What is ghost employee fraud and which payroll control best prevents it?

• A. Over-reporting hours by existing employees to inflate wages; routine audit of timesheets helps prevent it.
• B. Creation of non-existent employees to collect wages; biometric time clocks and independent payroll verification help prevent it.
• C. Misclassifying contractors as full-time employees; strict contract reviews prevent it.
• D. Payroll fraud through vendor payments; vendor reconciliation prevents it.

Answer: (B)

Ghost employee fraud happens when wages are paid to a non-existent worker, allowing someone to skim funds from payroll. The best prevention combines two strong controls: biometric time clocks and independent payroll verification. Biometric clocks ensure that time is recorded by the actual person, making it much harder to pay for someone who doesn’t exist or to have someone clock in for a fictitious employee. Independent payroll verification adds a separate check that the payroll master file matches active HR records, confirming each paid person really exists and is authorized to be on the payroll; this cross-check can catch a phantom employee before or shortly after payroll runs.

Other options address different payroll risks. Over-reporting hours by existing staff targets time theft by real employees, and routine time-sheet audits help but don’t directly stop the creation of non-existent workers. Misclassifying contractors as full-time is a classification issue, not a ghost employee problem, and vendor payments with vendor reconciliation focus on accounts payable, not employee payroll.