In order to examine the various ways in which payroll fraud can be perpetrated, it is extremely useful to understand something about the person behind the scheme.

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First, an embezzler is typically someone who has the trust of his/her employer. The embezzling employee works long hours, arrives at work early, works after hours, works on weekends, takes work home, assumes more and more responsibilities, and appears to be a very hard-working employee. Just the type of employee most employers covet. Seeing that the employee assumes more responsibilities without complaining and appears to perform his or her duties, the employer then bestows even more trust and responsibilities on the employee until the system of internal controls is breached.

Many embezzlers are well respected in the community, often serving on civic boards of directors and even on church boards and committees. The embezzling employee often feels unappreciated and underpaid, and is able to justify stealing with this mind-set. The profile embezzler resents normal and routine questioning by the employer. The embezzler typically acts alone.

The vast majority of embezzlers do not hoard or invest the embezzled funds. The embezzler will live the life that he thinks he deserves, which may mean purchasing just about anything. Often his/her lifestyle is consistent with that of the president/executive director of the organization.

The fictitious employee is the most prevalent method used to perpetrate payroll fraud -- the embezzler adds a bogus name to the organization's payroll and arranges for the individual to receive a payroll check. A more common method is the use of direct deposit of wages.

Who is the invisible man? Often it is a dead person or acquaintance of the embezzler. If the person is deceased, such as a relative, the embezzler may use the decedent's Social Security number. It may take several years for the Internal Revenue Service to determine that the decedent is earning a wage. Someone in a supervisory position who is responsible to approve periodic wages usually does this type of fraud. It is more apt to occur in large organizations where one does not know all the employees.

There are ways to prevent this type of fraud. Personally hand out the checks if the organization is not too large. Investigate any paychecks or pay stubs, in the case of direct deposit, that are not picked up. Review payroll records for any post office box given as the employee's address. Periodic searches should be done to see if any two employees are shown with the same Social Security number or direct deposit routing number.

A sleeper is defined as an embezzler who manipulates the tax reporting forms and numbers for his own benefit. These embezzlers are among the brightest. This method requires patience because the embezzler frequently has to wait more than a year to get the money. A couple of examples of this are as follows.

941 Overpayment: Here an embezzler who is earning $36,000 a year decides to take out very little federal payroll deductions from his/her payroll checks, thus increasing the take-home pay. Then the embezzler overpays federal tax to the government via the 941 deposits. At the end of the year, the embezzler accumulates the overpayments and adds it to the federal withholdings on his/her W-2. The embezzler then plans for a sizable refund on his/her individual federal tax return.

This is harder to detect. In the example above, the monthly payments of federal tax looked consistent with prior years and the level of wages paid by the employer. To detect this, one must review the following: payroll records for the year; year-end W-2s issued to the employees; and the quarterly 941s. Everything should agree and reconcile. If they do not, then further review should begin.

Withholding shuffle: In this example, an employee who inputs payroll has the ability to shift withholdings from one employee to another. The embezzler shifts $100 of federal withholdings from 10 different employees into his/her W-2 that results in another $1,000 of federal withholdings paid in on the embezzler's behalf for which a tax refund can be obtained. This could easily be $10 from 1,000 employees or any combination.

To prevent "withholding shuffle," one needs to have a payroll computer system that prohibits the payroll clerk from changing or overriding the payroll fields being used and to scrutinize the W-2s of employees who have payroll access.

Employers often wonder why the business isn't doing as well as history or current trends would indicate. If this is the case for you or someone you know, it is best to seek professional advice from a fraud examiner.