That said, it is not just large businesses that need to be on the lookout for ghost employees. Small organizations are also at risk, especially when a one individual oversees the payroll process and/or there is no one else reviewing payroll transactions carefully.

Who typically commits this type of fraud?

To perform this type of fraud, the employee carrying out the scheme needs access to the payroll system or will need to collude with someone that has access. The dishonest employee(s) would access the payroll system to add the ghost employee and set the ghost's pay rate. Employees with the ability to add, remove, and edit payroll information are the most likely to carry out a ghost employee scheme. Such an employee would not need complete control over the payroll process and may not even need the ability to approve outgoing payments, as the payroll system often automatically creates and processes the outgoing payments. Once the ghost employee scheme is set up, the fraudster can simply collect the stolen funds every time payroll is run.

How does the ghost get added to payroll?

Adding the ghost employee into payroll can be accomplished via direct access to the payroll system by the employee committing the fraud or by colluding with a peer that has payroll system access.

If the fraudster does not have access to the system and is not colluding with someone who does, a ghost employee can also be added via the organization's normal new employee onboarding process. To carry this out, the fraudster may forge documents and authorizations needed to add an employee to payroll. Forged documents of this nature are especially difficult to detect in organizations with large employee bases and high turnover.

The fraudster may also have to forge documents such as wage/salary approval forms and timesheets to keep the scheme running.

How does the fraudster get the money from the ghost?

If paychecks are mailed, the employee committing the fraud will need to get possession of the check. If the ghost employee is an actual person, the two individuals can work together to cash the check and split the funds. Common examples of a ghost employee acting as an accomplice include the dishonest employee's family, friends, or other employees. To cash the check, the ghost, acting as an accomplice, will need to have a bank account in their name to convert the check into usable funds. If the ghost employee is not an actual person, the fraudster will need to have a bank account established using the fake name.

If wages are paid by electronically via direct deposit, the employee committing the fraud will need access to the bank account in which the funds are deposited. This will be easier to accomplish if the ghost employee is an actual person and accomplice in the scheme. If the ghost is a fictitious person, the employee committing the fraud will likely have to forge documentation to set up the bank account.

How can organizations protect themselves?

The first step in protecting your organization from ghost employee fraud is to prevent it from happening in the first place. Establishing strong internal controls surrounding payroll is a crucial step in preventing ghost employee fraud. Some examples of effective payroll internal controls include requiring approval from multiple individuals to add, remove, or change the pay information of employees; rotating the duty of payroll processing amongst several individuals; and performing periodic reviews of the payroll register report.

In summary, early detection through monitoring for existing fraud schemes is crucial in managing payroll fraud risks. The first step to identifying potential ghost employee schemes is to thoroughly review the payroll register report each pay period. To do so, organizations need to be mindful and take the proactive steps necessary to identify the warning signs that may indicate the existence of a ghost employee.

Disclaimer: The summary information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal questions, it is recommended they consult with their attorney.