Haunted by Ghost Employees? Here’s How to Catch One

Does your company have ghosts? No, not the spiritual ones, but ghost employees. Who are these phantom employees?

Ghost employees are a type of payroll fraud scheme in which a business pays individuals through payroll who do not actually work for the company. The ghost employee can be a real person or entirely fictitious, created by the dishonest employee who then collects the wages paid to the ghost. The dishonest employee(s) committing this fraud can be either one or more employees where someone has access to the payroll systems to add the ghost employee and then set the pay rate and payment method, such as a direct deposit.

According to the Association of Certified Fraud Examiner’s Occupational Fraud 2022: A Report to the Nations, organizations are estimated to lose approximately 5 percent of revenue to fraud each year, with an average of loss of $1,783,000 per case. Payroll frauds, such as ghost employees, are among the multiple types of fraud schemes and have a median loss of $45,000 lasting approximately 18 months.

While this type of occupational fraud was previously more common in larger companies or businesses with multiple locations, ghost employees are inhabiting more companies with the rise in remote workers. Other factors that put companies at risk for this fraud scheme include global entities with decentralized payroll processes, small businesses that assign all payroll duties to one or two employees with little oversight and companies with loose internal controls.

So how can your company take precautions and prevent ghosts from appearing?

1. Know your accounting staff. Perform background checks on these employees to thoroughly vet who will have access to your company’s accounting system and payroll.
2. Trust, but verify. While managing your business’s finances may not be at the top of your want-to-do list, completely turning over the reins to a “trusted” employee may be your company’s downfall. Be sure to monitor the processes and employees in the accounting department, especially those handling payroll, and run reports periodically to keep a check. Also, have an employee operate as a backup for special accounting functions, such as payroll, to step in from time to time.
3. Outline accounting processes and procedures to avoid ambiguity. Make sure your staff knows the correct processes for payroll and accounting activities. Not only will this reduce opportunities for fraud, but it will also help eliminate errors and make it easier to train new employees.
4. Implement checks and balances. Much like the government, a checks and balances system protects a business from one individual circumventing controls and running amuck.
5. Surprise, it’s an audit! By providing oversight, outlining processes and procedures and conducting surprise audits, the accounting personnel will understand that reducing fraud and eliminating errors is a management priority. These audits will enable your company to ensure accounting functions are operating as intended. In addition, audits allow you to identify possible discrepancies, errors and/or inconsistencies that may require a more thorough review.

It can be overwhelming to prevent or catch a ghost employee, so it may make sense to employ a consultant or third-party firm to perform internal audits, review personnel records and review your company’s business processes and internal controls. Your company may also elect to purchase a commercial crime insurance policy that covers your business if a dishonest employee commits fraud. Windham Brannon can help you in these endeavors – to learn more, reach out to your advisor, or contact Matt Stelzman