Question

Golden Bear Construction operates throughout California. The owner, Gaylan Beavers, employs 15 work crews. Construction supervisors report directly to Beavers, and the supervisors are trusted employees. The home office staff consists of an accountant and an office manager.

Because employee turnover is high in the construction industry, supervisors hire and fire their own crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee W-4 forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their crews, and the accountant prepares the payroll. At noon on Friday, the supervisors come to the office to get paychecks for distribution to the workers at 5 p.m.

The company accountant prepares the payroll, including the paychecks. Beavers signs all paychecks. To verify that each construction worker is a bona fide employee, the accountant matches the employee’s endorsement signature on the back of the canceled paycheck with the signature on that employee’s W-4 form.

Requirements

1. Identify one way that a supervisor can defraud Golden Bear Construction under the present system.

Discuss a control feature that the company can use to safeguard against the fraud you identified in Requirement 1.

Short answer

1. A supervisor can enter a fictitious employee on a weekly timesheet, submit the time sheet to the company, and receive and keep the paycheck.
2. Beavers should make unscheduled visits to construction sites and distribute payroll checks.

Step-by-step solution

Meaning of Payroll

Payroll is the emolument that a representative gets from his managerfor the work he does for the company. It incorporates different remittances and derivations depending on the work of the employee.

(1) Identifying one way that a supervisor can defraud Golden Bear Construction under the present system

A supervisor has the authority to enter a fictional worker on a weekly timesheet, turn in the timesheet to the employer, and pocket the compensation. The manager may manufacture a false signature on a W-4 form and use that signature to endorse the check. A supervisor may also employ a real person, such as a relative, who will get a salary but not perform any work in exchange for the supervisor receiving the money.

Additionally, a manager might continue to submit the hours worked for a fired employee. The supervisor is free to keep the check that was written out to that employee for personal use.

(b) Discussing a control feature that the company can use to safeguard against the fraud you identified in the Requirement

Beavers (or a home office staff) should make ad hoc trips to construction sites to hand out payroll checks to prevent the corporation fraud mentioned in Requirement 1. Beavers may question other employees to determine whether an absent employee has been working on a particular task or if a paycheck is due to an employee not being there to accept it. If the employees respond negatively, Beavers will have discovered a potential scam.

The business would be protected from fraud by separating the tasks of recruiting and firing personnel from the distribution of payments. Although it is more cost-effective for supervisors to deliver paychecks on the job site than for all employees to report to the home office to pick up their pay, this separation of roles is not typical in the construction industry.