I read with interest “ Keep Ghosts Off the Payroll ” ( JofA , Dec.02, page 77) and would like to share what our firm discovered a number of years ago while conducting some basic auditing procedures for a local business.
The payroll clerk in this particular company was a very patient man. His job was preparing all aspects of the payroll—he calculated hours worked and taxes withheld, generated checks and prepared payroll tax deposits and reports. The only duty he was not responsible for was the actual signing of the checks, which the owner did.
The clerk realized the owner was concerned only with the net check issued and never required a report indicating gross wages. That is when the young man set the wheels in motion to embezzle from his employer. At that point, he had been employed by the company approximately five years. During the next three years, he grossed up his check by several thousand dollars per pay period. Then he adjusted his federal withholding and social security deductions upward to generate the net check he always had received.
By properly completing his W-2 with the exaggerated wages received, he protected himself from any possible IRS liability for underreporting wages. He filed his tax returns and received extremely large refunds.
As in most fraud cases what started out on a small scale escalated as the embezzler built up confidence. Fortunately for our client, we discovered the ongoing thievery and reported it to management.
Even though the employee stole in excess of $100,000, management chose not to prosecute but terminated his employment immediately. Since then, it has set up safeguards to keep this type of problem from happening in the future.
Too much control by one employee can be a very dangerous thing.
Joy S. Wood, CPA