An employee’s term in an organisation comes to an end when they complete their exit formalities and receive a relieving letter, right?

Wrong! Non-existent workers—known as ghost employees—often slip through the cracks of an organisation's payroll system and continue to haunt its resources by claiming salaries, benefits, and other expenses, amounting to significant losses.

Ghost employees are those with either completely fabricated identities or former employees who have left the company but remain on the payroll due to oversight or deliberate manipulation. This reiterates the need to maintain accuracy and transparency in payroll management systems in organisations.

Living up to their identity, ghost employees remain listed on an organisation’s payroll system much after their official exit from the company thanks to dishonest employees in decision-making positions in Human Resources or Finance functions, who exploit every loophole in the system to claim fraudulent wages under their names.

Not just salary, unscrupulous employees often use these pseudo identities to divert huge funds into their personal accounts. However, the implications of ghost employees go far beyond mere financial mismanagement and may also be an indicator of other fraudulent activities being carried out within the organisation.

Your 'ghost' is a symptom of fraud

Such fraudulent activity causes erosion of trust in the workplace and, if undetected, could lead to regulatory penalties and even legal repercussions. Payroll fraud, in its various forms, has become an increasingly pressing concern for organisations globally, with ghost employees being a common problem due to their hard-to-detect nature.

Unfortunately, by the time such fraud comes to light, it has already resulted in significant losses to the organisation. According to the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations 2024, payroll fraud generally lasts 18 months before detection, averaging a loss of $2,800 per month to the organisation.

Recently, the Finance Manager at a private company was suspended and subjected to an inquiry over allegations of having fraudulently claimed a monthly salary under his wife’s name for over 10 years. This serves as a clear reminder that even the most robust payroll systems need to be constantly monitored and updated to prevent such catastrophic slip-ups.

Since payroll frauds can only be committed by existing employees—who are aware of the system’s shortcomings—it becomes very difficult to keep this fraudulent activity in check. A lack of regular audits and the failure to keep a tighter scrutiny over the payment process leads to a proliferation of such incidents. Conducting periodic audits, using analytical procedures, and background checks of existing employees, as well as thoroughly vetting new hires with tech-led solutions, can go a long way in ensuring that the integrity of the workforce is aligned with the company’s ethos. Monitoring non-financial data such as leave history, check-ins, timesheets, and training attendance can also help determine if the employee is indeed a part of the organisation or merely a name on the payroll.

Organisations will also benefit from updating their existing systems of payroll management, which usually use spreadsheets and are particularly vulnerable to human errors or deliberate manipulation.

Detecting ghost employees requires vigilance and a robust internal control system. Automating background checks and integrating advanced software tools to track employee attendance, salary, and benefits in real-time can serve as a powerful safeguard against such activities and foster trust within the employee ecosystem. Artificial Intelligence (AI) and Machine Learning tools can help businesses quickly identify patterns of potential fraud by cross-checking employee records across various databases, ensuring that only those who are actively employed are being compensated. It can also help detect inconsistencies in the payroll system that may indicate ghost employees or other types of payroll fraud.

Additionally, tech-based solutions can ensure that the exit process for employees is handled swiftly and accurately. When an employee resigns, retires, or is terminated, automated systems can promptly update their status in the payroll, reducing chances of their information lingering in the system and being exploited by employees with malicious intent. Moreover, these systems can generate timely reports flagging off any anomalies in the payroll.

Like most fraudulent activities, the key to preventing payroll fraud lies in proactive steps to counter the possibility of a slip-up. By embracing cutting-edge, tech-driven solutions for employee verification and payroll management, businesses can protect their financial integrity and set a strong foundation for sustainable growth.