Are You Haunted by a Ghost Employee?

A ghost employee is someone who appears on your payroll system, but who does not work for your company. The ghost employee can be a real person who is knowingly added to the payroll records, or a fictitious person invented by a dishonest employee.

For example, Matt was a trusted long-term employee who, unfortunately, was deeply in debt. Recognizing that his company’s payroll controls were loose enough to be exploited, he put a “ghost” employee, “Scott,” on the payroll, opened a bank account in Scott’s name and arranged for direct deposit of Scott’s paychecks.

Although both Scott and Matt are fictitious, they have plenty of real-life counterparts. “Ghost” employees go unnoticed in many companies because employees are trusted too much and internal controls are nonexistent — or only haphazardly applied.

Small businesses at risk

It may seem like it would be easier to hide ghost employees in large companies. In fact, small businesses, where a single employee may handle all the payroll accounting, are more vulnerable. In some cases, the perpetrator enlists a friend or relative to forge endorsements or deposit checks; in others, no assistance is necessary. The thief simply exploits weaknesses in the payroll system.

But ghost employees are just one way for dishonest employees to manipulate your payroll system. Perhaps the easiest scam to perpetrate is to overpay withholding or payroll taxes. The government sends a refund to your company, and the employee deposits it in an account in his or her name. Other methods of defrauding your payroll system include falsifying hours, increasing commission rates and filing false workers’ compensation claims.

Follow the tracks

The good news is that payroll schemes usually leave traces. Look for:

  • Paychecks with no tax or Social Security deductions,
  • Dual endorsements on paychecks,
  • Duplicate names, addresses or Social Security numbers in payroll records,
  • Higher-than-budgeted payroll expenses, and
  • Unusual spikes in the number of payroll checks presented for payment.

To prevent this type of fraud, it’s essential to segregate payroll duties. If one employee writes checks, reconciles statements and keeps the books, that employee may be tempted to steal — particularly if that person feels overworked or underpaid.

You might also consider outsourcing your payroll process. If that’s not practical, make sure your computer system is secure and that all records are password-protected and access-limited.

Take control

It’s fairly easy to invent ghost employees and conjure up other payroll fraud schemes. But it’s also easy to prevent and detect them. You just need to take control. Contact us for more information.


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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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