Fraud Spotlight

Stopping the clock on employee time theft

Time thieves can become time fraudsters in the right conditions. Protect your employees and organizations by suggesting to top management and human resources departments that they embed sophisticated time-tracking software, procedures and training.

A growing subtle threat of time theft in the workplace jeopardizes developing organizations, according to time-keeping software companies. Employees can unknowingly and casually steal time. Or they can willingly and fraudulently malinger. Time theft can morph into serious crimes, such as payroll fraud schemes. (See the sidebar, Ghost employees haunt organizations' payrolls.)

Time thieves, if they see opportunities, can commit more serious crimes, such as the ghost-employee payroll fraud scheme. A “ghost employee” is someone on the payroll who doesn’t actually work for the victim organization. Through the falsification of personnel or payroll records, a fraudster causes paychecks to be generated to a non-employee, or ghost. The fraudster or an accomplice then converts these paychecks. The ghost employee might be a fictitious person or a real individual who simply doesn’t work for the victim employer. When the ghost is a real person, it’s often the perpetrator’s friend or relative.

Four things must happen for a ghost employee scheme to work: 1) the ghost must be added to the payroll, 2) timekeeping (for an hourly employee) and wage rate information must be collected, 3) a paycheck must be issued to the ghost and 4) the check must be delivered to the perpetrator or an accomplice.

Adding the ghost to the payroll

The first step in a ghost employee scheme is entering the ghost on the payroll. In some businesses, all hiring is done through a centralized personnel department, while in others the personnel function is spread over the managerial responsibilities of various departments.

Regardless of how an organization handles hiring of new employees, those that are in the best position to put ghosts on the payroll have the authority to add new employees and remove terminated employees.

Here’s an example of a ghost-employee scheme. A manager who was responsible for hiring and scheduling janitorial work added more than 80 ghost employees to his payroll. The ghosts were actual people who worked at other jobs for different companies. The manager filled out time sheets for the fictitious employees and authorized them, and then took the resulting paychecks to the ghost employees who cashed them and split the proceeds with the manager. It was this manager’s authority in the hiring and supervision of employees that enabled him to perpetrate this fraud.

Source: ACFE online Fraud Examiners Manual, Financial Transactions and Fraud Schemes/Asset Misappropriation: Fraudulent Disbursements/Payroll Fraud Schemes/Ghost Employees

Charlie worked as an hourly, full-time staff accountant for a CPA firm. He usually punched in the digital time clock at 9 a.m. and punched out at 9 p.m. He always scattered his desk with files and papers to give the impression that he was overloaded with work. After punching in, he’d wander the building socializing with many of the employees and partners for up to 90 minutes each day.

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