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Strategic Planning in the Payroll Department

FINDING PHANTOM EMPLOYEES The Challenge: Fraud can take many forms in a payroll department. One of the most common is the phantom employee scam. A fake or phantom employee is “hired” and set up in the payroll system. A payroll staff member even may work with a supervisor of another department in the scheme. This phantom employee is paid normally, never varying from regular hours, so as to avoid detection on an audit report. In fact, once the phantom employee is set up, it is almost impossible to detect and can go on for years, especially in large companies. The challenge to payroll managers is to ensure that no phantom employees exist on their watch.

The Solution: Payroll managers need to conduct internal audits to expose phantom employees or to prove that none exist. The best method to detect this type of fraud is to conduct a physical head count of employees to payroll checks. This is called a phantom employee audit.

During a phantom employee audit, a team of employees not related to the payroll department pass out the paychecks in person to each employee. This team, consisting of two or more individuals, should be from a third-party source if possible such as the company’s legal or accounting department. Keep a careful watch over this team.

To receive their paycheck, every employee must show identification, such as a company badge or driver’s license, and sign for the check. The ID must be a picture ID, if possible. No one receives a check without the ID. If an employee is on vacation or “out sick,” the check cannot be given to a supervisor. The employee must pick up the check in person.