Ghost Employees, Fictitious Suppliers and Asset Misappropriation
Fraud types that organizations should be mindful off as economies start to recover post COVID-19.
The uncertainty and disruption caused by COVID-19 created the perfect storm for fraud being committed. Many employees have lost their jobs. Companies withdrawing incentives, bonuses and benefits increased the rationalization for committing fraud, which has been exacerbated by instances of reduced pay. Those fortunate enough to have retained employment have been working remotely in line with social distancing practices.
The retention of employee details on your payroll after the termination of their services, the creation of fictitious suppliers and many employees work remotely are some of the concerns that organizations should look at immediately, that might possibly lend itself to the following scenarios:
- Ghost Employees;
- Fictitious suppliers; and
- Misappropriation of non-cash assets
A ghost employee stays on a company's payroll but does not do any actual work for the victim company and as such their inclusion onto the payroll constitutes fraud. In many instances, a ghost employee is a real person who has worked for different companies, has passed on or left the company, but their personal information remains on the organization’s database. In other instances, the employee is entirely fictitious.
The modus is usually quite simple. Through the falsification of personnel or payroll records, paychecks are generated by the fraudster and the proceeds are simply split among the colluding parties.
To identify and prevent this type of fraud, the following measures should be implemented:
- A quick phone call or email might be sufficient to verify if a person actually works for your organization;
- Conduct a due diligence exercise by scrutinizing all payroll information provided;
- Reconcile time and attendance records against pay checks;
- Extract login details on all system applications and reconcile same against time sheets;
- Check your payroll bank accounts and look for potential duplicates; and
- Flag the payroll/employee number of an individual once their services are terminated to prevent any future payments.
Similarly, with the reduced controls, the creating of fictitious suppliers with payment into a fraudsters bank account is very likely. This risk is increased with there being no individuals to receive the stock, perform reconciliations and only high-level reviews being conducted because of capacity constraints when working out of office or remotely.
But what can be done to identify this instance of fraud?
- Establish a procurement and new supplier policy with clear mandates in terms of delegation of authority and payment limits;
- Establish due diligence procedures for all new suppliers, including the comparing of vendor details with that of your employees and verifying the registration, tax, and ownership details;
- Review any changes to vendor accounts during the lockdown period;
- Review the fast-tracking of new suppliers and other business partners (customers, suppliers, agents, intermediaries, or other advisors);
- Ensure appropriate segregation of duties between the personnel receiving goods, those processing invoices, and those processing payments; and
- Employ data mining capabilities to identify trends and anomalies, including but not limited to payments that fall just below an approval limit, for round dollar amounts, where the vendor invoice numbers are out of sequence, where delivery addresses are different than payment addresses and payments for a duplicate amount on the same date.
3. Non-cash asset Misappropriation
In its simplest terms, this refers to the theft and misuse of non-cash company assets.
Many employees have been working remotely during the lockdown period and have had to make use of company resources including computers, mobile devices. Others have used personal devices but for the most part have access to the company’s IP. With the reduced control and oversight, chances of theft and damage to property also increases with some individuals using company assets to do personal work.
The following are some measures that could be implemented to mitigate the losses of your organization:
- Perform regular counts and surprise audits of fixed assets, including computer software;
- Analyze depreciation, salvage and re-order schedules for unusual patterns;
- Compare shipping addresses to employee addresses;
- Utilize employee contracts and company policies to protect trade secrets and other company IP
- Implement cyber security safeguards
With restrictions easing and many world economies starting to open, organizations should focus on their preventative and detection fraud controls sooner rather than later.