Cannabis Payroll: Challenges, Compliance, and Solutions for the Industry
The cannabis industry is growing fast, bringing new challenges for HR and finance executives. Managing payroll in this sector is more complex than in...
3 min read
Kayla Kelly
:
Jan 03, 2022
Regardless of the cause, ghost employees result in financial losses as funds are disbursed to individuals who do not contribute to the company. This guide provides insights into auditing, detecting, and preventing payroll fraud associated with ghost employees.
A ghost employee is an individual who appears on a company’s payroll but does not actually work for the organization. This could occur due to an accidental failure to remove a former or deceased employee from payroll records. However, more often, ghost employees are fraudulently added to payroll to divert wages to unauthorized individuals.
Occupational fraud refers to deliberate deception committed by employees or executives for financial gain at the expense of the organization. It includes misappropriation of company assets, fraudulent financial reporting, and corruption. Payroll fraud, including ghost employees, is one of the most common types of occupational fraud, as it allows individuals to siphon funds through falsified wage payments. The Association of Certified Fraud Examiners (ACFE) estimates that businesses lose approximately 5% of their revenue annually to occupational fraud, highlighting the need for strict internal controls and oversight.
Companies with a high number of employees are particularly vulnerable. Payroll specialists may not personally recognize every individual receiving payment, increasing the risk of fraudulent names slipping through unnoticed.
Organizations with frequent employee turnover or multiple locations often experience challenges in tracking employees, making it easier for fraudulent records to blend in with legitimate payroll data.
Businesses without a structured process for reviewing payroll or those lacking automated payroll software are at greater risk. Fraudsters only need to enter a ghost employee once for continuous fraudulent payments.
Ghost payroll schemes often involve an HR or payroll employee with access to key payroll functions, such as:
When these functions are not separated among different personnel, fraud risks increase. Additionally, unauthorized individuals may gain access to payroll systems through password theft or physical access to payroll records.
Fraudsters exploit payroll access to create fake master records and issue payments to ghost employees. These schemes often include:
The fraudster must have access to payroll systems, either as an employee with permissions or through stolen credentials.
A fraudulent employee is added to the payroll database with fabricated personal details, including a falsified Social Security number and bank account.
The fraudster ensures that the ghost employee has a wage assigned, typically at an inconspicuous level to avoid detection. Some schemes manipulate payroll data to reflect overtime or bonuses.
The ghost employee’s salary is directed to a personal or fraudulent bank account controlled by the fraudster.
Fraudsters may exclude ghost employees from tax deductions or hide them in payroll summaries by manipulating employee numbering systems or omitting them from certain compliance reports.
The scheme can persist over time, with payments continuing until an audit or a red flag prompts an investigation.
The individuals responsible for introducing ghost employees into payroll typically include:
To mitigate this risk, companies should implement strict oversight, multi-step approvals, and automated payroll audits to ensure accountability and detect suspicious payroll activity.
Detecting ghost employee fraud requires proactive auditing and strict internal controls. Best practices include:
A robust payroll system helps prevent fraud by automating payroll monitoring and flagging inconsistencies before payments are issued. Payroll and tax software solutions enable companies to detect potential ghost employees in real-time, reducing financial losses and improving compliance.
For more information on payroll fraud prevention and software solutions, contact our team today.
About the Author
Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.
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