Ignoring Red Flags for Corporate Fraud Can Cost Millions
 5/1/2017
As published in the http://www.nj.com/mercer/index.ssf/2017/03/ex-payroll_ceo_pleads_guilty_to_56m_fraud_scheme.html

If you have employees, you have payroll; if you have payroll, you also have payroll taxes. For many businesses, it may be easier and more economical to use the services of a payroll company. These services usually include processing payroll, filing required reports and paying required taxes.

However, this was not the case for some unfortunate businesses, as we see in this recent article about the CEO of Innovative Payroll Services, a payroll company in New Jersey, who pled guilty to an $8.4 million fraud scheme. He used funds deposited by customers for payroll taxes to pay for personal expenses, including credit card bills, a deposit on a $1.8 million house, payments for cars, boats and airplanes. While these customers thought their payroll taxes were paid, this CEO was embezzling their payments to live a grand lifestyle. The judge in this case said that more than 103 clients lost more than $8.4 million in local, state and federal tax deposits, as well $578,000 in associated penalties and interest.

One of these clients was the City of Trenton. The mayor of Trenton admitted that red flags were ignored that may have prevented such a great loss.

Some of the red flags that should have caused concern were:

  • Notices of unpaid balances, penalties and interest
  • Notices of late filings
  • Payroll company employees always “looking into it” with no resolution

Michael Pires, an industry expert and CEO of JetPay Payroll Services, offers some tips for hiring and using a payroll company:

  • Research the company thoroughly – number of years in business, track record, testimonials
  • Ask for a copy of the SOC (Service Organization Control) Report. There are two types of reports: a Type I report describes the company's controls at a specific point in time, but a Type II report goes a step further to include detailed testing of the company's controls over a period of time.
  • Register for the Electronic Federal Tax Payment System and the state’s filing system so you can verify that tax payments were made on time.
  • Know where your money is held until tax payments are due.
  • Make sure the company has a fidelity bond insurance policy that would cover any losses in the event of errors or thefts. Amounts will vary depending on the size of the company.

If you have noticed any red flags within your organization, contact a Certified Fraud Examiner for a fraud checklist. Mike Rosten, CPA, CFE and shareholder with Piercy Bowler Taylor & Kern can help review a company’s books and records to find potential fraud.