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 FighterDeveloper 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

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

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

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 Average Per OccurrenceGhost Employees $100,000 - $300,000Commission Schemes $100,000+Workman’s Compensation $100,000+Falsified Wages $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. 24 months

b. 18 months

c. 36 months

d. 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

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 Overtime for Salaried Employees Meal allowances to Unqualified Employees

Employees on the payroll that do not appear on the: 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)

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

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. Access & Activity Listing from IT

b. Employees with All Changes

c. Neither of the Above

d. 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


Top 10 Areas for Data Analysis cont.

3) Sampling Ability to Test 100% Adequate Representation Scope Setting4) Data Imports/Extracts & Analysis of Large Data Sets Text PDF Excel Word5) Continuous Auditing & Monitoring 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. Different Bank Accounts2. No Overtime for Salaried Employees3. Overtime for Salaried Employees4. Gross Pay = Net Pay5. Terminated employees receiving paychecks



6) Fraud Detection & Forensics Red Flags & Discovery (Payroll)

7) Analysis of P - CardsReviewing Internal Controls Process DeterminationFraud Detection

8) Payroll & Time Sheets (Payroll)Ghost EmployeesFalsified Wage Sheets & Time CardsWeekly / Monthly ReasonablenessCompliance Review e.g. Approvals




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 RaisesSegregation of Duties for Preparation, Disbursement, and

Distribution. Restrict Access to the Software & Keep Passwords SafeHave Removed Approver for PayrollCompare Wages Approved vs. Paid QuarterlyReview Budget v. Actual Monthly.

Prevention of Creation of Ghost EmployeesDo 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 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 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. Ghost employee schemes

b. Commission schemes

c. Worker’s comp fraud

d. None of the above


Questions?

Any Questions?Don’t be Shy!


Thank You!

Website: http://www.fraudresourcenet.com

Jim KaplanFraudResourceNet™

800-385-1625 [email protected]

Peter GoldmannFraudResourceNet™

[email protected]

Katrina KiselinchevInclusivitie, LLC832-236-4778

[email protected]://www.inclusivitie.com

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

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