Payroll fraud is quite common. Sometimes the theft occurs as a payroll department employee secretly inflates payments to family and friends.
One Friday evening, Jimmy and Rachel are sitting on the back porch drinking a cool lemonade and chatting about how long it’s been since the business gave them a raise–three years and counting. And everyone knows the owners just bought a beautiful cabin in Aspen. The cost: $10 million. Meanwhile, Jimmy and Rachel (cousins) are wiling away their time discussing what they could do to make more money.
Jimmy pauses and says, “I didn’t ask if you give raises? I mean, can’t you change pay rates, like you could increase mine. You know, quietly.” He grunts, “After all, the owners sure don’t need the money.”
Rachel ponders the request and replies, “I think I could. No one ever reviews what I do. I doubt anyone would ever notice. Come to think of it, I could do the same for myself. With over 300 employees, no one would know. The supervisors never look at the computer payroll files, only the physical personnel files.“
The next day Rachel increases her pay rate and Jimmy’s by 10%, just to test the waters. If anyone notices, she’ll say it was a mistake. But no one does. And after six months, she moves the rates even higher–another 30%. Easy money. Even if she’s caught, white collar crime is often lightly punished.
No one is comparing–on a test basis–the pay rates in the payroll master file to the approved rates in the personnel files.
Have someone in internal audit or an external CPA or CFE randomly select employees, comparing the master pay rates for each person to the personnel files. Let the payroll and human resources employees know that this test will be performed once a year. The knowledge of the test will be a deterrent to fraudulent increases in the master pay rate file. In particular, pay rates for payroll personnel should be reviewed.
For a detailed article about how to audit payroll, check out my post here.
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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