What Is a Ghost Audit?

Large organizations and those with multiple locations face a form of financial fraud called ghost employees. To detect them, and ultimately to prevent them, these firms routinely engage in a practice of ghost audits.

Ghost employees - sometimes called phantom employees - are names on a payroll to whom paychecks are issued, but who are not actual employees and do not perform any work. They The term “ghost employee” is given because the employee exists on paper but is nonexistent in the workplace; the jobs to which ghost employees are purportedly assigned are often called no-show jobs. It can take a long time to find ghost employees without the help of ghost audits. Strict internal controls can help prevent ghost employees.

Most organizations require documentation of hiring in order to place someone on the payroll, which generally means that a supervisor or manager -- someone with the authority to direct the payroll department to add a new employee -- must be involved. Sometimes a member of the payroll department is also involved. Ghost employees are added to the payroll by, among other things, creating a fictitious employee, using the name of a terminated employee, putting new employees in the system one pay period before they begin working for the company and adding temporary employees to the payroll. In some cases, the people who sneak ghost employees onto a payroll remove them after only a few weeks, making it more difficult for a future audit to identify.

While the existence of ghost employees may sometimes be uncovered in a routine audit, in most cases the documentation provided is sufficient to pass such an examination. Ghost audits are designed specifically to uncover any ghost employees, and closely investigate payroll records and employee behavior for evidence of ghosts. These audits have proved beneficial, especially for large organizations. For instance, in 2009, an audit conducted by Detroit Public Schools found more than 250 ghost employees -- a fraud that cost the system more than $400,000 over four years.

One of the most effective methods for conducting a ghost audit is to require all employees to pick up their paychecks or direct deposit stubs in person. The ghost employees' paychecks or stubs will not be collected. This is how the Detroit Public Schools determined how many ghost employees it had. Other effective ghost audit methods include looking for employees who haven’t taken a vacation, do not list a physical address and receive no deductions on their paychecks (for Social Security, taxes or insurance). Additionally, those conducting ghost audits look for multiple direct deposits going to the same bank account, invalid Social Security numbers and missing employee information.