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ARTICLES OF INTEREST - PAYROLL
PAYROLL PAYOFF by Edward Nagel
2. Beware of your vulnerability to fraud by lax controls over your payroll systems

What Adele Sharpe was a compulsive gambler, and she hid it well. Her problem began innocently at work when one day a casino website popped up on her computer as she surfed the Internet during lunch. She placed a few bets using the free credits offered by the site to entice first-time players. She won, and that gave her a thrilling feeling, she would later explain to fraud investigators.

Two years later, as the payroll manager of a medium-sized manufacturing firm near Winnipeg, Sharpe found herself accused of defrauding her employer of $750,000.

Why did she do it? To pay off her gambling losses, an average of $7,000 a week. How did she do it? By taking advantage of a lack of proper controls in her company's payroll department. There was nothing cunning about Sharpe's scheme. She simply exploited a system that functioned on the assumption that, like most payroll managers, she was trustworthy. Until she developed a taste for gambling, that had been true.

Sharpe had worked at the company for a decade. Her performance reviews described her as hardworking, reliable and loyal but did not mention she felt underpaid. Her annual salary was slightly more than $35,000, and had barely risen in recent years despite an increase in her responsibilities. As a result, Sharpe was bitter, thinking her employer didn't treat her fairly. Her bitterness grew as she saw others get annual increases and bonuses. When her gambling began to spiral out of control, she used the lack of oversight in the payroll department to cover her debts. "As far as I was concerned, they owed me," she told the forensic accountants.

Sharpe's primary deception was two factitious employees she set up on the company's hourly payroll system as a new and separate cost centre. As she processed and received the records sent to and from an external payroll provider (EPP) without effective oversight, she was able to control the scheme without detection. The phantom employees' cheques were drawn up manually by EPP, sent to Sharpe and deposited into an account she had in a bank near her home.

In theory, the company's human resources manager and comptroller were supposed to review Sharpe's work. In reality, the manager was focused on providing her with the correct input for employees' wages and benefits. The comptroller appeared not to have exercised control over payroll in any meaningful fashion, a trait Sharpe was well aware of. In particular, the payroll paid was never reconciled with the authorized payroll.

When EPP returned the voluminous payroll registers, Sharpe destroyed the pages relating to the phantom employees. Near year-end, she also had EPP make adjustments to the payroll register to eliminate the amounts paid to the phantom employees, thus avoiding any undue T4 slips. When she went on vacation, she deactivated the two names from the payroll — it was not uncommon for hourly workers to come and go — and reactivated them upon her return. Sharpe could design the payroll system so that only active employees would appear on the payroll register generated by EPP. During her absences, the phantom employees were excluded from the payroll package.

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1. Preventing and detecting Payroll fraud..
2. The Payroll Payoff...Edward Nagel
3. What internal controls are needed for payroll?
4. Keep ghosts off the payroll
5. Payroll - Risks associated with payroll
 
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