Is Your Company Paying a Ghost Employee?

Payroll internal controls are critical for every organization to prevent fraud, avoid clerical errors and protect confidential employee data. Payroll fraud can include such acts as an employee falsifying time records and the payroll administrator paying wages or a salary to a fictitious employee. These acts generally occur due to a lack of internal controls over payroll. Here are key controls to consider:

1. Access controls: Restrict access to the payroll system and employee files to authorized employees only.
2. Segregation of duties: The preparation, approval and processing of payroll should be segregated amongst various employees. Depending on the size of an organization, the divisional managers may approve the time sheets which are then reviewed and entered into the payroll system by the payroll clerk. The payroll or human resources manager review the final payroll report for accuracy before it is approved by senior management for payment processing.
3. Change authorization: Changes to payroll (e.g. pay increases, termination of an employee, changes to an employee’s bank account number, etc.) must be tracked and approved. A change report can be used to monitor such changes to ensure these are reviewed and approved by senior management.
4. Perform payroll audits: Consider performing an internal audit to include some of the following procedures:
   1. Evidence of approval of time sheets by divisional managers and on a sample basis review the approved hours of selected employees to the pay summary for selected pay periods.
   2. Select employees and agree their regular pay to the employee payroll file to ensure the employee exists and their pay agrees to the approved pay rate.
   3. Review the reconciliation of the payroll summary for selected periods to the payments made as per the bank statements.
   4. Review of new employee additions or terminated employees to ensure they were added or removed appropriately in the payroll system.
5. Review of payroll costs: A review of your monthly, quarterly and annual payroll costs against the historic trends or employee headcount can provide additional insight into unusual trends to obtain an additional level of comfort over payroll costs.

GG Observations

Organizations are encouraged to adopt systems and controls that will ensure payroll records are complete, accurate and in compliance with industry and regulatory requirements. Our team of professionals can assist you in assessing and making recommendations over your internal controls to mitigate the likelihood of payroll fraud and errors.