What is a Ghost Employee?

21 July, 2016
By G-Team in Payroll
Gpayroll payroll software's blog - ghost employee
One of the most common types of payroll fraud is the use of "ghost employees" to divert money to sham identities. Also know as ghost employees fraud, who are these ghost employees and how do we deal with them?

Who are Ghost Employees?

Thankfully, we are not referring to those paranormal beings that we think are haunting the walkways of our offices or lying in wait to scare us from the dark corners of the office toilets (we had enough of movies like The Conjuring, thank you). Based on the definition from the Association of Certified Fraud Examiners (ACFE), a ghost employee "is someone recorded on the payroll system, but who does not work for the business." This "ghost" can either be a real person who is placed knowingly or not on the organisation's payroll or it could be a fictitious person invented by a dishonest employee. However, what drives this motivation of creating ghost employees for fraudulent activities?

Who profits from Ghost Employees?

Ghost employee fraud is commonly perpetrated in organisations where the number of employees are large, particularly when the employees are spread out across several geographical locations and payroll operations are handled centrally. However, this does not necessarily mean that small businesses are less likely to be exposed to such frauds. Small businesses can also fall victims if payroll operations are being managed by one person who, unfortunately, happens to be a fraudster or does not ensure stringent checks on the payroll process. In most situations, the deceitful employee will need some access to the payroll system in order to add the ghost. Typically, it is the person who authorizes the payroll or has some form of direct access to the payroll system. 

The purpose of ghost employees is for the fraudster employee to collect the wages that are being paid out to the "ghost". Given that the annual wages paid to any employee in a year can be quite a significant amount, the cumulative monetary loss by the organisation, due to several ghost employees, can be a hefty amount if the fraud goes undetected over the years.

What can be done about it?

It is critical to address the issue of ghost employee fraud and take essential measures to prevent it. Here are several practices that can help thwart ghost employees:

1.       Proper implementation of payroll policies

Ensure that payroll policies are written in place and up-to-date. This will ensure that there are proper protocols for payroll processes and ensure that employees familiarize themselves with it.

2.       Removal of resigned / terminated employees

Whenever an employee resigns or has been terminated, ensure that their records are properly updated. Under the legislative law in Singapore, employers must maintain records for employees who have left the organisation for one year. Ideally, ensure that the employee roster is constantly updated and conduct frequent audits to prevent the possibility of ghost employees.

3.       Separation of payroll duties

This general principle of control in the payroll department is evident amongst many of the best practices of payroll standards. Payroll systems should never be solely handled by one employee. For instance, the employee running the system should be different from the employee approving the payroll. Rotate the responsibility of payroll operations between a number of people to reduce any opportunity for fraudulent activities.

While it is difficult to entirely eliminate ghost employee fraud, implementing stringent controls and frequent checks can reduce the risk of such payroll fraud and save the organisation on unnecessary monetary losses and time.