John was the new ranch manager at Santos Farms. He always liked to get to know the guys who worked for him, and he found that the best way to meet new employees was to personally hand them their paycheck.
As pay day approached, Jarrett, the long-time supervisor, seemed hung up on John's insistence on passing out the paychecks. "The guys know me and some of them don't speak English, it will be better if I distribute the checks," Jarrett told John.
John smiled and said, "No problem! My Spanish is good enough to get by - and besides, I really like to put faces to names and this is the best way to do it."
Jarrett shook his head and walked off.
John didn't think much about the interaction until pay day arrived.
Jarrett didn't show up to work that day. Instead, a moving van was parked at Jarrett's company-issued house at the ranch, and it appeared that he and his family were moving out.
Funny, John thought, Jarrett hasn't given notice. Perhaps Jarrett was moving into his own place in town?
It didn't take John long to rethink that assumption. At the end of the day, after he had issued all the paychecks to the employees, John had 13 paychecks leftover.
When he called the corporate office, he learned that just days before, Jarrett had turned in a change of employment form for the same 13 employees, indicating that they had all terminated employment on the same day.
Between the strange interactions with Jarrett, the sudden moving out of the company ranch house, and the leftover paychecks, John realized that something much bigger was happening.
He took the issue to the owners and corporate payroll. Corporate pulled the last payroll checks for the same employees and noted that all of the endorsements on the checks appeared to have a very similar signature, and all had been cashed at the same local smoke shop.
We were called in to investigate the matter. We learned that as ranch supervisor, Jarrett was responsible for hiring employees, ensuring they had appropriate documentation, approving their timecards, sending approved time information to the corporate office, and distributing checks.
We understand that while this wasn't typical protocol for most of the Company's ranches, this particular one was different. You see, the previous ranch manager had been seriously ill for a long time and Jarrett had filled in for him, causing this lack of segregation of duties.
When we pulled the 13 employee names from the master employee list, we noted that each of them had the same home address. When we did a search on the same address, we found even more employees - all of them showing the same home address.
We pulled the payroll checks for these individuals as well, and uncovered a payroll scheme with losses in excess of $700,000.
The above scheme is what is defined as a ghost employee payroll scheme, which is typically characterized with a fictitious employee being issued a payroll check. In this case, all of the "ghosts" had at one time been legitimate employees of my client's ranch, but when they left employment, hours continued to be turned in and those payroll checks were diverted to the employee perpetrating the scheme: Jarrett, the ranch manager (turns out the address in question was his parents' house).
Payroll schemes are not difficult to perpetrate. In addition to the ghost employee scheme, one can falsify the hours they work, their pay rate, or their commission calculation. We have also investigated payroll schemes where the unscrupulous employee does not have the appropriate payroll taxes or benefit copayments deducted from their payroll checks. In addition, we have investigated issues related to the inappropriate reporting of Paid Time Off (PTO).
What do best practices for payroll look like?
There are also plenty of analytical considerations one can consider, including:
The good news in all of this? Our client received the majority of their lost funds from both an insurance claim and requests for refunds from the IRS and state taxing authorities. Jarrett was investigated by local authorities and referred for prosecution, but that's where the story ends. That prosecution never happened. We hope that Jarrett's brush with the law scared him enough to deter him from becoming a thief in another company.
Tiffany R. Couch, CPA/CFF, CFE has more than 20 years of experience in the field of Accounting, with the last 13 years focused completely on Forensic Accounting related engagements. Ms. Couch holds a Bachelor of Science in accounting degree cum laude from Central Washington University. She is a Certified Public Accountant (CPA), Certified in Financial Forensics (CFF), and is a Certified Fraud Examiner (CFE).
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