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PAYROLL PAYOFF by Edward Nagel
2. Beware of your vulnerability to fraud by lax controls over your payroll systems

To conceal the additional costs of her scheme, Sharpe would spread them over the company's legitimate cost centres when she provided the payroll journals to the comptroller.

Sharpe also expanded her scheme. She started paying herself for unauthorized overtime. Although this plan proved to be a great success — she paid herself for 1,500 hours overtime over two years as opposed to the actually 50 she did work — it proved to be her downfall.

Sharpe falsified records, carelessly changing numbers with whiteout. She used already approved overtime forms and altered dates and hours to paper her overtime file. One day, the human resources manager noticed one of the clumsily altered documents — the excessive overtime claimed had itself gone unnoticed — and contacted the company's external auditors. After a preliminary review, a full-scale investigation was done by independent forensic accountants.

Although Sharpe managed to shred critical documents before her dismissal, it didn't take the forensic accountants long to uncover her schemes. When she was confronted with the evidence, it was confirmed that she had spent all the money on gambling.

While Sharpe exploited the company's almost nonexistent controls over a long period, Sonia Arpao's company had more than adequate oversight. Her opportunistic plan was described as a smash-and-grab operation.

During a 20-year career, Arpao moved up through the ranks at a large retail company until she became its payroll administrator. She was respected for her work ethic and her tendency to mind her own business. However, a change in her life circumstances led her to defraud her employer and, ultimately, to her undoing.

While on a trip to Brazil, Arpao fell in love and allowed her to be talked into a plan her lover said would allow them to retire together, forever.

Arpao and he concocted a way to steal $1 million when her immediate supervisors would be away in early November.

As part of the retailer's control system, most payroll functions were set up on a computer only Arpao and her two supervisors — both of whom implicitly trusted her — had access to. Arpao knew the retailer didn't have a separate bank clearing account for payroll (an unwise decision), which made it possible for an artificially created payroll run to be charged against the firm's main bank account.

Arpao was also aware the firm would be paying generous bonuses to senior managers after the year-end in October. Consequently, in early November she directed EPP to make an unauthorized payroll run that sent bonus payments of $1 million to her account at a local bank. On the payroll the payments were made under the executives' names, but the direct deposit information was changed to ensure she got the funds. She counted on the false run being perceived by EPP as legitimate bonus payments. At the same time, she purchased a one-way ticket to Brazil.

She later tried to wire transfer the funds to Brazil. However, an alert bank employee noticed the infusion of company funds into her account and contacted the employer for verification. The transaction was cancelled and the accounts were frozen. If not for the alert bank employee, a temporary weakness in the firm's controls would have allowed her plan to succeed.

A common failing in many business systems is that they are too focused on the prevention and detection of fraud by employees. However, payroll fraud is not just perpetrated by workers and middle-level employees, it can also involve senior executives.
Michelle Rivers was a long-term, trust-ed executive who had full responsibility over the executive payroll function at a large investment dealer. She longed to live the high life and, early on during her tenure at the company, began to award herself unauthorized salary increases. At first she made small annual adjustments to payroll, but these gradually increased over time, as greed got the better of her. Over a 10-year period, Rivers paid herself $5 million she had not earned.

Rivers' exclusive control over executive payroll allowed her to appropriate some of the firm's profits. Her scheme was effective until an internal auditor stumbled over the excessive payments. Each of these cases involved a trusted employee who had access to the payroll system without controls or oversight.
In the first case, the employee took advantage of her employer's trust and used her extensive knowledge of the EPP functions to cover up fraudulent activity. A periodic review of the payroll registers by the human resources manager or comptroller, closer scrutiny of labour costs or reconciliation between the payroll expense and the funds disbursed for payroll would have revealed the fraud.

In the second case, the employee took advantage of a temporary absence of effective oversight and the availability of funds as the company had no separate payroll clearing accounts. While not an uncommon practice, particularly in smaller firms, this was an easy and tempting target for a greedy employee.
The third case was an opportunity waiting to happen. Rivers created an exclusive role for herself by ingratiating herself to key executives. The payroll function lacked any segregation of duties such that this role went completely unsupervised. And there was a strong, healthy cash flow from operations. Again, a blatant weakness in internal controls led to this simple yet effective fraud.

Given the autonomy enjoyed by payroll administrators, the frequency and volume of activity going through payroll throughout the year, and the fact that payroll often represents by far the most significant expense a company incurs, it would follow that the payroll function is highly susceptible to fraud. In light of this, it is critical companies do whatever they can to prevent opportunities for payroll fraud, including careful oversight of personnel at all times.

Although most employees are trustworthy, there are enough cases of that trust being exploited for all companies to ensure they always look over the shoulder of the people who look over their payroll.

All the cases have been disguised.

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1. Preventing and detecting Payroll fraud..
2. The Payroll Payoff...Edward Nagel
3. What internal controls are needed for payroll?
4. Keep ghosts off the payroll
5. Payroll - Risks associated with payroll
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