Ghost Employees: Your Guide to Auditing, Detecting & Eliminating Fraud

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.

What is a “Ghost Employee?”

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.

What is Occupational Fraud?

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.

What Types of Companies Are Susceptible to Ghost Employees?

1. Large Companies

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.

2. Companies with High Turnover

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.

3. Companies That Don’t Audit Payroll

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.

The Common Element of Ghost Payroll

Ghost payroll schemes often involve an HR or payroll employee with access to key payroll functions, such as:

• Posting time and attendance information
• Preparing payroll disbursement summaries
• Adding and deleting employee master records
• Approving payroll disbursements and transactions

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.

How Payroll Ghost Schemes Work

Fraudsters exploit payroll access to create fake master records and issue payments to ghost employees. These schemes often include:

1. Gaining Payroll Access

The fraudster must have access to payroll systems, either as an employee with permissions or through stolen credentials.

2. Creating a Fake Employee Record

A fraudulent employee is added to the payroll database with fabricated personal details, including a falsified Social Security number and bank account.

3. Assigning a Salary and Hours Worked

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.

4. Routing Payments to a Fraudulent Account

The ghost employee’s salary is directed to a personal or fraudulent bank account controlled by the fraudster.

5. Avoiding Detection in Payroll Reports

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.

6. Continuing the Fraud Over Multiple Pay Periods

The scheme can persist over time, with payments continuing until an audit or a red flag prompts an investigation.

Who is Responsible for Adding Ghost Employees to Payroll?

The individuals responsible for introducing ghost employees into payroll typically include:

• Payroll Specialists: Employees with direct access to payroll systems may exploit their role to introduce ghost workers.
• HR Personnel: Those responsible for adding new employees to the system may insert fraudulent records.
• Managers or Supervisors: In some cases, higher-level employees may authorize fake payroll records or sign off on fraudulent disbursements.
• External Hackers: Cybercriminals who gain unauthorized access to payroll systems can manipulate records to funnel funds to their accounts.

To mitigate this risk, companies should implement strict oversight, multi-step approvals, and automated payroll audits to ensure accountability and detect suspicious payroll activity.

Auditing for Ghost Employees

Detecting ghost employee fraud requires proactive auditing and strict internal controls. Best practices include:

• Segregating Payroll Duties: Ensuring no single employee controls payroll preparation, disbursement, and distribution.
• Auditing Payroll Records: Identifying records without tax or Social Security deductions.
• Eliminating Paper Checks: Using direct deposits to reduce the risk of forged paychecks.
• Verifying Payroll Details: Checking for duplicate names, addresses, bank accounts, and Social Security numbers.
• Conducting In-Person Payroll Distributions: Periodically requiring employees to collect their paychecks in person with identification.
• Monitoring Payroll Budgets: Comparing labor costs to budgeted figures to identify discrepancies.
• Implementing Automated Audits: Using payroll software with built-in fraud detection to flag suspicious activity.

Tax and Payroll Software Solutions

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.