The Best Fraud I Ever Saw

Guest Post By: David W. Perky, CPA, CFP®

I’m a little hesitant to publish an article about fraud, knowing that it may fall into the wrong hands. But I was asked to write it by someone I most admire, Mr. Helzberg, and I wasn’t about to turn him down.

The best fraud I ever saw came across my desk a few years ago. Although simple in many ways, the fraudulent act was very difficult to detect. The company involved had a highly trusted, well-liked controller who had complete control of the payroll, including preparation of all payroll returns. Naturally, the company owner was happy to have such a hard-working individual who was willing and able to complete multiple tasks with little internal controls.

But blind trust can be a dangerous thing.

The criminally minded controller regularly paid extra to the Internal Revenue Service during the year, and he accounted for the extra payments in the total of the taxes deposited on the quarterly payroll reports. As you may know, these quarterly reports don’t require detail. Instead, everything is reported in total, including wages, taxes withheld from the wages and the employer payroll taxes.

Only at the end of the year do we give a detailed accounting to the IRS of the amounts applicable to each employee. So, only at the end of the year could you see that this trusted, well-liked controller applied the extra $26,296 to their own W-2. Ultimately, they filed their personal income tax return and claimed this extra withholding as their money – generating a large personal income tax return refund in the process. In other words, the money made a round trip via the IRS!

How do you prevent such fraud? First, have an outside payroll service complete your payrolls and applicable reports. Another smart measure is to regularly reconcile your financial statement wage and payroll tax expenses to detailed payroll reports, and scan the payroll reports to ensure they are reasonable. Either of these efforts will provide protection, but doing both will give you the best chance of preventing fraud.

Well, the cat is out of the bag. But now you know how to protect yourself from this kind of fraud.

About the Author: David Perky is a partner of TPP Certified Public Accountants, a Kansas City-based firm that offers accounting, retirement plan administration and CFO services, so you can focus your time and energy on what you do best. See for more information.

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