Unauthorized and Redirected Payroll Deductions

Payroll deductions are deductions made from an employee's gross salary to arrive at net salarythe amount actually paid to the employee.

Payroll deductions are made for employee tax deductions (ETD) required by the federal government for Canada Pension Plan (CPP), Employment Insurance (EI), and personal income tax. In addition, individual organizations require payroll deductions for union dues; pension plans (also known as superannuation); medical, dental, and life insurance; and so on. Large organizations make millions of dollars of payroll deductions every month.

Some payroll deductions, such as ETDs, are highly regulated. Because of this, irregularities often flag payroll fraud. For instance, phantom employees with no, or incorrect, ETDs become evident when mandatory reporting forms (such as the T4s for income tax) are filed and yearend payroll reconciliations prepared. In fact, manipulated payroll deductions are often uncovered by the Canada Revenue Agency (CRA).

T4 forms, required by CRA, must be prepared for all employees, reporting employment earnings, benefits, and deductions. Reconciliations between the payroll accounting records (in accounts, such as Salaries Expense, Employee Benefits Expense, and Payroll Taxes Payable) and T4s generally flag:

• suspicious employees with no or incorrect deductions
• the presence of unrecognized, additional employees (phantoms)
• incomplete or falsified data fields; for instance, SIN, employee numbers, pension amounts, etc.

While many are not aware of source deduction requirements, payroll department employees are acutely aware of how they are handled. They are, therefore, capable of formulating methods to avoid detection by manipulating source deductions.

Unethical payroll employees may:

• Prepare fictitious T4s and then destroy them in an attempt to destroy the paper trail.
• Force the total of payroll reconciliations; for instance, Gross Salary on T4s should equal the amount in the books (in the Salaries Expense account). If payroll fraud has occurred, the Salaries Expense amounts are forced to agree with dollar amounts reported on employees' and government T4 copies.
• Simply destroy or not prepare required forms or reconciliations.

Payroll (salaries and benefits) represents a major cost component of organizational operating expenses. Even payroll deductions are attractive misappropriation targets. Tampering with payroll deductions requires access to payroll records, deductions information, and remittance mechanisms. Even in moderately sized organizations, employee deductions add up to sizeable amounts; large firms remit millions. If controls are weak, the perpetrator may misappropriate significant amounts from deductions and remittances.

Source deductionsamounts deducted from employees' wagesalong with employers' required contributions are to be remitted (paid) by employers to appropriate agencies the following month or quarter. In addition, ETDs require yearend payroll reconciliations and T4 preparation for employees and the federal government. Because this occurs only once a year, there is time for employeeperpetrators to devise coverups or leave the organization before fraud is exposed. Many organizations fail to prepare reconciliations for deductions, such as benefit and pension plans. This means that, although paper trails exist, there may be no observable symptom of fraud, such as outofbalance reconciliations. On the other hand, employeeperpetrators responsible for this function may force the balance of reconciliations to make them balance (agree).

If responsible for preparing payroll and remittance payments, perpetrators may:

• Redirect required remittances to self.
  • They may pay the amount of deductions in the form of a payroll cheque to self or their phantom employee. In this manner, the accounts will all reconcile and undue attention is avoided. That is, until CRA, insurers, unions, and pension plans inquire about missed remittances!
  • To placate these outsiders, the employeeperpetrator may consistently remit only part of the amount deducted, keeping the rest.
• Make unauthorized deductions.
  • The perpetrator redirects extra amounts deducted from other employees' pay to self. If small amounts are deducted from large numbers of employees, the total amount may be significant. Yet small individual deductions, even if noticed, are not generally questioned by individual employees.
  • Employees, or groups of employees, who work overseas, are temporary, are Temporary Foreign Worker Program workers, or are provided by contractors may not have the means or opportunities to complain.
  • Individual employees who are known to not review, or otherwise ignore, their employment earnings statements (pay slips) may be targeted for larger fraudulent deductions.

Paraphrase the paragraph into small points for my powerpoint