​​The Phantom Employee

Effective controls are key to addressing costly payroll fraud and time theft.​

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​A senior official with the U.S. Bureau of Land Management (BLM) has been convicted of covering up that a former subordinate was still being paid by the agency, the Associated Press reports. Federal investigators say John G​rimson Lyon, the BLM's Eastern States Region director, aided his former deputy Larry Denny in receiving US$112,000 in wages and benefits after Denny left the age​ncy for a job in Montana in July 2012. They say Lyon certified Denny's work hours and sick leave until March 2013 and pressured BLM employees who raised questions about Denny. A federal judge in Montana sentenced Lyon to six months in prison and ordered him to pay US$74,000 in restitution. Denny has pleaded guilty to theft and fraud, and awaits sentencing.

Lessons Learned

This story involves a form of payroll fraud, albeit a very sizable single example. Making the story that much worse is the deliberate, sustained collusion between the former employee and his supervisor that enabled this fraud to go undetected for many months. When employees are paid for time they have not actually worked, it's a form of fraud and theft. It is estimated that the average employee "steals" between four and five hours a month from his or her employer — committing time sheet fraud, break abuse, or conducting personal business on company time — which adds up to one full work week every year, costing businesses hundreds of billions of dollars a year worldwide. According to the Association of Certified Fraud Examiners, payroll fraud is the No. 1 source of accounting fraud and employee theft:

  • Payroll fraud happens in 27 percent of businesses.
  • Payroll fraud occurs nearly twice as often (14.2 percent) in small organizations with fewer than 100 employees than in large ones (7.6 percent).
  • The average instance of payroll fraud lasts about 36 months.

Internal auditors should check that their organization has taken steps to address payroll fraud and time theft:

  • Internal controls are the first line of defense against payroll fraud. In the case of the BLM, clearly the soundness of those controls should be questioned. In writing this article, I checked the BLM's website for audits conducted, going back several years, but I didn't find any related to payroll and employee time theft issues. Payroll audits should be conducted regularly in all areas of the organization and cover all types of employment situations. Using computers, it is relatively easy to flag anyone who receives certain categories of pay such as sick leave, temporary employment with another organization, overtime, and standby time. An identified subpopulation of employees can then be stratified based on materiality and risk for further investigation.
  • Senior management and its related human resources and financial management oversight function also need to be engaged in the review of salary expenditure and employee performance reports, including talking to employees from time to time. An effective human resources function should be able to scrutinize employee time and leave reporting for unusual patterns and to report these incidents to senior management.
  • Another check and balance on potential long-term time theft fraud is to periodically conduct "desk audits" of employee work functions as detailed in job descriptions vs. how the employee actually performs the work. This practice is useful both in periods of organizational change and relative stability where productivity improvements may be desirable.
  • Rigorous background and security checking before recruitment takes place is always a good practice, but given the evidence of ever-increasing fraud committed by long-term employees and managers, it also is important to periodically re-check employee backgrounds to establish whether their personal circumstances and predilections for fraudulent behavior may have changed. In an environment where younger employees change jobs more frequently, employers need to be able to share relevant background information more readily.
  • Essential controls should be in place regarding time reporting, including that line managers must send time reports directly to the payroll function, rather than to the employee, who could gain an opportunity to falsify them.
  • As in this story, managers and employees may conspire to commit fraud. With today's tight corporate budgets, raises may be small or nonexistent, so even a well-meaning manager who has staff retention in mind may give an employee a raise by allowing questionable overtime charges or leave requests. With this in mind, some potential red flags to look out for in the behavior of managers include:
    • Being overly protective or exclusive about their organizations, employees, and workspaces.
    • Preferring to work on sensitive matters such as human resource issues after hours or take work home.
    • Gaps in financial records or missing records.
    • Unexplained debt or wealth gains in the individual's personal life.​
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