Finance News & Insights

Payroll fraud: Are you vulnerable to ‘ghost’ employees?

The existence of ghosts, or other paranormal entities, is up for debate. But the existence of — and damage caused by — ghost employees has been well documented.

Nonexistent employees who fraudulently show up on payroll — more often than not to fund a crooked employee’s habits — can take a huge chunk out of a company’s cash.

In fact, affected companies lose an average of $50,000 each time it occurs.

Ghost employee fraud takes many forms. Here are just a few examples:

  • A Payroll clerk who sets up a bank account for a nonexistent employee — and deposits the paychecks into an account for his or her own use, or
  • An Accounting staffer (or manager) who leaves a terminated employee on payroll so he can take/keep the former employee’s paycheck for personal use.

Of course, the fraudulent employee doesn’t have to come from Payroll or Finance, he or she can come from any area of a company.

Key to safeguarding against Payroll fraud: Getting more employees involved in processing payroll, so there are controls/double checks in place.

Example: Have a minimum of two employees review bank statements and returned checks every month. Also, divide Payroll duties so different people are responsible for approving time sheets, entering hours worked data, distributing paychecks, etc.

How does your company prevent having ghost employees on your payroll? Share it with us in the Comments section.

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  • Darlene

    As a security measure we randomly do a photo ID check twice a year when distributing payroll checks. The employee needs to show a picture ID (driver license or state ID) and sign the payroll log indicating they received their check or stub (for direct deposit). We also have a policy that says if an employee authorizes someone else to pick up their check they need to put in writing who that person is, the employee is responsible for the length of time ie this one pay period or open ended. In the later case the open ended one the employee is responsible for notifing us when the permission is not longer granted. This protects the company from giving a paycheck to an ex spouse if we have not been notified. We also require the person picking up an employee paycheck to have a state issued photo ID as well, which we check each time that person picks up a check.

  • Bruce Campbell

    Yes, ghost employees can be a problem. However, if you look at if from a risk and control perspective, you can insert controls into the process to mitigate the risks.

    Risk: Fictitious employees are set up in the system.
    C1: Access to new employee input in system should be controlled by user id and password. Only those authorized employees’ user ids would be allowed by the systemt to input new employees. It would be ideal to have an authorized HR employee set up any new employees, not the Payroll clerk – called segregation of duties.
    C2: Establish an avenue of communication for any payroll changes. Where I used to work, we had a personnel change form. This was used for new hire, title change, raise, promotion, termination. It required the approvals of the employee’s manager, a manager one-level up, and HR. The form was was then filed in the employee’s file in HR.

    Risk: Terminated employees continue to receive unauthorized benefits or pay after termination.
    C3: The personnel change form is completed for a terminated employee. A copy is provided to the payroll clerk/manager who runs the payroll cycle. During the next cycle, the payroll person verifies that no check or direct deposit is created before the personnel change form is filed.
    C4: If your payroll system has a cycle exception report, payroll personnel can verify terminated employees are in the exception cycle.

    Depending on your type of business, you could also try other measures as a means of verification. (1) You could run a list of all paid employees and compare that list to a list of users with sign-on access to your network. (2) You could also compare all paid employees to those with key card access to building.

    However, each of these has slight hurdles to deal with. (1) Users with sign-on access may include third-party contractors. You’ll need to work with your IT department to identify them. (2) A listing of those with key card access to the building may include contractors such as cleaning company, HVAC, etc.

    A company has to protect the assets of its owners &/or sharehoulders. By inserting controls into the HR/Payroll process to reduce the risk of ghost employees, a company is taking proactive measures to protect its assets.

  • Bruce Campbell

    Darlene, those are excellent controls to combat the risk of ghost employees. Kudos to your and your company.

  • I work for a company where two of the owners(husband and wife) pay there kids and they don’t even work here. They handle the payroll. I happened to come across some of there time cards. How do you address this breach of ethics when they own the company!

  • undecided

    sdrahiem i understand. i too work for a “family” who pays their kid $1000 every month for work. they also pay another family member “rent” for another building and “lease payment” for cars that don’t exist. i’m the only one who has access to this information so would be obvious who turned them in. but this is ridiculous

  • Dan

    The ghost employee refers to an individual on the company payroll who does not work for the company. Adding these factious employees can be accomplished by different means. The ghost could be added by an employee within or outside the payroll department. Any payroll employee with access to the payroll records and / or payroll software could potentially create this payroll fraud. Implementing internal controls help mitigate your exposure from simple precautions to detailed procedures. Simple payroll fraud prevention could be requiring employees to show identification when picking up their paychecks. Using password best practices for payroll file access can help prevent payroll fraud. Auditing all new employees each week is another good idea. Have a person not responsible for initiating new employees confirm those names with the employee’s supervisor.