THE FRAUD BEAT Strong internal controls and well-trained, attentive auditors can prevent phony-employee schemes. Keep Ghosts Off the Payroll T BY JOSEPH T. WELLS urner, a payroll specialist for a...

THE FRAUD BEAT
Strong internal controls and well-trained, attentive auditors can prevent phony-employee schemes.
Keep Ghosts Off the Payroll
T
BY JOSEPH T. WELLS
urner, a payroll specialist for a large Florida nonprofit organization, was a sick man. Most employees who steal do so out of greed, but Turner had a different motive—he was HIV-positive and needed expensive drugs to control the disease. Complicating matters, he hid his illness from his employer
and health insurer. Over the course of two years, he embezzled $112,000 to cover his medical costs. Although Turner needed the extra cash, there were alternatives to stealing. But he couldn't bring himself to reveal his sickness and ask for help.
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 safe-guard, a supervisor approved all payroll disbursements, and the company de-posited 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, Turn-er peeked over her shoulder and noted her user ID and password. This enabled him to add fake mas-ter 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 as-signed to it an employee number higher than the range. Thus, the pay-roll 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 in-formation 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 institu-tion, Turner knew the bank did not
U
match the employee name to the one on the depositor's account. Finally, to get over the last internal control hurdle—approval of the pay-roll disbursements by a superior—Turner prepared his own fake payroll summary for the supervisor's signa-ture. Because Turner was seen as an exemplary employee, the supervisor didn't check his work carefully and failed to notice the fraudulent docu-mentation was printed in a typeface different from the one used in the real reports.
WHITE AS A GHOST 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 em-ployees' checks—printed in the ac-counting department were yellow, while the ghosts'—printed by Turn-er were white. But someone did notice: An obser-vant accountant got lucky and discov-ered 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 pay-
December 20{}2 JOURNAL of ACCOUNTANCY 77