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Don’t Let Ghost Employee Fraud Trick Your Business This Season

October 29th, 2021

The season of tricks and treats is here, but the risk of fraud occurring in your business or organization is a scary thought any time of the year. There seems to be a never-ending list scams that fraudsters are pulling off, but this Halloween season businesses should focus on one culprit – the ghost employee.

What is ghost employee fraud?

Ghost employee fraud is a type of payroll fraud that occurs when there is someone included in the payroll system that should not be there. Ghost employees typically take two forms:

  • A real person (who may or may not know they are included in the payroll system)
  • A fictitious person invented by a deceitful employee

How does it work?

Why would a someone set up a ghost employee within payroll? The purpose of this type of fraud is to have wages paid to the ghost employee via the normal payroll process, with the funds eventually being collected by the dishonest employee that set up the scheme. If gone undetected, ghost employee schemes can result in significant fraud due to the size and frequency of payroll transactions.

What organizations are most susceptible to ghost employee fraud?

Organizations that have many employees are often most susceptible to the creation of ghost employees because the employees preparing and reviewing payroll may not be personally familiar with each employee. This issue is amplified in a remote working environment where employees are in different locations.

It’s not just large businesses that need to look out for ghost employees. Small organizations are also at risk, especially when a single person oversees the payroll process and/or there is no one else reviewing payroll transactions carefully.

Who typically commits this type of fraud?

To perform the fraud, the employee carrying out the scheme needs access to the payroll system or will need to collude with someone that has access. The dishonest employee(s) would access the payroll

system to add the ghost employee and set the ghost’s pay rate. Employees with the ability to add, remove, and edit payroll information are the most likely to carry out a ghost employee scheme. Such an employee would not need complete control over the payroll process and may not even need the ability to approve outgoing payments, as the payroll system often automatically creates and processes the outgoing payments. Once the ghost employee scheme is set up, the fraudster can simply collect the stolen funds every time payroll is run.

How does the ghost get added to payroll?

Adding the ghost into the payroll system can be accomplished via direct access to the payroll system by the employee committing the fraud or by colluding with an employee that has payroll system access.

If the fraudster doesn’t have access to system and is not colluding with someone who does, a ghost employee can be added via the organizations normal new employee onboarding process. To carry this out, the fraudster may forge documents and authorizations needed to add an employee to payroll. Forged documents of this nature are especially difficult to detect in organizations with large employee bases and high turnover.

The fraudster may also have to forge documents such as wage/salary approval forms and timesheets to keep the scheme running.

How does the fraudster get the money from the ghost?

If paychecks are mailed out, the employee committing the fraud will need to get possession of the check. If the ghost employee is an actual person, the two individuals can work together to cash the check and split the funds. Common examples of a ghost employee acting as an accomplice include the dishonest employee’s family, friends, or other employees. To cash the check, the ghost, acting as an accomplice, will need to have a bank account in their name to convert the check into usable funds. If the ghost employee is not an actual person, the fraudster will need to have a bank account established using the fake name.

If wages are paid by direct deposit, the employee committing the frauf will need access to the bank account in which the funds are deposited. This will be easier to accomplish if the ghost employee is an actual person and accomplice in the scheme. If the ghost is a fictitious person, the employee committing the fraud will likely have to forge documentation to set up the bank account.

How can my organization protect itself?


The first step in protecting your organization from ghost employee fraud is to prevent it from happening in the first place. Establishing strong internal controls surrounding payroll is a crucial step in preventing ghost employee fraud. Some examples of effective payroll internal controls include

  1. Require approval from multiple individuals to add, remove, or change the pay information of employees
  2. Rotate the duty of payroll processing amongst several individuals. This will prevent any single person from having complete control over the payroll process.
  3. Perform a periodic review of the payroll register report, looking for suspicious names, addresses, and other demographic information. The individual performing the review should consider verifying information in the payroll records to personnel files, inquiries of the other departments, and face-to-face meetings with employees.
  4. Do not make payroll payments with cash. Cash can be easily stolen and is difficult to track when misappropriated. Check and direct deposit payments provide for a much more thorough trail of documents and audit evidence should a suspicion of payroll fraud arise.


Detection of existing fraud schemes is also crucial in managing payroll fraud risks. The first step we recommend for identifying potential ghost employee schemes is to thoroughly review the payroll register (report created by the payroll system) each time payroll is run. Keep on the lookout for the following situations that may indicate the existence of a ghost employee:

  1. Are there employees on the payroll report that no one recognizes? Are there employees on the report that do not have a clearly defined job title and description? An incomplete personnel file or no personnel file at all?
  2. Are there employees on the payroll report that share some of the same demographic or bank account information? Look for employees with matching:
    1. Address
    2. Phone number
    3. Email Address
    4. Birth date
    5. Direct Deposit back account number

Additionally, special attention should be paid to employees on the payroll report who utilize a PO Box or have their wages direct deposited to a financial institution in an unexpected geographic region.

Combatting fraud of all kinds is a critical business measure needed year-round. Our consultants at The Bonadio Group are experts when it comes to fraud detection and prevention. Reach out to us today to discuss your specific situation or learn more.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship

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Charlie Wood April 2020
Charlie Wood
Practice Lead, FoxPointe Solutions
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The Bonadio Group