Detecting and Preventing Payroll Fraud in the Workplace

Written by Jonas Ileka

An increasing number of businesses face the haunting phenomenon of ghost employees draining companies of their resources and undermining their financial stability. These ethereal figures lurk in the shadows, existing only on paper, yet their impact on organisations can be very real and detrimental.

Ghost employee incidents typically involve individuals fraudulently listed on an organisation’s payroll but do not work for the company. They can be fictitious people or former employees who were not removed from the payroll system after leaving the company. This practice allows perpetrators to syphon funds through unauthorised salaries, benefits, or bonuses, causing financial losses and potential legal consequences for the organisations involved.

In Namibia, there have been several instances where government entities and private companies have discovered ghost employee schemes. These schemes are a form of internal fraud that can persist for extended periods before detection, and they often involve collusion between dishonest employees and individuals responsible for payroll processing.

Prominent Cases

In 2022, a fish processing plant in Walvis Bay discovered 127 ghost employees on their payroll. This list included former employees and their family members. It was reported that this scheme costed the company between N$2.22 million and N$7.94 million. Management decided to cease salary payments for the ghost employees pending investigations, and requested that the employees themselves contact the company to verify their previous employment details.

In another incident, a government ministry discovered a ghost employee scheme between 2017 and 2018, totalling N$13 million. The ministry took internal disciplinary measures and laid criminal charges against the 23 staff members implicated in the matter. Additionally, the ministry implemented strategies and controls to mitigate these challenges by implementing an annual payroll verification and headcount exercise, and conducting monthly pay sheet reconciliations.

In 2023, an audited financial report for another ministry found that deceased workers’ compensation were still active on the ministry’s payroll.

The report, however, neither indicated the number of ghost employees nor the losses incurred by the ministry as a result. In response to the audit findings, the ministry has undertaken to complete a database of all compensation awards active on the payroll system by using information from the Social Security Commission, to allow for an annual payroll verification exercise. Moreover, the Auditor General recommended that the accounting officer put measures in place to ensure that all deceased workers’ compensation are removed from the payroll system to prevent a repeat.

Implications and Dangers

The presence of ghost employees can unleash a chain of detrimental consequences.

The unauthorised payments to these fictional workers drain an organisation’s financial resources, dealing a blow to profitability and impeding growth prospects. Companies also risk facing lawsuits, audits, and penalties from government authorities due to noncompliance with tax and labour laws, inviting legal and regulatory complications. Additionally, ghost employees can erode public trust and investor confidence, tarnishing the company’s brand image and investor relations.

Moreover, the discovery of ghost employees can lead to a demoralised workforce, as honest employees feel undervalued and unmotivated, ultimately resulting in decreased productivity and increased turnover.

Exorcising Ghost Employees

HR professionals can take proactive measures to prevent and detect ghost employees. First and foremost, organisations should establish rigorous onboarding and offboarding processes, ensuring that only legitimate employees are added to or removed from the payroll system. Regular audits and reconciliations of payroll records are crucial to identify discrepancies and unauthorised entries. A clear segregation of duties must be enforced to strengthen internal controls, assigning different individuals to handle payroll processing, data entry, and approvals. Moreover, mandatory verification checks using official documents, such as government-issued IDs and social security numbers, are vital in confirming the identity and legitimacy of employees.

HR professionals can play a pivotal role in safeguarding their organisations from ghost employees. Diligent oversight, transparency, and adherence to best payroll practices can ensure businesses remain financially secure and maintain their integrity.