It might be hard to imagine, but there are instances when companies pay for employees who do not exist in reality. It is like paying someone who doesn’t show up for work. That’s what happens with ghost employees.
Ghost employee fraud usually happens at global companies with decentralized payroll processes. As these companies have to maintain payroll across countries that involve different currencies and tax implications, it is easier for them to fall victim to this type of payroll fraud.
According to the Association of Certified Fraud Examiners, as many as 29% of large and small businesses globally are affected by ghost employee fraud. Ghost employees are the most difficult to detect of all the payroll frauds.
The financial implication of ghost employees on payroll can be huge. For instance, the Indian Railways Department has to suffer a loss of USD 187,600 due to ghost employees.
For HR managers, it is essential to know how to prevent ghosting employees. This article is all about dealing with ghost employee fraud.
Table of Contents
Ghost employee meaning
Ghost employee or ghost payroll is an essential concept for HR professionals. A ghost employee is a worker who exists on paper and is added to the company’s payroll to take a wage, even though the company does not employ them. Sometimes, it could be a deceased person who is not taken out from the payroll due to unawareness or accidentally.
But in most scenarios, fictitious employees are added to the payroll to commit financial fraud. Whatever the reason, HR managers must ensure that their organization is not paying for the workers who do not exist. Now that you understand what ghost employees are, let’s look at common ways these employees exist within a company.
- The most common reason why ghost employees exist is that someone within the company adds them intending to commit fraud.
- Some employees can indulge in buddy punching marking attendance for workers on leave.
- Deceased employees or employees who left the job but still exist on the payroll.
How to detect and prevent ghost employees
For businesses suffering from ghost employee menace, there are specific ways to deal with the issue. HR managers must ensure that the employee management is not chaotic. Usually, unclear processes leave the scope for such frauds to occur.
Given that for a large workforce, it is not easy to find ghost employees, this is why some essential steps are needed to prevent ghost employees. Large companies with hundreds of workers can track payroll budgets and investigate spikes in the report that does not match the labour projection.
Smaller businesses can take a much simpler approach like hand-delivering paychecks to ensure only employees working get the pay. Any leftovers indicate ghost employee fraud. HR managers can bring in some provisions to prevent payroll fraud. Here are some steps to get started:
- Check on all workers before hiring with background checks
- Ensure that employee data in the payroll system is accurate and updated
- Avoid single-point-of-contact systems
- Use financial checks and balances audits
1. Background checks for accounting employees
Companies should take extra measures to thoroughly evaluate employees with access to the payroll and accounting systems. Whether an entry-level accounts clerk or a CFO, background checks for these professionals are necessary.
There are several ways to identify ghost employees. You can hire agencies for the job to audit the background of prospective employees before hiring them.
2. Maintain the records of employees accurately
Whether new hires or existing employees, HR managers must ensure that their accurate and current data is in the payroll system. No new hires must be allowed to work until their information is collected, verified, and entered into the system. There must be strict policies to deal with employees who provide incorrect information or try to defraud the payroll system.
3. Conduct routine audit to detect ghost employees
Hiring honest employees and ensuring accurate employee data will not be enough. To ensure that there are no ghost employees on the payroll, you must conduct routine financial audits. With audits, you can immediately find any mismatches or fraudulent activities.
Not only fictitious employees, but regular audits can also help find duplicate entries, clerical errors, unverified government identification numbers, attendance recording inconsistencies, and more. While not all clerical mistakes are fraud, repeated mistakes can help you identify patterns, such as repetitive manual timekeeping adjustments. Or terminated employees are still kept as active in the payroll system.
Smaller companies without well-defined human resource management systems can rely on self-audits; for a more complex organizational audit, you can hire consultants or third-party services.
4. Clearly define procedures for payroll
If the company has clearly defined processes for payroll and accounting activities, there will be no opportunity for fraud. All employees must be trained to adhere to the methods and workflows decided.
For instance, the HR department should maintain a checklist of worker information that must be entered into the system before their first work day. A similar list must be there for terminating an employee.
Both processes ensure that all the employee data within the payroll system is accurate and updated. Usually, when employees are terminated or when they leave, if the information is not updated soon, it creates an opportunity for ghost employee fraud.
5. Eliminate ghost workers menace using facial recognition
Human interference with attendance recording can be a hotspot for ghost employee fraud. To eliminate ghost workers you can use a facial recognition based automated attendance systems like Truein that eliminate manual attendance timesheets.
Truein is a new-age face recognition attendance system that can integrate with most payroll software. It is designed to automate attendance and leave management. As it leaves no scope for time theft, buddy punching and manual errors when importing attendance data into the payroll system, it can be a reliable defence against ghost employees.
Schedule a free demo today and see how it can be integrated with payroll software and can help to prevent ghosting of employees.
6. Incentivize existing employees to report ghost employment
Offer a reward for any accurate and verifiable reports. This could be a cash prize or other incentives, such as additional time off or recognition at company-wide meetings.
Another option is to establish a confidential reporting system, such as a hotline or anonymous online form, that allows employees to report any suspected ghost employment without fear of retribution. This can create a culture of transparency and integrity within the organization and encourage employees to speak up if they see any suspicious activity.
Additionally, it may be helpful to provide employees with training and education on the importance of reporting ghost employment and the potential consequences of failing to do so. This can help employees understand the gravity of the issue and feel more inclined to speak up if they suspect any wrongdoing.
Ghost employees can haunt your profit margins for months and years without being detected. It is essential to be proactive and understand how to detect ghost employees before your organization’s productivity, and the bottom line is hurt.