CPA Practice Advisor

SEP 2018

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SEPTEMBER 2018 ■ 27 A YEAR IN THE LIFE: PAYROLL ACCOUNTANT 7 TIPS to Find and Prevent Payroll Fraud By Tiffany Couch, CPA/CFF, CFE “Rick” was a salt-of-the-earth man who had built a profitable and successful farming operation. Now in his early 70’s, he was ready to step back and let his children take over the day-to-day logistics of running the multi-million-dollar farm. He placed operations in his sons’ hands, while his daughter took over the office, including accounts receivable and payable, and issuing employee payroll. Everything went well for about five years, but people began noticing that the daughter was coming into the office less and less. Worse, some vendors were complaining that invoices hadn’t been paid, or the payments were incorrect. Then, it was discovered that the company’s payroll taxes hadn’t been paid, which led to further investigation. It didn’t take much analysis of the farm’s books to learn the daughter had been issuing herself three or more paychecks per week. Upon closer inspection, there were hundreds of checks clearing the bank that weren’t in the register at all! The books were so manipulated, it was almost impossible to understand how much was stolen, but in the end the fraud tipped the scale at more than a half-million dollars. At first blush, payroll fraud might seem difficult to pull off – after all, shouldn’t it be obvious? But a well-hidden fraud is not obvious to most business owners. And, unfortunately, by the time most payroll frauds are discovered, months or years have passed, resulting in large losses. Payroll fraud can occur in any business, in any industry – from the mom-and-pop corner market to a billion dollar publicly-traded company. Payroll fraud is a form of asset misappropriation. In this scheme, an employee abuses his or her access to company payroll systems to issue unauthorized payments. The most common payroll fraud schemes include: Ghost employee schemes. A fake, terminated or non-existent employee or vendor is issued checks that the fraudster cashes for personal gain. This is more common in companies where supervisors manage large staffs and are not reviewing compensation in detail as a smaller organization might. Employers should conduct periodic audits of their payroll reports to ensure employees are getting the correct pay. It’s also essential to review Social Security numbers to make sure there aren’t duplicate or missing numbers that point to a ghost employee scheme. Another red flag is multiple direct deposits to the same account or the issuance of checks to employees at the same address. Timesheet fraud. This is common in businesses that pay their workers an hourly rate. An employee inflates his or her hours or punches the clock for an absent employee. To deter this scheme, supervisors should verify and sign timecards for each pay period or use biometric systems. Rate Adjustment. This is a fraud where employees increase their rate of pay, pay themselves overtime, or intentionally give themselves a bonus or commission not actually earned. Lack of deductions. Federal withholding tax, state withholding, Social Security, and benefits deductions that are required to be deducted from the employee’s check but aren’t. Instead, the employee effectively allows the employer to pay for the tax or benefit. Un-repaid payroll advances. This is a passive fraud. An employee requests a payroll advance but doesn’t pay it back. This is easiest to execute when the accounting staff records the advance as an expense rather than charging it as a balance sheet item, or never monitors for repayment, eventually forgetting the advance was issued. Payroll fraud is especially frustrating because it’s preventable. Even small businesses can implement simple internal controls that reduce risk. The best measure is a simple review of payroll reports after it has been approved and processed to verify payee names, rates of pay, hours and deductions are appropriate. Additional controls include: 1. Separate payroll set-up, approval, and processing functions. 2. Require employees to take mandatory vacation time. 3. Cross train and rotate job duties of employees in payroll and human resources. 4. Implement a direct-deposit system for payroll and bonuses. 5. Require managers to approve timesheets and overtime requests. 6. Review bank statements and cancelled checks each month, making sure the payee matches the entry in QuickBooks. 7. Establish a zero-tolerance policy for fraud and prosecute violators to set an example. Payroll fraud is a costly and potentially devastating crime because very often payroll is a company’s most significant expense. To reduce the likelihood of insider theft, employers should stay up to date on who in the organization is being paid and how much is authorized. It’s critical to keep a close eye on money in and money out to disrupt fraud and prosecute the perpetrator. ■ Tiffany Couch is CEO and founder of Acuity Forensics, a national forensic accounting firm. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be reached at or (360) 573-5158. It's time to think outside the box. Way outside Learn more at:

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