and FRAUDSTER manage to continue such employee account for long and the amount is being withdrawn by the help of even bank employees. There are number of reported cases in the public domain where several GHOST employees were created into the system with the knowledge of some of higher level employees and hence they managed to take away such funds from the entity in the name of such GHOST employees. Satyam was one of recent cases happened in India which shocked the entire industry.

halloween deco isolated decoration ghosts ghost

Statistic about the PAYROLL FRAUDS

According to the Association of Certified Fraud Examiners, it’s the number one source of accounting fraud and employee theft.

Refer the statistics as given by –

  • Payroll Fraud happens in 27 percent of all businesses,
  • Payroll fraud occurs nearly twice as often (14.2 percent) in small organizations with less than 100 employees than in large ones (7.6 percent).
  • The average instance of payroll fraud lasts about 36 months. That’s three years of paying ghost employees or overpaying existing ones. In Delaware, a School District Finance Director paid himself an extra $150,000 over eight years. He also underpaid several school administrators a combined $50,000 in one school year.

payroll salary electronic money using debit card

Some real time incidences on PAYROLL FRAUDS

Satyam paid 13,000 ghost employees (2009)


THE disgraced former chairman of Satyam Computer Services, B. Ramalinga Raju, used salary payments to 13,000 fictitious employees to siphon millions of dollars from the Indian outsourcer for land purchases, prosecutors said.

Prosecutors in the southern Indian city of Hyderabad, where the technology outsourcing firm is based, told a criminal court that Satyam has only about 40,000 employees instead of the 53,000 it claims.

Source: http://www.theaustralian.com.au/business/latest/satyam-paid-13000-ghost-employees/news-story/403bb8fe9790fb1fde67dd6342ee2733

Upper Macungie company loses $54,000 to possible payroll fraud (2013)


Upper Macungie Township Police said a township trucking firm found fraudulent payroll deductions Friday totaling $54,000.

Billig Trucking, at 5316 Oakview Dr., told police that three people who do not work for the company were given the money. The disbursement went through the company’s regular payroll system which is run by an outside firm.

Upper Macungie police did not identify the three people who received the money.

Source: http://articles.mcall.com/2013-04-14/news/mc-m-upper-macungie-payroll-fraud-20130414_1_payroll-fraud-three-people-upper-macungie-township-police

How to prevent:

The below is an indicative list only and there are several other areas/ way to prevent such FRAUDS in payroll:

1) Maker – checker of employee payroll should be rotated at non-fixed interval basis,

2) Physical verification of employees should be done on an ongoing basis,

3) Complete background check should be done for each employee before it is hired and document the substantiation accordingly,

4) Automation process control should be re-evaluate periodically and change report should be sought from IT department on non-fixed intervals,

5) Compare a employee payroll cost each time with the averages of past periods and any changes/ variation should be investigated and documented,

6) Employee ID should be issued by separate unit of department which does not has any control by HR or finance, if the process is outsourced then it is periodically to be reviewed or consider for change,

7) Bank reconciliation should not be allowed to be postponed and all non-reconciled items should be investigated and properly documented,

8) Bank statement received directly from BANK should be used and avoid getting the bank statement by personal visits,

9) Always logon to online banking and periodic checking of debits should be done,

10) Employee leaving and joining the organization should be announced at bigger platform to avoid adding any GHOST employee,

Note for Forensic Accountants

The understanding about this common and significant area of FRAUD is essential to tick the list of possible FRAUDS that might happen which may erode the business funds. While performing any such FORENSIC investigation related to possible employee related FRAUD should possibly be started with payroll embezzlement. Hence Forensic Accountant should be aware about such trends around and one has to think in a way FRAUDSTER thinks to catch them and ensure compliance of law of the land.

Author is a Certified Forensic Auditor and passionate about sharing knowledge/ experiences writing articles. He can be reached at agrawal.anuj@icai.org or Whatsapp 9634706933


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July 2024