Backdoor Payroll Theft of Withholdings

Backdoor payroll theft is not common, but it is a real threat. Many auditors are unaware of this possibility. So they don’t look for it. In this article, I explain how the theft occurs.

Backdoor Payroll Theft

Gertrude, the payroll clerk, intentionally overpays company state withholding taxes by $25,000. She then amends her own W–2 so that it includes the excess payment (the $25,000 is added to her state withholding total). Once Gertrude files her personal state tax return, she receives an extra $25,000. In effect, she is using the state government as a funnel for theft.

In this business, Gertrude processes payroll and files all related payroll tax reporting information. Additionally, she makes payroll withholding payments and records payroll entries in the general ledger. Not uncommon in a small entity. Also, no second person reviews the W-2s before they are mailed.

The Weakness

One person is performing all payroll functions, so her actions are not visible to anyone else. Also, no second person is reviewing the W-2s before they are mailed.

The Fix

Have someone outside the payroll department review and mail the W-2s. Or add an additional person in payroll to create additional segregation of duties.

More Information About Auditing Payroll

See my article titled Auditing Payroll: The Why and How Guide. I provide information about payroll walkthroughs, risk assessment, and substantive procedures. So check it out.