Occupational Fraud and Abuse

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					 Chapter 8: Payroll and
Expense Reimbursement
      Schemes
Payroll Schemes
       What is Payroll Fraud?
 Employee fraudulently generates
  overcompensation on his/her own behalf
 Three common schemes:
    – Ghost employees
    – Falsified hours and salary
    – Commission schemes
                        Payroll Schemes

         Fraudulent Disbursements                 Payroll  frauds make
                                                   up 17% of
                               Check               fraudulent
        Billing                Tamp
        33.3%                  24.5%
                                                   disbursements; 8%
                                                   of all occupational
                                                   fraud cases.
                                                  121 payroll frauds
Other
8.1%                                   Payroll
                                                   were reported, with
          Register   Expense
           2.7%       14.9%            16.5%       a median loss of
                                                   $50,000.
                  Payroll Fraud –
                  Breakdown of Cases
                                        121  payroll fraud
          Work
                     Other
                                         cases were reported
          Comp.
           5.0%      15.7%
                             Commis.     in the 1993 study.
                              14.0%
                                         Over half of these
                                         involved the
                                         falsification of
                                         hours worked or
                                         pay rate.
Hours &                       Ghosts
                               9.9%
                                        Ghost employee
 Salary
 55.4%                                   scams made up
                                         approximately
                                         10%.
                    Payroll Fraud -
                     Median Losses

Ghost Employees                                       $275,000

    Hours/Salary     $30,000


    Commission                                    $200,000


 Workers Comp.                             $155,000


          Other       $35,000

               $0   $50,000 $100,000 $150,000 $200,000 $250,000 $300,000
    Ghost Employee Schemes
 Ghost employee: someone on the company
  payroll who does not actually work for the
  company
 Four steps to ghost employee scheme:
    –   Add ghost to payroll
    –   Document time worked
    –   Issue paycheck
    –   Deliver paycheck
   Ghost Employee Schemes
Adding the ghost to the payroll
 Perp either has hiring authority or access to
  payroll records
 Common methods:
  – Add completely fictitious person
  – Leave former employee on payroll
  – Add relative or friend of current employee
    Ghost Employee Schemes
   Documenting time worked
    – Only required for hourly employees
    – Time must be calculated and approved
    – Perp usually has authority to approve timecard
    – Approval can also be forged
   Once timecard approved, paycheck issued
   Ghost Employee Schemes
Delivery of paycheck
 On-site delivery of paychecks: perp physically
  misappropriates check
 Checks mailed: perp uses home address or mail
  drop for ghost
 Direct deposit: perp uses own account or shell
  account to collect deposits
 If ghost is an accomplice, checks delivered
  directly to ghost
    Ghost Employee Schemes -
        Countermeasures
   Separate hiring function from other payroll
    duties
   Maintain personnel records independently of
    payroll, and periodically compare the two
   Look for employees with no ssn, withholding
    taxes, or other deductions from paychecks
   Periodically check for employees with same
    address, ssn, bank account, etc.
    Ghost Employee Schemes -
        Countermeasures
 Keep paychecks secure until distribution
 Distribution of paychecks should be
  independent of those with hiring authority
 Investigate any returned paychecks with
  dual endorsements
 Conduct proper background and reference
  checks for all new hires
    Falsified Hours and Salary
 Overstate hours worked
 Underreport leave time
 Overstate salary/rate of pay
   Falsified Hours and Salary
Manually prepared timecards
 Perp overstates hours worked
 Must get timecard approved:
   –   Forge supervisor’s signature
   –   Conspire with supervisor, kickback
   –   Supervisor “rubber stamps” timecards
   –   Poor custody procedures:
           Perp gets timecard back after it is signed
           Alters timecard to reflect extra hours
     Falsified Hours and Salary
   Automated timekeeping systems (usually
    very simple schemes)
    – Accomplice “clocks in” absent employee
    – Employee clocks in, then leaves work
   Instead of overstating hours, employees
    may increase rate of pay
    – Requires alteration to payroll records
    – Perp or accomplice has access to payroll
    Falsified Hours and Salary –
          Countermeasures
   Separate functions of payroll preparation,
    distribution, and reconciliation
   Transfer of funds from general accts to payroll
    should be handled independently of other
    payroll functions
   Look for individuals with excessive overtime
   Look for payroll expenses that exceed budget
    projections or prior years
 Falsified Hours and Salary –
       Countermeasures
 All wage rate changes must be verified
  by designated official and administered
  through central hr department
 No sick leave/vacation without
  management approval
 Compare payroll to production schedules
     Commission Schemes
Salesperson fraudulently increases
commissions by overstating sales generated
Create fictitious sales
Alter price on existing sales
Claim sales made by other employees
    Commission Schemes -
      Countermeasures
 Verify linear correlation of sales to
  commission
 Look for high levels of uncollected sales
 Track commission earned per salesperson;
  investigate unreasonably high levels
 Randomly contact customers to verify sales
 Commissions should be handled
  independently of sales department
               Payroll Controls
   Separate the following duties:
    –   Payroll preparation
    –   Payroll disbursement
    –   Payroll distribution
    –   Payroll bank reconciliation
    –   Human resources
   Payroll accounting should be independent
    of general ledger function
           Payroll Controls
 Background checks on all new hires
 Appropriate approval for time worked,
  overtime, rate of pay, commission rates, etc.
 Employee payments should be classified to
  appropriate expense accounts
 Individual employee earnings should be
  tracked
 Cancelled payroll checks should be compared
  to payroll, personnel records
Expense Reimbursement
      Schemes
        What Is Expense
     Reimbursement Fraud?
 Employees overstate business expenses to
  generate inflated reimbursements
 Very common type of fraud
 Difficult to detect
            Expense Reimbursement
                  Schemes
          Fraudulent Disbursements               109 expense
                           Check                 reimbursement
                           Tamp
Billing                    24.5%                 schemes were
33.3%
                                       Payroll   reported, with a
                                        16.5%
                                                 median loss of
                                                 $20,000.
              Other
                      Register
              8.1%                 Expense
                       2.7%
                                    14.9%
       Common Expense
    Reimbursement Schemes
 Mischaracterized expenses
 Overstated expenses
 Fictitious expenses
 Multiple reimbursements
    Expense Reimbursements –
                  Breakdown of Cases
                                       Mischaracterized
Fictitious                Altered      expenses were the
  27.5%                   27.5%        most common
                                       scheme, followed by
                                       fictitious and altered
                                       expenses.

                            Multiple
             Mischar.       10.1%
              34.9%
      Expense Reimbursements -
                     Median Losses
     Median loss for expense reimbursements as a
      whole is $20,000, among the lowest for any
      category of occupational fraud.

 Altered                           $11,500


Multiple                             $12,500


Fictitous                                        $20,000


Mischar.                                              $22,500

           $0   $5,000   $10,000       $15,000       $20,000    $25,000
  Mischaracterized Expenses
Employee claims reimbursement for non-
business expenses by classifying them as
business-related
Personal travel, vacations
Personal meals
Dates, etc.
Mischaracterized Expenses –
     Countermeasures
 Clearly communicate company policy on
  reimbursable expenses
 Require detailed expense reports with date,
  time, purpose for expense
    – Independently spot-check with customers
   Compare dates and times of expenses with
    employee’s work schedule
Mischaracterized Expenses –
     Countermeasures
 Compare expense reimbursements to
  budgeted levels and to prior years
 Analyze expense reimbursements per
  employee
 Require all expense reports to be approved
  by a supervisor
      Overstated Expenses
Employee pads reimbursement by overstating
actual business expenses.
Common way to funnel $ to slush funds
Common scenarios:
  – No support required for reimbursements
  – Employee alters receipts
      Overstated Expenses
“Overpurchasing”
Variation of overstated expenses scheme:
  – Buy two plane tickets,
  – One cheap, one very expensive
  – Fly on the cheap ticket
  – Return expensive ticket, keep receipt for
    expense report
     Overstated Expenses –
       Countermeasures
 Require original support for all
  reimbursements – no photocopies
 Obtain vendor records to verify questionable
  expenses
 Compare the cost of similar expenses incurred
  by different employees (e.g., A & B both fly to
  Atlanta; A’s ticket $400 more)
 Look for department-wide trends of excessive
  reimbursements – indicator of slush fund
        Fictitious Expenses
Employee submits nonexistent expenses
 Produce fictitious receipts
 Obtain copies of blank receipts from
  restaurants, bars, etc.
 Claim expenses paid by clients or other
  parties
         Fictitious Expenses -
          Countermeasures
   Track expense reimbursements per
    employee; look for:
    – Expenses that always end in round numbers
    – Expenses consistently for same amount
    – Expenses that tend to fall just below
      reimbursement limit
    – Employees who pay cash for high-dollar items
      (no audit trail)
       Fictitious Expenses -
        Countermeasures
 Compare credit card statements to employee
  expense reports
 Look for counterfeit receipts – poor quality,
  no phone or address, no logo, etc.
 Compare mileage claims to travel actually
  incurred
 Look for consecutively numbered receipts
  in support of expenses
   Multiple Reimbursements
Employee requests more than one
reimbursement for the same expenses
 Submit several types of support for same expense
  (e.g., travel agency invoice and airline ticket stub
  for same flight)
 Submit several copies of the same support
  through different departments or budgets
 Submit expense, wait a month, submit it again
    Multiple Reimbursements –
         Countermeasures
 Do not accept photocopies as support
 Run reimbursement reports per employee,
  look for duplicate amounts, support, etc.
 Do not reimburse old expenses (e.g., 60 day
  limit)
 Investigate expense reports approved by
  supervisors outside requestor’s department
        Expense Reimbursement
               Controls
   Expense reports should require the
    following information:
    –   Original support documentation
    –   Explanation of business purpose
    –   Time and date
    –   Place of expenditure
    –   Amount
   Any deviations require independent
    verification
    Expense Reimbursement
           Controls
 Detailed review of all expenses by a
  supervisor
 Regular comparison of expenses with
  historical and budgeted amounts
 Spot-check expenses with employee work
  schedule, client records, service
  provider,etc.