Preventing Payroll Fraud
By:
David S. Barmak, JD CEO
Skilled nursing facilities (SNF) are often susceptible to fraud because their owners are often focused on resident care and/or have inexperienced administrators running day-to-day operations of a multimillion-dollar business. At times an administrator is running the SNF with little oversight of the business office or outsourced business resources (e.g., a payroll company).
In one matter I was involved with, a small SNF found itself the victim of occupational fraud when the owner realized that its Director of Payroll/Human Resources had been embezzling money by means of a payroll scheme. To make matters worse, this employee had also lied to the state Medicaid office in order to qualify for welfare benefits. The Director was earning a salary of around $60,000. Over a period of 25 months, she had been embezzling money by changing her payroll checks to reflect a greater amount of salary while also creating additional payroll checks to reflect very little money which were submitted to Medicare for welfare eligibility. There was no oversight or control, and as Director of Payroll, she had complete control of the process. No one noticed until Medicaid called to confirm her salary.
According to the 2020 Report to the Nations, as reported in Natalie Lewis’s article: Minding Your Business: Preventing Payroll fraud With Internal Controls, Fraud Magazine November 2021, (1) A typical payroll fraud scheme lasts approximately 24 months and has a velocity, or median loss per month, of approximately $2,600. (2) Fraud schemes with one perpetrator result in a median loss of $90,000 over a median duration of 14 months. (3) Fraudsters who had worked at companies for five years or less caused a median loss of $50,000. (4) The accounting department is a favorite spot for an employee to carry out a scheme. It ranked second among departments most at risk for fraud. (5) Female fraudsters caused a median loss of $85,000.
According to the Report to Nations, the top four methods used to conceal payroll crimes are (1) creating fraudulent physical documents, (2) altering physical documents, (3) modifying electronic documents or files and (4) generating fraudulent electronic documents or files.
The employee perpetrated the fraud because she had sole authority over the payroll. There were no checks and controls in place, e.g., someone else reconciling the payroll register. Ultimately it was Medicaid’s standard investigation that triggered the internal investigation that ultimately resulted in recognizing the fraudulent behavior.
How to investigate? Interviews. Interview the alleged fraudster and members of the accounting department. The fraudster initially lied about her conduct; however, upon further investigation and presentation to her of the multiple extra paychecks as well as information from Medicaid, she acknowledged her fraud. Preventative measures and internal controls, including separating the payroll functions were put in place to try to avoid similar frauds in the future. Oversight was also put in place to remedy the fact that she was solely responsible for all payroll activities. There were neither checks on her work nor any third-party reconciliation.
Original publication date: November 7, 2021
