Management and Organizational Studies 3367A/B Chapter Notes - Chapter 4&6: Trend Analysis, Accounts Payable, Shell Corporation

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Ch6 Payroll Scheme
Based on fraudulent time cards or payroll registers and they show that the victim
organization owes money to one of its employees
3 main categories
1. Ghost employee schemes (higher level managers)
a. Someone on the payroll does not actually work for the victim company
b. A ghost employee is an accomplice of the fraudster who cashes the
fraudulent pay checks and then splits the money with the perpetrator
c. Could be a real person or a fictitious, a friend or relative, and accomplice
d. 4 things must happen
i. The ghost must be added to the payroll
Through payroll department
Through hiring department
Through personnel department
Using names similar to real employees
Failing to remove terminated employees from the payroll
ii. Timekeeping and wage rate information must be collected
Fake timecards
Approval of timecards
Computerized timekeeping systems
Salaried workers VS. hourly workers
iii. A pay check must be issued to the ghost
iv. The check must be delivered to the perpetrator or an accomplice
Hand delivered
Mailed to the employees address
Direct deposited
e. Prevention and detection
Separate the hiring function from other duties associated with payroll
Personnel records should be maintained independently of payroll and
timekeeping functions, any changes to payroll need to be verified by
the personnel department
Conduct background checks and reference checks on all prospective
Periodically check the payroll records against personnel records for
terminated employees and unauthorized wage or deduction
Periodically run computer reports for employees
Without SINs
With no deductions - withholding taxes or insurance
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With no physical address or telephone number
Compare payroll expenses to production schedules
Keep signed checks in a secure location
Verify proper distribution and require employee identification
2. Falsified hours and salary schemes
a. Manually prepared time cards
i. Forging a supervisor's signature
ii. Collusion with a supervisor
iii. Rubber stamp supervisors
Rely on supervisor to approve them without reviewing the
timecards accuracy
iv. Poor custody procedures
b. Time clocks and other automated timekeeping systems (employee has
someone else clock in for them when absent)
i. Rates of pay (overstated the number of hours worked, inflation of the
rate of pay)
c. Prevention and detection
Preparation, authorization, distribution, and reconciliation should be
Transfers of funds from general accounts to payroll accounts should be
handled independently
No overtime should be paid unless authorized in advance
Sick leave and vacation time should not be granted without supervisory
review and should be monitored for excessive time taken
A designated official should verify all wage rate changes
Timecards should be taken directly to the payroll department after
Time cards should be secured and monitored
Run programs to actively seek out fraudulent payroll activity
d. Tests for Fraudulent Payroll Activity
Review employees who have significantly more overtime than similar
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