Study the hypothetical Payroll Fraud Case (see attachment) and identify the internal control weaknesses that allowed Ned to commit the fraud. Identified all of the weaknesses in internal control that allowed this fraud to exist. Recommend appropriate cost effective internal controls that Jack could implement to prevent future payroll frauds from occurring. Note that Jack?s Yard Service is a small business and cannot afford to create a human resources department and a payroll department like you might find in a larger organization.

Payroll Fraud Case - Unit 9 Team Assignment The Case Jack's Yard Service provides complete landscaping design and installation in the San Diego area. Services include grading, irrigation sprinkler installation, waterfalls, rock features, concrete pads, and patio decks. They will plant trees, shrubs, lawn, flowerbeds and provide any custom work that they are able to competently complete. The company has been very successful and Jack, the owner, has hired six project managers who each supervise from one to five projects at a time. When fully staffed each project manager has three full-time employees and numerous seasonal and part-time employees as needed. Jack regularly advertises for help and gives his project managers the applications. Project managers hire, lay-off, and fire their own team of employees as the demand for work dictates. Most employees start at $10 per hour but may receive raises determined by their project manager based on the quantity and quality of their work. Each project manager is evaluated based on the overall profitability of their projects. In February Jack received a phone call from Phil, a former employee who said that the W2 he received significantly overstated his income at Jack's Yard Service and requested a corrected W2 so he could file his income tax returns. Phil stated that he had worked part-time during the summer and earned approximately $200 per week for twelve weeks earning about $1,200 in total. His W2 indicated that he had earned over $10,000. Since he was a student and not expecting to earn a large amount of money Phil had indicated that he was exempt from federal and state tax withholding on his W4 filed with the company. Jack hired you to investigate. You verified that Phil had worked for twelve weeks in San Diego and then returned to school at Utah Valley University. Phil's direct supervisor was Ned, one of the six project managers. You then discussed with Jack how payroll was handled. Jack responded that each project manager would give him a time sheet for each employee every Monday morning showing the hours worked the prior week, the hourly pay rate, and the hours assigned to each project. Since the project managers worked directly with the employees they were in the best position to verify the hours worked and to determine their contribution to the company and rate of pay. Jack personally would calculate the payroll, write the checks, and give the checks to the project managers so they could be given to the employees by the end of the day. The payroll information was entered into a spreadsheet and the original time sheets were placed in a file drawer organized by month. Your examination of the spreadsheets and time sheets showed that Phil had earned $2,460 during the twelve weeks he was in San Diego and an additional $7,820 after he returned to school. All of Phil's time sheets were signed by Ned. Further investigation revealed that all three of Ned's three full-time permanent employees consistently had reported overtime hours even when other employees were laid- off or otherwise released from their employment. You decided to call all of the employees terminated during the past year and discovered that time sheets had been submitted for eight of them after the time they reportedly quit working for Jack's Yard Service. With this evidence you received permission from Jack to work with his attorney to investigate Ned further. Based on the evidence you provided Jack's attorney was able to work with law enforcement personnel and secure copies of Ned's bank statements directly from Ned's bank for the past year along with copies of the checks deposited into his account. Checks written to former employees and deposited into Ned's account totaled $68,550. In addition there were numerous suspicious cash deposits subsequent to the weekly payroll deposits. Your best guess was that many of these cash deposits were related to the suspicious overtime hours reported for Ned's three permanent employees. Your best estimate of overpaid wages during the past year was between $75,000 and $100,000. Because Ned consistently showed normal profits on all of his projects Jack had not suspected a fraud or any other problem related to payroll