Is Your Payroll Being Plundered - Detecting Payroll Fraud Using Data Analytics

Is Your Payroll Being
Plundered?
February 27, 2013
Special Guest Presenter:
Katrina Kiselinchev, CIA, CPA, CFE, CFF

Copyright © 2013 FraudResourceNet™ LLC

About Peter Goldmann, MSc., CFE



President and Founder of White Collar Crime 101

Publisher of White-Collar Crime Fighter
Developer of FraudAware® Anti-Fraud Training
Monthly Columnist, The Fraud Examiner,
ACFE Newsletter

 Member of Editorial Advisory Board, ACFE
 Author of “Fraud in the Markets”
Explains how fraud fueled the financial crisis.


About Jim Kaplan, MSc, CIA, CFE
 President and Founder of
AuditNet®, the global resource
for auditors
 Auditor, Web Site Guru,
Internet for Auditors Pioneer
Recipient of the IIA’s 2007
Bradford Cadmus Memorial
Award.
 Author of “The Auditor’s
Guide to Internet Resources”
2nd Edition

About Katrina Kiselinchev, CPA, CIA, CFE, CFF
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President of Inclusivitie, We Do “SMART”
Integration Partner with IDEA
Experience across industries, audit, fraud, and value
Achieved Value of $5+ Million & ROI of 2000+%,
which included using IDEA’s SMART Analyzer for
continuous monitoring & external reliance
Adjunct Professor at Georgia State University
Specific Fraud, in Payroll, Fake Checks & Hour Overages


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Learning Objectives
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Costliest Forms of Internal & External Payroll Fraud
Who Commits Payroll Fraud
Gathering Accurate Data for Effective Data Analysis
Powerful and User-Friendly Audit Automation Tests
Techniques for Detecting Red Flags of Payroll Frauds
Data Analytics Results & Improving Preventative
Controls for Payroll


5

Agenda
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Introduction
Standards & Essentials
Fraud State of the Union
In the News: Costliest Forms of Payroll Fraud
Payroll Fraudsters
Planning for Payroll Fraud
Data Gathering for Payroll Data Analysis
Data Analysis & Payroll Fraud
Red Flag Detection & Payroll Fraud
Using Data Analysis Results to Improve Controls

6

The Auditor’s Role

 IPPF Standard 1210.A3
 Internal auditors must have
sufficient knowledge of…available
technology based audit techniques
to perform their assigned work


IIA Guidance – GTAG 13
Internal auditors require appropriate
skills and should use available
technological tools to help them
maintain a successful fraud
management program that covers
prevention, detection, and
investigation. As such, all audit
professionals — not just IT audit
specialists — are expected to be
increasingly proficient in areas such as
data analysis and the use of
technology to help them meet the
demands of the job.


Professional Guidance



2012 ACFE
Report to
the Nations



2012 ACFE Report
to the Nations


In the News:
Costliest Forms of Payroll Fraud
According to ACFE's "Report to the Nation on Occupational Fraud
and Abuse":
 > 39% of Fraud Cases in Payroll Occur in Business with < 99
Employees
 Payroll Fraud Accounts for Nearly 10 percent e.g. $60 Billion Annually
 Small Businesses Losses Average $127,500 per Scheme.
 Large Company Losses Average $97,000 per Scheme.

Ranked from Most to Least Costly
Occurrence
Ghost Employees
Commission Schemes
Workman’s Compensation
Falsified Wages

Average Per
$100,000 - $300,000
$100,000+
$100,000+
$50,000+


Polling Question 1

The median loss in 2012 for
owners/managers in fraud cases was
_______.
a. $182,000
b. $573,000
c. $60,000


In the News:
Case of Being Asleep at the Wheel in the
City That Never Sleeps

Mayor Says Payroll Fraud “Slipped
Through the Cracks”
 Joel Bondy, Head of NYC Payroll hired Mark
Mazer, a “quality assurance” consultant and gave
him authority and budget to hire subcontractors.
 Mazer awarded “subcontract” of $55 million to a
company owned by his uncle… one for $20 million
to a friend … one worth $1.4 million to another
friend.
 Each “ghost subcontractor” kicked back 1/3 to
Mazer thru shell companies owned by his wife and
his mother.
Total cost to NYC payroll budget: $80 million


Payroll Fraudsters: Perpetrators


Payroll Fraudsters: Perpetrators


Polling Question 2

The duration of payroll incidents in 2012 was...
a.
b.
c.
d.

24 months
18 months
36 months
12 months


Data Gathering for
Payroll Data Analysis
 Request All Meta Data Fields
 Name
 Employee ID
 Address
 Rate of Pay
 Commission
 History for X Time Period
 Additions & Changes to Status
 Changes to Fields & Who Made Them


Auditing for Payroll Fraud
 Request Access Listing & Last Activity from IT
 Provide Employee Listing from Payroll & 100% Alignment with
Access

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Cross Reference IT to Active Employees Paid (Join)
Review Employees with High Withholding Exemptions
Review Employees with Low (or no) Tax Withholdings
Request Data of Employees with No Voluntary Deductions
Request a No-PTO-Used Report for Employees
Request a Listing of Employees with No Changes > 6 Months
Request a Listing of Employee & Deposit Accounts (Dups)
Any Red Flags Could Equal a Problem!

Red Flags of Payroll Fraud

 Allowances/Garnishments to Disallowed Positions
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Overtime for Salaried Employees
Meal allowances to Unqualified Employees

 Employees on the payroll that do not appear on the:
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Phone listings, Human Resources employee listing etc

Same Bank Account Numbers for Two Employees
Excessive Overtime
Excessive Commissions “Earned”
Gross pay = Net Pay (no deductions)
Continued…


Red Flags for Payroll Fraud (continued)

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Duplicate Payments & Time
Modified Time by Other Employees
Employees with No Vacation Time Paid
Employees Paid with Non-Standard Checks
Two employees with Same Social Security #
Same address for 2+ Employees
Oddly-timed Pay Increases
Ex-employees with Paychecks


Behavioral Red Flags

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Unexplained Wealth
Sudden Unusual Mood Swings
Financial Problems e.g. Credit card or other debt
Family problems e.g. divorce, child access issues
Gambling Problems
Addiction to Drugs / Alcohol

Polling Question 3

What Additional Items Should Be Requested
Beyond Meta Data Standard Fields?
a.
b.
c.
d.

Access & Activity Listing from IT
Employees with All Changes
Neither of the Above
Both a and b

Top 10 Areas for Data Analysis
1) Accounts Payable & Accounts Receivable
 Purchasing to Payment Analysis
 Review of Operating Disbursements
 Validation of Payments to Vendors
 Analyzing AR Open Orders for Process Deficiencies
 Evaluating AR Aging for Internal and External Financial Reporting
 AR Testing and Searching for Duplicate Payments
2) Duplicate Detection (Payroll)
 Fraud, Errors, Anomalies, or Outliers
 Payments, Invoices, Transactions, Credits
Results from Survey Conducted by Audimation Services, Inc. in 2011


cont.
3) Sampling
 Ability to Test 100%
 Adequate Representation
 Scope Setting

4) Data Imports/Extracts & Analysis of Large Data Sets
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Text
PDF
Excel
Word

5) Continuous Auditing & Monitoring
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Financial Statements & Areas
Travel & Entertainment
Disbursements(Payroll)
Human Resources

Polling Question 4

Which of the following could be red flags
of payroll fraud (choose all that apply)
1.
2.
3.
4.
5.

Different Bank Accounts
No Overtime for Salaried Employees
Overtime for Salaried Employees
Gross Pay = Net Pay
Terminated employees receiving paychecks


cont.
6) Fraud Detection & Forensics
 Red Flags & Discovery (Payroll)
7) Analysis of P - Cards
Reviewing Internal Controls
Process Determination
Fraud Detection
8) Payroll & Time Sheets (Payroll)
Ghost Employees
Falsified Wage Sheets & Time Cards
Weekly / Monthly Reasonableness
Compliance Review e.g. Approvals

cont.
9) Joins & Comparisons
 Active Application Users vs. List of Terminated Employees
 Physician Scheduling System to the Billing System
 Vendor Terms including Early Payments & Aging
 Tax ID numbers and Conflict of Interest
 Review of Billing & Pricing vs. Contracts
 Missing Invoice Numbers
 Employee to Vendor Address
10) Inventory
 Obsolescence
 Slow Moving
 Reconciliations

Using Data Analysis to
Improve Controls

 Don’t Simply React to Findings
 Determine What is Not Happening
 Improve the Environment


Payroll Control Improvement
Prevention of Unauthorized Raises
 Segregation of Duties for Preparation, Disbursement, and
Distribution.
 Restrict Access to the Software & Keep Passwords Safe
 Have Removed Approver for Payroll
 Compare Wages Approved vs. Paid Quarterly
 Review Budget v. Actual Monthly.
Prevention of Creation of Ghost Employees
 Do all Employees Have Deductions?
 Do All Match IT Access Listing?
 Implement Controls That Don’t Allow Addition of Payroll Without
Confirmed IT Access

Preventing Payroll Fraud
Ghost Employees
 Conduct periodic payroll audits in which all employees must physically sign
 Review payroll for duplicate addresses or Social Security numbers.
(Sample)
 Investigate all returned W-2 forms.
 Verify Social Security numbers with Social Security Administration.
 Randomly review payroll database for employees with P.O. boxes or No
Deductions
 Require direct mailing of checks or have management distribute them
physically
Types: Terminated, Fake, No Show, Temporary, Rehire, and Pre-employment
Ghost


Worker’s Compensation
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Maintain cameras in your workplace to capture accidents.
Require that injuries are reported promptly.
Receive concurring medical opinions for certain injuries.
Consider retaining private investigators to monitor employee actions.

Falsified Wages
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Sophisticated time clocks or systems that require a unique employee
pass code.
Require manager or supervisor approval of all timecards or timesheets,
including overtime.
Executive approval of all bonus-type compensation.
Mandatory vacations for at risk employees.
Executive approval of all paychecks.
The ability to modify wage rates, add employees are restricted.
These individuals should have their records periodically reviewed.

Commission Schemes
 Periodically review your commission structure for needed changes
aligned to business?
 Are you recovering commissions overpaid to employees or paid for
cancelled sales?
 Review financial correlations. Are sales commissions increasing
when sales are dropping?
 Closely audit some of your top performers. Are commissions
justified?
 Re-perform commission pay-outs (Sample)


Polling Question 5

Obtaining concurring medical opinions for
employee injuries is key to auditing for...
a.
b.
c.
d.

Ghost employee schemes
Commission schemes
Worker’s comp fraud
None of the above


Questions?
 Any Questions?
Don’t be Shy!


Thank You!
Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com
Katrina Kiselinchev
Inclusivitie, LLC
832-236-4778
katrina@inclusivitie.com
http://www.inclusivitie.com

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