A10. (103-5) Fraud The Chester family owned and operated CEL, a manafacturer of electrical equipment. Mom and Dad Chester started the business. Their children grew up, became stockholders, and sat on the board of directors, which consisted entirely of family members. The youngest son, Matthew, was in charge of human resources and payroll. He hired employees, authorized factory time sheets, calculated the aet pay for each empioy. -. and took custody of the payroll checks from the outside firm that generated the physical paychecks for emplogees. Many of the factory workers were low income immigrants who did not trust direct deposits for their paychecks, Matthew distributed paychecks to these employees himself. Matthews sister. Maisie, was the CFO of the company and a member of the Board of Directors. By accident one day, she detected a payroll fraud perpetrated by her brocher: When reviewing the fronts and backs of canceled payroll checks, she noticed endorsements to ber brother on the backs of some payroll checkic. Further checkinit revealed many more of instances of endorsersents. As a CPA berself, she became frightened because she konew the implications of fraud She hired a CPA firm to do an audit and to uncover the ectent of the fraud. A ghost, or fictitions, employee is someone who is on the payroll but who did not do work to earn the pay. When a ghost employee is paid, the money endi up in the hands of the fraudute: in this case, Matthew embezaled money from the family business by using ghost employees and stealing the checks-a form of asset misappropriation. He did not remove terminated employees from the main table. In this manner, he created 344 ghost employees over tima. low income immigrant workers who needed work and could not speak English well to be his ghost employeet. Maisie reported the fraud to the board of directorn. Upon shing the audit evidence. Matthew confeised to the fraud and apologired profisely. Matthew bad violated the truat placed in him by his family His motivation was greed. Even though he wat a shareholder in the business and earned a good salary if was not enough for him. He saw the opportunity to commit payroll fraud, and he tookit however, was icared Sthe realized that, while family owned, the company was a separate legal entity and that the fraud revolted in sichificant ritks for the company, There Were criminal implications for all isvolved, suth as identity theft. The employees used as 'ghostr' could sue the company the business insurance could be canceled if the frand wax not addrested, and the company s reputation in the community could suffer harm. timployees astered the consequences. The fictitious poyroll payments of over 5500,000 were inclided in the amounts reported to the state tax authorities and to the ifs. This creatod tax problems for the actual employees used as ghost employees, One employee, for example, was denied low income housing because his "ipcome" reportird by A10. (103-5) Fraud The Chester family owned and operated CEL, a manafacturer of electrical equipment. Mom and Dad Chester started the business. Their children grew up, became stockholders, and sat on the board of directors, which consisted entirely of family members. The youngest son, Matthew, was in charge of human resources and payroll. He hired employees, authorized factory time sheets, calculated the aet pay for each empioy. -. and took custody of the payroll checks from the outside firm that generated the physical paychecks for emplogees. Many of the factory workers were low income immigrants who did not trust direct deposits for their paychecks, Matthew distributed paychecks to these employees himself. Matthews sister. Maisie, was the CFO of the company and a member of the Board of Directors. By accident one day, she detected a payroll fraud perpetrated by her brocher: When reviewing the fronts and backs of canceled payroll checks, she noticed endorsements to ber brother on the backs of some payroll checkic. Further checkinit revealed many more of instances of endorsersents. As a CPA berself, she became frightened because she konew the implications of fraud She hired a CPA firm to do an audit and to uncover the ectent of the fraud. A ghost, or fictitions, employee is someone who is on the payroll but who did not do work to earn the pay. When a ghost employee is paid, the money endi up in the hands of the fraudute: in this case, Matthew embezaled money from the family business by using ghost employees and stealing the checks-a form of asset misappropriation. He did not remove terminated employees from the main table. In this manner, he created 344 ghost employees over tima. low income immigrant workers who needed work and could not speak English well to be his ghost employeet. Maisie reported the fraud to the board of directorn. Upon shing the audit evidence. Matthew confeised to the fraud and apologired profisely. Matthew bad violated the truat placed in him by his family His motivation was greed. Even though he wat a shareholder in the business and earned a good salary if was not enough for him. He saw the opportunity to commit payroll fraud, and he tookit however, was icared Sthe realized that, while family owned, the company was a separate legal entity and that the fraud revolted in sichificant ritks for the company, There Were criminal implications for all isvolved, suth as identity theft. The employees used as 'ghostr' could sue the company the business insurance could be canceled if the frand wax not addrested, and the company s reputation in the community could suffer harm. timployees astered the consequences. The fictitious poyroll payments of over 5500,000 were inclided in the amounts reported to the state tax authorities and to the ifs. This creatod tax problems for the actual employees used as ghost employees, One employee, for example, was denied low income housing because his "ipcome" reportird by
