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Question:

As a mortgage lender, what are some common risks my audit department/external auditor should be aware of to identify payroll schemes and related fraud?

Answer:

In general, ghost employees are an employee added to a company’s payroll to collect a paycheck fraudulently. According to information provided by the Society for Human Resource Management (“SHRM”), The Association of Certified Fraud Examiners (ACFE) suggests that employers, to protect themselves [from payroll fraud/ghost employees], pay attention to the following four categories of red flags:

1. Employee information anomalies. An employee’s Social Security number (SSN) is not listed, or multiple employees have the same SSN; an employee doesn’t have any deductions-for taxes or benefits-coming out of the paycheck; or there are multiple address changes within a year or so.
   
   
2. Payroll-register anomalies for direct deposits. The same bank account number is used for multiple employees, potentially indicating a ghost employee’s paycheck is being deposited into the same account another employee uses. Multiple bank accounts for one employee’s paycheck could potentially indicate that a ghost employee’s paycheck is being split between co-conspirators.
   
   
3. Payroll-check anomalies. Multiple checks are issued to an employee within one pay period, or an image of the payroll check shows it was endorsed by someone with a name different from the payee’s.
   
   
4. Bonus or pay-increase anomalies. An employee receives a bonus at a time different from the company’s typical bonus distribution, or an employee receives multiple pay increases within one year.”^[2]

Below are suggestions for implementing preventative actions to keep the workplace free from ghost employees:

• Comparing payroll files against the master employee file for inconsistencies and duplicate checks.
• Reconciling the number of paychecks generated per cycle to the number of active employees within the Company for every pay cycle. If the number of payees is greater than the number of employees, then the Payroll Department should investigate further.  
• Have controls in place to ensure that no more than one paycheck is generated for each employee each pay period, and to ensure that bonus checks are only generated at company-authorized intervals.

The aforementioned reviews should be performed by an associate who is not responsible for submitting and verifying the output of the payroll cycle to ensure proper segregation of duties is in place.

^[1] Association of Certified Fraud Examiners. Occupational Fraud 2022: A Report to The Nations. Pages 9-14. https://acfepublic.s3.us-west-2.amazonaws.com/2022+Report+to+the+Nations.pdf

^[2] Society for Human Resource Management. Ghost Employees May Be Haunting Your Workplace. September 6, 2018. https://www.shrm.org/hr-today/news/hr-news/pages/ghost-employees-spirit-away-money-from-employers.aspx

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