A ghost employee is a fraudulent scheme designed to siphon money from your
company. It’s a form of payroll fraud typically perpetuated by someone with
access to your payroll system, like an accounting employee with little
oversight.
Ghost employee schemes leach millions from unsuspecting employers around the
world. These schemes can involve one employee or a group of employees. And
they can range from simple clerical manipulation to detailed schemes that
involve falsified timekeeping records and fraudulent paychecks.
For example, the culprit may make it appear that a terminated employee is
still collecting checks on payday. Sometimes these fraudsters use real names,
but other times they add fictitious characters to the payroll. At either rate,
companies with hundreds or thousands of employees can easily overlook a couple
of extra names on the books. This is especially true when turnover is high.
One employee at an Italian hospital collected a salary for 15 years without working a
single day. Another audit in Tanzania turned up a shocking 10,000 ghost employees on
government payroll resulting in millions of dollars in losses.
The largest global study on business fraud found that organizations lose up to
5% of their annual revenue from these types of schemes, so the risk is real and worth
an extra layer of security.
How to detect ghost employees?
Your payroll burden eats up a lot of your overhead as it is─nobody wants to spend
more paying employees that don’t actually work for their company.
Fraud thrives in chaotic environments with unclear processes, which is exactly
what tends to occur when multinational companies grow into new countries
without a clear payroll plan or centralized oversight.
Unfortunately, finding ghost employees on your payroll isn’t so simple.
You might try tracking payroll budgets and investigate spikes that exceed
labor projections. Some smaller businesses even hand-deliver paychecks and
identify any leftovers.
But an official audit that checks for duplicates and discrepancies is the only
reliable way to detect ghost employees on your payroll. And with thousands of
employee records, it can still be difficult.
When it comes to ghost employees, your best line of defense is prevention.
Here are some tips to prevent ghost employees and other types of payroll
fraud:
- Vet employees with background checks
- Prioritize accurate and current personnel records
- Maintain control of finances
- Avoid single-point-of-contact systems
- Use checks and balances
- Conduct routine audits
1. Require background checks for all accounting employees
Take extra steps to thoroughly vet potential employees who will have access to
payroll and accounting systems. This includes entry-level accounts payable
clerks all the way up to accounting managers and CFOs.
You can also verify personnel details with local government agencies. For
example, in the US, where payroll fraud is slightly more common, you can verify social
security numbers at the time of hire and periodically during audits.
2. Keep detailed and accurate personnel records
There should be no exceptions when it comes to the records kept on your
employees. New hires should not be allowed to begin work until all pertinent
information is collected and entered into the system. And similarly, your
company should have a strict process for terminating employees that includes
clear directives for payroll systems.
3. Maintain control of company finances
Business owners come from many different backgrounds. Some have a natural
inclination towards managing the finances, while others may be eager to hand
over the reins when it comes to the company’s books. This is always a mistake.
Even when you delegate the day-to-day financials to someone else, you should
always maintain administrative access to the systems, so you can pop in and
run reports from time to time.
4. Set up redundancies for payroll and purchasing activities
Any system that allows a single point of contact to manipulate payroll
records, run checks or make purchases opens the door for the opportunity of
fraud. Instead, make sure you have an easy system of checks and balances that
requires at least two signatures to make key changes—like adding an employee
to the payroll.
5. Clearly define all financial procedures
Clearly defined processes for payroll and accounting activities help eliminate
errors, and they also seal up the gaps that provide opportunities for fraud.
All employees should be trained on processes and workflows with strict
adherence and accountability standards.
For example, your company should have a checklist of personnel information
that is entered into the system before the employee’s first shift. New
employees should not be allowed to begin work until a payroll specialist
has received and entered all details.
A similar checklist should exist for terminating employees.
In both cases, it should be a two-step process where one employee enters the
information and a separate employee verifies it.
6. Conduct routine audits
Hiring trustworthy payroll employees, providing oversight, and clearly
defining processes are all good steps. But the only way you will know if they
are working is by using routine audits. Audits can help you find discrepancies
that may need a second look, such as:
- Unverified government identification numbers
- Duplicate entries
- Clerical errors on birth dates, hire dates or termination dates
- Timekeeping inconsistencies or red flags
- Fictitious employees
- Misclassified employees
Clerical errors and inconsistencies don’t always mean fraud. But they do
warrant a deeper look, especially if you uncover patterns like the same
employees with repetitive manual timekeeping adjustments week after week. Or a
large number of terminated employees still flagged as active.
While you can DIY an audit, it may not do any good if you have a problem
hiding under your nose. The same employee that has been stealing money
undetected will likely be involved in the audit, providing an opportunity to
cover their tracks. A better option is to use a consultant or third-party firm
to help audit your books and personnel records.
How a payroll partner can help
Global Managed Payroll provides a centralized process for global companies to pay
employees around the globe. GMP standardizes the steps of paying employees
in different countries and with different currencies while also providing tools like real-time
data reporting that make it easier to analyze payroll and identify irregularities.
While GMP providers don’t directly specialize in detecting ghost employees,
the clear processes and thorough reporting they offer can help you reduce the
likelihood that a ghost employee can pull the wool over your eyes for long.
Learn more about how managed payroll services can help your company.
Contact a solutions advisor to get started.