Study the hypothetical Payroll Fraud Case (see attachment) and identify the internal control weaknesses that allowed Ned to commit the fraud. Identified all of the weaknesses in internal control that

Study the hypothetical Payroll Fraud Case (see attachment) and identify the internal control weaknesses that allowed Ned to commit the fraud. Identified all of the weaknesses in internal control that allowed this fraud to exist. Recommend appropriate cost effective internal controls that Jack could implement to prevent future payroll frauds from occurring. Note that Jack’s Yard Service is a small business and cannot afford to create a human resources department and a payroll department like you might find in a larger organization.

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Payroll Fraud Case – Unit 9
Team Assignment
The Case
Jack’s Yard Service provides complete landscaping design and installation in the San Diego area. Services
include grading, irrigation sprinkler installation, waterfalls, rock features, concrete pads, and patio
decks. They will plant trees, shrubs, lawn, flowerbeds and provide any custom work that they are able to
competently complete. The company has been very successful and Jack, the owner, has hired six project
managers who each supervise from one to five projects at a time. When fully staffed each project
manager has three full-time employees and numerous seasonal and part-time employees as needed.
Jack regularly advertises for help and gives his project managers the applications. Project managers hire,
lay-off, and fire their own team of employees as the demand for work dictates. Most employees start at
$10 per hour but may receive raises determined by their project manager based on the quantity and
quality of their work. Each project manager is evaluated based on the overall profitability of their
projects.
In February Jack received a phone call from Phil, a former employee who said that the W2 he received
significantly overstated his income at Jack’s Yard Service and requested a corrected W2 so he could file
his income tax returns. Phil stated that he had worked part-time during the summer and earned
approximately $200 per week for twelve weeks earning about $1,200 in total. His W2 indicated that he
had earned over $10,000. Since he was a student and not expecting to earn a large amount of money
Phil had indicated that he was exempt from federal and state tax withholding on his W4 filed with the
company.
Jack hired you to investigate. You verified that Phil had worked for twelve weeks in San Diego and then
returned to school at Utah Valley University. Phil’s direct supervisor was Ned, one of the six project
managers. You then discussed with Jack how payroll was handled. Jack responded that each project
manager would give him a time sheet for each employee every Monday morning showing the hours
worked the prior week, the hourly pay rate, and the hours assigned to each project. Since the project
managers worked directly with the employees they were in the best position to verify the hours worked
and to determine their contribution to the company and rate of pay. Jack personally would calculate the
payroll, write the checks, and give the checks to the project managers so they could be given to the
employees by the end of the day. The payroll information was entered into a spreadsheet and the
original time sheets were placed in a file drawer organized by month.
Your examination of the spreadsheets and time sheets showed that Phil had earned $2,460 during the
twelve weeks he was in San Diego and an additional $7,820 after he returned to school. All of Phil’s time
sheets were signed by Ned. Further investigation revealed that all three of Ned’s three full-time
permanent employees consistently had reported overtime hours even when other employees were laid-

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off or otherwise released from their employment. You decided to call all of the employees terminated
during the past year and discovered that time sheets had been submitted for eight of them after the
time they reportedly quit working for Jack’s Yard Service.
With this evidence you received permission from Jack to work with his attorney to investigate Ned
further. Based on the evidence you provided Jack’s attorney was able to work with law enforcement
personnel and secure copies of Ned’s bank statements directly from Ned’s bank for the past year along
with copies of the checks deposited into his account. Checks written to former employees and deposited
into Ned’s account totaled $68,550. In addition there were numerous suspicious cash deposits
subsequent to the weekly payroll deposits. Your best guess was that many of these cash deposits were
related to the suspicious overtime hours reported for Ned’s three permanent employees. Your best
estimate of overpaid wages during the past year was between $75,000 and $100,000. Because Ned
consistently showed normal profits on all of his projects Jack had not suspected a fraud or any other
problem related to payroll.

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