Ghost stories can be good fun, particularly this time of year. Ghost employees, on the other hand, are trouble for employers. They may be just as fictional as the paranormal activities in your favorite scary book or movie, but if you have ghost employees on your payroll, you have fraud. And if you have fraud, you have potentially significant financial losses.

Anatomy of a scheme

Ghost employee schemes usually are perpetrated by employees who have easy access to payroll records. If your company’s internal controls are loose enough to be exploited, a greedy or disgruntled staffer could invent an employee, put this “person” on the payroll and direct deposit paychecks to a bank account in the ghost’s name.

It may seem like it would be easier to hide ghost employees in large companies. In fact, small businesses, where a single employee may handle all the payroll accounting, are more vulnerable. In some cases, perpetrators enlist friends or relatives to forge endorsements or deposit checks. In others, no assistance is necessary. The thief simply exploits weaknesses in the payroll system.

Look for traces

Ghost employees are just one way for dishonest employees to manipulate your payroll system. Perhaps the easiest scam to perpetrate is to overpay withholding or payroll taxes. The government sends a refund to your company, and the employee deposits it in an account in his or her name. Other methods of defrauding your payroll system include falsifying hours, increasing commission rates and filing false workers’ compensation claims.

The good news is that ghost and other payroll schemes usually leave traces. Look for:

  • Paychecks with no tax, Social Security, health insurance or retirement plan deductions,
  • Dual endorsements on paychecks, and
  • Duplicate names, addresses or Social Security numbers in payroll records.

Also scrutinize higher-than-budgeted payroll expenses, and unusual spikes in the number of payroll checks presented for payment.

To prevent this type of fraud, segregate your business’s payroll duties. If one employee writes checks, reconciles statements and keeps the books, that employee may be tempted to steal. Divide the duties among more than one employee. You might also consider outsourcing your payroll process. If that’s not practical, make sure your computer system is secure and that all records are password-protected and access-limited.

How we can help

Ghost employees go unnoticed in many companies because employees are trusted too much and internal controls are only haphazardly applied — if they exist at all. We can audit your internal controls and suggest improvements to prevent losses. And if you suspect a ghost employee is haunting your business, contact us immediately.

© 2020 Covenant CPA