Mark Twain Museum, Hartford

In “not so breaking news” (at least to those in the non-profit sector), the controller for the Mark Twain Museum in Hartford, pleaded guilty to fraud and filing false income taxes this past August.  How did she do it?  Through the use of ghost employees.  Up until 30 minutes ago, I was completely unaware of this (apparently) common scandal that happens often in the non-profit sector.  According to Easy Office Blog, “For those of us in the sector who have seasonal workers, or a large part-time staff, ghost employees can be a real problem…the bookkeeper simply “invents” an employee and pays them.  Management often doesn’t notice as payroll gets entered into the accounting system in a lump sum.”

Ghost employees "add up" via

How can you prevent employees from committing this fraud?  Well the most important way is having a pre-payroll register approved and signed by department head so that people and amounts can be verified and approved.  Other tactics may include:

  • Ensure the payroll preparation, disbursement and distribution functions are segregated.
  • Look for paychecks without deductions for taxes or Social Security. Completely fictitious employees frequently don’t have any.
  • Examine payroll checks that have dual endorsements. Although most of them are legitimate, two signatures could signal the forgery of a departed employee’s endorsement, which the thief also endorses and deposits into his or her own account.
  • Use direct deposits. This method, although not foolproof, can cut down on payroll chicanery by eliminating paper paychecks and the possibility of alteration, forgery and most theft, although it doesn’t prevent misdirection of deposits into unauthorized accounts.
  • Check payroll records for the presence of duplicate names, addresses and Social Security numbers.
  • On occasion, hand-deliver paychecks to employees and require positive identification. If you have leftover paychecks, make sure they belong to actual employees, not ghosts.
  • Be wary of budget variations in payroll expense. Higher-than-budgeted labor costs can indicate ghost employees.

Arguably, in smaller organizations, this type of fraud may be difficult to complete.  But, at the Mark Twain Museum, staff had been cut from 49 to 17 — two years before the fraud even started!  Suffice it to say, being smart about transactions of your organization and behaviors of co-workers is extremely important!

– Kate