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The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems by Leonard W. Vona

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Chapter 12

Payroll Fraud

In terms of threat likelihood, the chance of fraud's occurring in the payroll process is very high, with one or more instances per year. Any employee filling out a time card has the opportunity to falsify the hours worked. What compounds the problem is that supervisors tend to develop close personal relationships with the employees they supervise, so they may look the other way when hours are falsified to help an employee going through difficult times or just to keep good employees. Perhaps they just do not believe it can happen based on the mutual respect that has been reached in their supervisor–subordinate relationship. Conversely, if the relationship is a bad one, a supervisor may spend a considerable amount of time supervising employees versus work flow. Even though it's a common occurrence, most payroll fraud will not have a material impact on the organization. The exception, of course, is with smaller companies where payroll tends to be the largest expense.

When it comes to business systems, no other system is bypassed as much as payroll, because there are typically numerous proliferations of “unofficial” systems that seem to spring from the “official” one. Everyone on the payroll knows the system and, therefore, knows the controls in place. This knowledge lends itself to the bypassing of the controls. The opportunity to circumvent the controls is too easy, and once one person does it, of course, everyone follows and the unofficial becomes the official ...

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