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Payroll Fraud is a form of asset misappropriation that involves the theft of cash through a company’s payroll processing system. Common payroll fraud schemes include:

Most common payroll fraud and abuse:

Ghost Employees – This involves the creation of a fake employee and/or reactivate a previously terminated employee in the company’s payroll system.

Prevention internal control measures:

* Require secondary management approval in the payroll system to new hire or reactivate terminated employees.

* Eliminate paymaster access to employees direct deposit account information or ability to enter new account information.

* Perform routine verification of all active employees on a random quarterly basis.

* Segregation of duties between the person whom prepares the payroll (paymaster) and the qualified manager whom reviews and approves each payroll.

* Require a printed check (disable auto deposit) for all employee terminations.

* Require new Form I-9’s be completed for re-hire or reactivated employees.

* Limit inter-company payroll charges appearing in multiple division or company payrolls.

Buddy Punching – This payroll abuse scheme involves an arrangement of employees who fraudulently clock-in for one another when one of them is not present. The missing person is receiving his/her wages without physically being present and performing his/her work duties.

Prevention internal control measures:

* Utilize online employee work schedules and forecasting compared to actual with variances

* Utilize bio finger time clocks

* Require manager daily time punch review and edits

Pay Rate Alteration – Employees of a company who collude with the payroll department and/or system to adjust their pay. This type of fraud is more likely at a small company due to a fewer amount of controls and segregations between work.

Prevention internal control measures:

* Require secondary management approval to enter and/or change employee pay rates in the payroll system.

* Utilize signed PAF personnel action forms in writing or online when processing employee pay rate changes.

Internal Audits play a key role in minimizing the potential occurrence of fraud.

Our auditors have considerable experience in understanding potential weaknesses in hotel operations, and instituting internal control procedures to minimize the occurrence of potential fraud.


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