When it comes to taking more than they’ve earned, payroll schemes are a common avenue for fraudsters looking to cash in. Characterized as the disbursement of funds to employees rather than external parties, this fraud continues to cause headaches for nonprofit organizations across the country.
In my webinar, Fraud Prevention for Nonprofits: Avoiding Fraud Schemes and Fraudsters, I discuss some common fraud schemes nonprofits face and ways to prevent them. We already discussed billing schemes, check tampering and expense reimbursement schemes in other articles. Here, we will focus on payroll schemes — what they are, and how to detect and prevent them.
What Are the Types of Payroll Schemes?
Payroll schemes are divided into three principle types and often include more than one fraudster or accomplice, one of whom has infiltrated the organization’s payroll department.
1. Ghost Employee Schemes
This scheme involves falsification of personnel or payroll records to generate and distribute paychecks to someone who does not actually work for the company. Aptly named, a “ghost” employee may be a fictitious person or a real individual such as a friend or relative of the fraudster. Upon disbursement, the fraudster will cash the paycheck.
2. Falsified Hours and Salary Schemes
As the most common method of misappropriating funds from payroll, this scheme involves the overpayment of wages. For an hourly employee, this includes the increase of the size of his or her paycheck by falsifying the number of hours worked or changing their wage rate. For salary employees, the fraudster often increases their rate of pay for a higher check amount.
3. Commission Schemes
Luckily, this scheme is usually sight unseen in the nonprofit sector. Involving the alteration of a commission rate or claiming commission on a sale not yet completed, this scheme is more commonly spotted in businesses that use a commission-based pay scale.
How Do I Catch the Fraudster?
You can take different actions that might call out a fraudster.
Manual distribution of paychecks
By making a point to manually distribute checks, your organization has a better opportunity to detect ghost employees.
Analysis of addresses or direct deposit accounts
In the process of reviewing accounts and addresses, your organization can identify duplicate account numbers, addresses or Social Security numbers for multiple employees.
Analysis of deductions from payroll checks
If there are employees on your payroll who are not withholding tax or any other deductions, they might be a ghost employee.
How Can I Prevent Payroll Schemes In My Organization?
One key prevention tip for payroll schemes, and most types of fraud, boils down to segregation of duties. Internal controls are a necessity when it comes to preventing fraud in all businesses, including nonprofits.
This includes the periodic review and analysis of payroll. If your payroll does not change frequently, as in cases where the number of employees is not changing on a normal basis, every time you run payroll, check that it’s in line with your expectations. Take a close look at any abnormal findings and know what to expect when running reports.
Need Help?
One great way to better understand fraud is by talking to experts who can answer your questions, give you some real-life fraud prevention tips and point out any red flags. Contact us online or call 800.899.4623 to talk with one of our Certified Fraud Examiners.
