Payroll fraud is any scheme whereby employees are paid funds for which they are not entitled.
Although there are numerous types of payroll scams, there are three primary methods in which payroll fraud is carried out, as listed below:

  • The creation of fictitious employees
  • False wage and benefit fraud
  • False expense reimbursement frauds
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Fictitious Employees

Fictitious Employees

A fictitious, or “ghost,” employee is a person who is on the company’s books but does not actually work for the organization. In some instances, the fictitious employee was previously employed by the organization or is deceased; more commonly, however, the individual was never an employee to begin with.

Payroll fraud can occur when the fraudster (who may be a payroll employee but may work in a different department) uses the social insurance number of a former employee or creates one for a fictitious employee. The culprit then arranges to have cheques or direct deposits sent to “the ghost” at an address or account that the fraudster will invariably have access to.

Red Flags:

  • Unusual employee addresses, especially Post Office boxes
  • Addresses and phone numbers that are the same as those of actual employees
  • Employees with a date of birth that make them too old (or too young) to be on the payroll
  • Manual adjustments to reverse entries in the payroll register
  • Payroll register being “physically” split in any way (which could indicate that someone is removing pages that include the fictitious employee)
  • Payroll employees who work excessive overtime hours, especially at night or do not take vacations

False Wage and Benefits Fraud

False Wage and Benefits Fraud

False Wage and benefits fraud is also a common payroll scam. It is particularly prevalent in companies that employ a significant number or employees that are paid on an hourly basis. These employees use timesheets or timecards to record their hours and are compensated for their work based on a formula that multiplies hours worked and a fixed dollar amount per hour.

This scheme often involves collusion between an hourly employee and a payroll employee. The employee that is paid by the hour records an excessive and inaccurate number of hours worked for which he or she will receive time-and-a-half payments , or overtime. The timesheets or timecards are processed by the payroll employee. Naturally, a company will assume a significant financial loss if several employees engage in false wage fraud.

In other cases, it is the employer who commits fraud with the intent to save the company money. For example, an anonymous tipster allowed a franchisor to discover that one of her franchisees was not permitting her employees from working beyond a pre-determined number of hours each week, so that overtime pay could not be earned.

Red Flags:

  • Handwritten adjustments on timesheets or timecards
  • Unsupported adjustments to payroll
  • Maximum benefits are claimed by an employee each year
  • Injuries sustained to an employee which are in conflict with pictures on social media
  • An employee who is the only ones in his or her department that claims overtime during a slow period

False Expense Reimbursement Fraud

False Expense Reimbursement Fraud

The third most common method of committing payroll fraud involves falsified expense reports. This can involve a variety of manipulations, including personal expenses claimed as business expenses. It can also involve inflated, false or duplicate expenses.

Although widespread, this form of fraud is most certainly preventable. Companies often neglect to implement effective controls. Even if these controls are in place, it is possible that they will not be applied to trusted and senior personnel. Eliminating this example of complacency is the most effective way of controlling. If all staff have the knowledge that their expenses will be carefully scrutinized, it would surely serve as compelling deterrent. It is also abundantly clear that suitable internal controls will detect the false expense reimbursement claims of those who choose to ignore their inherent efficacy.

Red Flags

  • Unsupported expenses claimed
  • Supporting receipts that appear to be altered
  • Credit card statements that have been submitted as supporting documentation, without detailed receipts that establish specific purchases
  • Employees who submit significant claims for transportation – such as taxies or, Uber) but who rarely have meetings outside of the office

Payroll Fraud Case Study

Mandy Marshall’s fraud scheme began like many others. Mandy unintentionally committed an error by filling out a taxi receipt for $20 instead of the correct amount of $10.When the expense report was approved without question, it gave her cause for thought. Mandy surmised that the review and approval process by her supervisor was superficial, at best. With substantial debt as her motivator, and forced to resolve massive credit card bills due to what she would later describe to forensic accountants as ‘retail therapy’, she hatched the seemingly perfect plan, or so she thought. Mandy began to submit expense claims for personal meals that she disguised as business expenses by providing only the credit card receipt (and altering the time of the transaction to 12:00pm, a likely time for lunch). She even created fictitious meeting entries in her Outlook calendar to support, and were consistent with her expense claims.

With her scheme now an unmitigated success, Mandy became more bold and brazen, as most fraudsters tend to be. This is especially true when greed or desperation set in. In Mandy’s case, advances were processed for her through Accounts Payable, while her expense reports were processed through the payroll department.

Mandy would also requisition an advance several months prior to an overseas business trip to purchase the airfare at the best rates, which was in accordance with the company’s employee travel policy at the time. When it came time to prepare her expense report following her return from this business trip, she would submit the expenses, but conveniently neglect to consider the advance that she received several months ago. Since Mandy’s advance and expense reports were approved by two different individuals working in separate departments, this fraud was not detected for several months.

Over the course of several weeks,an attentive colleague observed a marked improvement in Mandy’s wardrobe. This, of course, was noteworthy, since Mandy had neither been promoted, nor had she received a pay raise. Her stunning new dresses were also inconsistent with her frequent complaints about how she had financial issues.With all of this taken into consideration, Mandy’s co-worker decided to call the company’s whistleblower hotline to report her. Mandy Marshall’s charade came to its predictable conclusion in the same manner as many other fraudulent schemes do. Surveys have consistently and repeatedly indicated that tips are the most common way by which to expose a fraud.

Our investigation of Mandy’s case would include (but not necessarily be limited to) the following procedures:

  • Securing and reviewing all of Mandy’s expense reports that were submitted during a prescribed period of time (a time frame that encompassed the period during which the suspected fraud took place)
  • Acquiring and reviewing all cheques issued to Mandy from Accounts Payable as well as any documentation supporting her advances – such as requisitions, cancelled cheques and bank statements
  • Obtaining a forensic image and analyzing Mandy’s company-issued computer as well as other electronic communications (such as texts and emails) for relevant evidence
  • Reconciling Mandy’s expenses to her Outlook calendar, timesheets, security pass and other relevant sources. This would determine what would constitute a reasonable amount of claimed expenses for Mandy, relative to her authorized business-related activities
  • When possible, determining if the costs that Mandy incurredare legitimate by confirming or rejecting – this with the third parties that she has listed in the expense report.
  • Conducting a formal interview of Mandy

To determine whether your organization may be susceptible to fraud, take the following brief survey: