You are a manager in the forensic auditing investigation department of the audit firm. The directors of a local manufacturing company, MSc 2 Ltd, have contacted your dregarding a suspected fraud, which has recently been discovered operating in the company, and you have been asked to look into the matter further. You have held a preliminary discussion with Segun Peter, the finance director of MSc 2 Ltd, the notes of this conversation are shown below:Notes of discussion with Segun PeterFour month ago MSc 2 shut down one of its five factories, in response to deteriorating market conditions, with all staff employed at the factory made redundant on the date of closure.
While monitoring the monthly management accounts, Segun perform analytical procedures on salary expenses. She found that the monthly total payroll expenses has reduced by 3% in the months following the factory closure-not as much as expected jilven that 20% of the total staff of the company has been made redundant. Initial investigation performed last week by Segun revealed that many of the employees who had been made redundant had actually remained on the payroll records, and salary payments in respect of these individuals were still being made every month, with all payment going into the same bank account. As soon as she realised that there may be a fraud being conducted within the company, Segun stopped any further payments in respect of the redundant employees. He contacted our firm as she is unsure how to proceed, and would like our firm‘s specialised department to conduct an investigation.
The Correct Answer and Explanation is:
Correct Answer:
The suspected fraud in MSc 2 Ltd is a payroll fraud, specifically a ghost employee scheme, where salaries were continuously paid to individuals who had supposedly been made redundant, and the payments were funneled into a single bank account. This suggests a deliberate manipulation of payroll records for fraudulent financial gain. An internal employee may have retained the names of redundant staff on the payroll system and redirected their wages for personal benefit.
Explanation:
The preliminary findings from the discussion with Segun Peter indicate a serious case of payroll fraud at MSc 2 Ltd, commonly referred to as a ghost employee fraud. This occurs when salaries are paid to fictitious or former employees, and the funds are illicitly collected by a perpetrator, typically someone with access to the payroll system.
Following the closure of one of the company’s five factories, 20% of MSc 2 Ltd’s workforce was made redundant. However, payroll expenses only decreased by about 3%, which is significantly lower than expected. This discrepancy raised a red flag. Further investigation revealed that many of the supposedly redundant employees were still being paid, and these salary payments were all deposited into the same bank account. This is a strong indicator of fraud, as it is unlikely that multiple former employees would use a single bank account for salary payments.
This type of scheme typically requires collusion or access by someone within the finance or HR department who has the authority or system permissions to alter payroll records and add or retain ghost employees. The fact that all payments were directed into one account further supports the theory that this was a deliberate and organized fraud, likely perpetrated by an internal employee abusing their position.
The next step would be for the forensic audit team to conduct a full investigation, including tracing payment records, accessing system audit trails, and interviewing relevant staff, to identify the individuals involved and gather sufficient evidence for disciplinary or legal action.
