CFE Question of the Day: Payroll ghost employee prevention

Quiz Yazan Ibrahim
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CFE exam practice question — CFE Question of the Day: Payroll ghost employee prevention

CFE exam practice question: daily practice for the Certified Fraud Examiner (CFE) exam — domain: Fraud Prevention and Deterrence.

Question

A medium-sized nonprofit discovers a small, recurring payroll disbursement to an employee who cannot be located in HR records. Management asks you which preventive control would best reduce the risk of ghost employees. Which of the following is the most effective preventive control?

  • A. Require dual authorization for all new hires and payroll changes and perform monthly reconciliations of payroll to HR personnel records
  • B. Install biometric time clocks for nonexempt staff to capture attendance and clock-in data
  • C. Allow employees to update direct deposit information via the self-service portal with a supervisor notification
  • D. Schedule an annual external payroll audit that verifies payroll totals against bank disbursements
Show the answer and explanation

Correct answer: A. Require dual authorization for all new hires and payroll changes and perform monthly reconciliations of payroll to HR personnel records

The best preventive control is dual authorization for payroll additions/changes plus monthly reconciliations of payroll to HR records because it prevents unilateral creation of payroll records and detects unauthorized records quickly. Biometric time clocks help confirm hours worked but do not stop someone from being added as a ghost employee in the payroll master. Allowing self-service updates with only a notification is weak because it relies on the employee or supervisor to spot fraud rather than requiring independent approval. An annual external audit is retrospective and infrequent, so it will detect fraud late and cannot prevent creation of ghost employees in real time.

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