Beyond Controls

Turner's duties included posting time and attendance information to the computer system and preparing payroll disbursement summaries. Adding and deleting employee master records were separate tasks, performed by another staff member. As an additional safeguard, a supervisor approved all payroll disbursements, and the company deposited them directly into employees' personal bank accounts.

It took a bit of doing to circumvent the internal control system and steal cash from the nonprofit, but Turner was up to the task. First, when the co-worker who added and deleted master records logged onto the system, Turner peeked over her shoulder and noted her user ID and password.

This enabled him to add fake master records--for "ghost" employees--to the system. Because tax deductions were programmed to fall within a given range of employee numbers, each time Turner added the name of a phony worker to the system, he assigned to it an employee number higher than the range. Thus, the payroll summary report--which was printed each week in ascending order by employee number--displayed fake workers at the end of the printout where they wouldn't be selected for deductions.

Next, Turner entered false wage information for the ghost workers. At the same time, he arranged for their paychecks to be direct-deposited into his own bank account. Based on past dealings with his own financial institution, Turner knew the bank did not match the employee name to the one on the depositor's account.

Finally, to get over the last internal control hurdle--approval of the payroll disbursements by a superior--Turner prepared his own fake payroll summary for the supervisor's signature. Because Turner was seen as an exemplary employee, the supervisor didn't check his work carefully and failed to notice the fraudulent documentation was printed in a typeface different from the one used in the real reports.

Turner also had to create phony file copies of the ghosts' paychecks. He hoped no one would notice that the office's hard copies of legitimate employees' checks--printed in the accounting department--were yellow, while the ghosts'--printed by Turner--were white.

But someone did notice: An observant accountant got lucky and discovered Turner's ghost-employee scheme. During routine transaction-testing of the payroll account by the CPA firm Cuthill & Eddy LLP (www.cuthill eddy.com), an auditor immediately singled out a white copy of a paycheck. He brought it to Carson L. Eddy, the partner in charge of the audit.

Eddy, a CPA for more than 30 years, had encountered payroll frauds before and considered this suspicious. "Let's trace this disbursement through the system and see what we come up with," he instructed the staffer. The additional testing revealed the employee in question was not in the payroll register.

After more digging, Eddy and his staff uncovered three more names that weren't in the register. Their paychecks were all being direct-deposited to the same bank account--Turner's. "Looks like we've got a ghost-employee scheme," Eddy told his auditors. Realizing it was important to determine whether Turner was in collusion with another staff member, Eddy used textbook fraud-examination techniques to document the defalcation. First, the auditors obtained original copies of payroll registers, payroll check summaries, direct-deposit records, personnel files, time sheets and bank documents. In addition, they carefully interviewed accounting department employees and the executives in charge of oversight. Noting that Turner was the only employee who profited from the scheme, Eddy and his team concluded Turner had acted alone. Their report, which detailed his embezzlements, convinced Turner to plead guilty when the nonprofit filed charges. Under a plea bargain agreement, he served no jail time but was sentenced to 15 years' probation and ordered to make restitution.