Canadian Payroll Reporter

4 Canadian HR Reporter, a Thomson Reuters business 2014 News August 2014 | CPR August 2014 | CPR attending an education session on payroll fraud at the Canadian Payroll Association's recent annual conference in Toronto. Nagel's firm, nagel + associates inc, carries out fraud investigations and provides fraud awareness courses and anti-fraud consulting to organizations. His presentation looked at the elements that go into committing payroll fraud, the warning signs to watch for and steps that companies can take to prevent it. Fraud consists of four parts, starting with the actual act of fraud, he said. "What we are talking about here is some- thing like setting up a fictitious or ghost em- ployee and putting them onto our payroll and paying that employee." The other elements are the intention to carry out fraud, actions taken to hide the fraud (such as shredding documents) and loss (generally a financial one). "Those four elements need to be in place for a fraud to occur," said Nagel. He described the profile of a typical person who may commit fraud as being a male be- tween the ages of 36 and 55 who has worked for an organization for more than 10 years and is in a senior management position. Research on fraudsters by professional services firm KPMG found that 32 per cent worked in finance, 26 per cent were CEOs and 25 per cent were in operations/sales. "Those are the people that have control, access and limited supervisory oversight in some cases," Nagel said. Many of those who commit fraud do not do it alone. "For example, somebody within the HR department and somebody in the payroll de- partment could get together, in theory, add a new employee and start paying them. Now, if those two individuals got together, you could see how quickly a ghost employee could be added to payroll without anyone noticing," he said. To prevent fraud, Nagel said it is impor- tant to understand why and how it occurs. He used a model called the fraud triangle to explain the elements that go into a decision to commit fraud. "That's the one thing that, (if ) you think about (it) as you are reviewing transactions, you will always know when something might be going on," he said. The triangle's three points are incentive/ pressure, opportunity and rationalization. Nagel used a fictitious example of a senior manager within an organization who has been living beyond his means and has credit card debts and loans to pay (incentive/pres- sure). The person has minimal supervision by his direct report and has access to account- ing records. He is often the person who ap- proves his own expenses (opportunity). The manager has worked for his employer for more than 10 years, but has not received the promotions that he feels he deserves. His resentment about this has continually grown over the years (rationalization). Nagel said newer research into fraud sug- gests two other elements are also at play: arrogance and competence. This would be individuals who think they are above an or- ganization's rules and policies and who know how to override company systems without being caught. "Those two additional elements will en- able you to carry out fraud," he added. Nagel gave an overview of five different ways employees can carry out payroll fraud: • Falsified wage schemes: This can include employees claiming for overtime that did not occur or purposely writing down incor- rect information on timesheets. • Commission schemes: This can include salespeople putting in purchase orders for sales that do not exist or using secret side agreements to obtain unearned commis- sions. • Ghost employees: This is where fake em- ployees are put on an organization's payroll. They can be fictitious people or real people who do not work for the organization. "I've seen cases where people have added termi- nated employees on their books," Nagel said. "I have seen (cases) where deceased employ- ees have been brought back." • Workers' compensation schemes: This can include faking injuries or suffering inju- ries at home and claiming they happened at work in order to claim workers' compensa- tion benefits. • False expense claims: This can involve falsely claiming expenses for small and large amounts of money. Some employees claim a few dollars more for a taxi fare, while others claim personal expenses as business expens- es. Nagel said he has seen cases where some people go so far as to create fake receipts to claim expenses for meals or items that they never bought. He added that there are web- sites that allow individuals to create phony receipts. To prevent fraud, Nagel identified payroll- specific red flags to watch for. While they do not mean fraud is actually taking place, he said payroll should investigate for possible fraud if they see these signs: • There are unusual fluctuations in payroll expenses or hours. • Employees who do not have an HR file, but who are listed in payroll records. • Employees who have the same bank ac- count number, home address, social insur- ance number, date of birth, etc. • Employees who accrue vacation time, but refuse to take it. • An employee's home address is not listed, is a post office box, is the company's address or is more than 150 km from the workplace. • Employees listed in the payroll register who do not have a position included. • Extra payroll stubs are left over after being handed out to employees. Nagel said one cli- ent that paid employees in cash started to notice its payroll costs were rising. When Nagel's company investigated, it found a ghost employee scheme. "One of the things that you can do to discover fraud in payroll is to substitute the person who is actually handing out the payroll stubs for one pay period. And they did that and they had five envelopes left over, all full of cash, all ghost employees." • Receipts for expense claims that are inad- equate or have been altered. • Pay increases happening at unusual times of the year. "Most companies do a pay in- crease at one or two times a year based on financial results," he said. "If we start to see any changes in pay midway through the year, that should get a red flag automatically un- less you got a promotion or some other rea- son that legitimizes that." • SINs that are not valid. He also offered a number of tips for pre- venting and detecting payroll fraud, in- cluding the importance of segregating du- ties within payroll. "We've got to separate between setting up employees and paying those employees." Where there are cheque requisitions, there must be cross-referencing to prevent people from taking advances and not offsetting them against their claims, he said. "If there's a manager who approves a cheque requisi- tion and a different manager who approves an expense report, there has to be some kind of communication between the two." Training is also important, Nagel said. Not only can it teach people how to look for the signs of fraud, it can also act as a deterrent. "It tells everybody else within your organi- zation that now everyone knows what these red flags are." He also suggested organizations use whis- tleblower hotlines to provide a confidential way for people to report suspicions without fear of retaliation. Companies could set up a hotline themselves or use a third party. Another measure organizations can take is to put in place effective anti-fraud policies. Watch for commission schemes, ghost workers and false expense claims from FRaUD on page 6 see anti-FRaUD on page 6

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