Ghost employees: A threat to organizations
After Elon Musk’s Twitter acquisition, he made a few stirring announcements. One of them was about an audit of his employees to ensure the absence of ‘ghost employees’. Since the term was unfamiliar to most people, Twitter users considered the request to be nonsensical.
However, ghost employees have long since been a real phenomenon that poses a threat to organizations. This phenomenon is one of the modus operandis of payroll fraud schemes in occupational fraud practices. The purpose of this fraud is to continue to pay wages or salaries to non-existent employees (“ghosts”), for other employees to later collect the money for themselves.
This fraud often occurs in companies with labor-intensive industries that employ hundreds or thousands of employees but are not accompanied by a centralized support/technology system, internal control, or good supervision.
Losses resulting from this type of fraud are no joke. According to ACFE, Occupational Fraud 2022: A Report to the Nations, payroll fraud is a fraud scheme that causes organizations to lose an average of US$45,000 within 1.5 years.
The “Ghost employee” modus operandi
An experienced HR practitioner who has worked in various national and multinational companies for more than two decades, Yos Rizal Setiawan, shared his experience regarding ghost employee cases.
Ghost employees are basically the names of employees who are still listed in the payroll system, but no longer work for the company. The term ‘ghost’ refers to employees who have resigned but whose statuses are still registered as employees of the organization concerned.
“Generally, ghost employees exist because of a lack of supervision on the headcount of a company,” said Rizal.
“In the manufacturing industry, say, a factory with hundreds or even thousands of employees, sometimes there are cases where employees who have resigned are not reported or are reported late by their superiors to the HR department. Delays can occur because the payroll administration process is calculated manually using a spreadsheet and the company does not have a payroll system that is connected to the attendance and overtime systems,” he explained.
“Another instance is when a supervisor deliberately does not report or delays the reporting of employees who resign, so that the names of former employees remain in the payroll system,” he continued.
According to him, this type of fraud is usually carried out by collusion. First, there is an agreement between the supervisor and his former employees due to unilateral layoffs. The supervisor typically gives the former employees a few months for their names to remain in the payroll system without notifying the personnel department.
Second, even though this rarely happens, there have been cases where the supervisor deliberately does not report to HR that the employee has resigned, so the salary is still paid to the ex-employee’s account. Then, the supervisor makes a deal with the former employee to share the profits of the money coming in.
Payroll fraud committed by ghost employees can also include overtime fraud.
“For instance, on the weekend, a company asks ten employees to work overtime. In reality, fewer employees came in, but full personnel attendance was reported,” said Rizal.
Given the large number of employees and the lack of supervision, it is not easy for organizations to detect “ghost employees”. It’s no wonder that payroll fraud can go undetected for up to 18 months on average.
Methods of prevention
According to Rizal, several measures can be taken to prevent ghost employees. This includes the placement of HR personnel to directly monitor employee presence in the work area, proper audit mechanisms, or investment in a payroll system that is integrated with attendance, for example.
What is equally important is the implementation of employment background screening. This tool can be applied to prospective employees (pre-employment background screening) and existing employees (monitoring), especially for strategic positions that will later handle job scopes related to staffing.
Based on the results of a study, as many as 43% of organizations that were victims of fraud did not carry out background checks on the perpetrators prior to recruitment.
Pre-employment background screening basically verifies the claims mentioned by prospective employees in their resumes. Furthermore, this method can also provide insight into and uncover new information that is not written in the resumes, such as criminal histories and information from social media.
For more strategic positions, organizations can design pre-employment background checks that are more comprehensive and can be tailored to their needs, including credit checks, bankruptcy checks, and AML checks.
Meanwhile, monitoring can be applied to existing employees as one of the prerequisite procedures for promotions. To carry out this method, organizations must invest time and money, but in the long run, this effort can prevent substantial losses due to fraud.