Ais Romney 2006 Slides 13 The Hr Cycle

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Ais Romney 2006 Slides 13 The Hr Cycle

  1. 1. HAPTER 13 The Human Resources Management / Payroll Cycle
  2. 2. INTRODUCTION <ul><li>Questions to be addressed in this chapter include: </li></ul><ul><ul><li>What are the basic business activities and data processing operations that are performed in the human resources management (HRM)/payroll cycle? </li></ul></ul><ul><ul><li>What decisions need to be made in this cycle, and what information is needed to make these decisions? </li></ul></ul><ul><ul><li>What are the major threats and the controls that can mitigate those threats? </li></ul></ul>
  3. 3. INTRODUCTION <ul><li>The HRM/Payroll cycle is a recurring set of business activities and related data processing operations associated with effectively managing the employee workforce. </li></ul>
  4. 4. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>
  5. 5. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>These two tasks are normally done only once for each employee.
  6. 6. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>These tasks are done repeatedly as long as the employee works for the company.
  7. 7. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>In most companies these six activities are split between a payroll system and an HRM system.
  8. 8. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>The payroll system handles compensation and comes under the purview of the controller.
  9. 9. INTRODUCTION <ul><li>The most important tasks performed in the HRM/payroll cycle are: </li></ul><ul><ul><li>Recruiting and hiring new employees </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Job assignment </li></ul></ul><ul><ul><li>Compensation (payroll) </li></ul></ul><ul><ul><li>Performance evaluation </li></ul></ul><ul><ul><li>Discharge of employees (voluntarily or involuntarily) </li></ul></ul><ul><li>Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. </li></ul>The HRM system handles the other five tasks and comes under the purview of the director of human resources.
  10. 10. INTRODUCTION <ul><li>In this chapter, we’ll focus primarily on the payroll system: </li></ul><ul><ul><li>One of the largest and most important components of the AIS </li></ul></ul><ul><ul><li>Must be designed to meet: </li></ul></ul><ul><ul><ul><li>Management’s needs </li></ul></ul></ul><ul><ul><ul><li>Government regulations </li></ul></ul></ul><ul><ul><li>Incomplete or erroneous payroll records: </li></ul></ul><ul><ul><ul><li>Impair decision making </li></ul></ul></ul><ul><ul><ul><li>Can results in fines and/or imprisonment </li></ul></ul></ul>
  11. 11. INTRODUCTION <ul><li>The design of the HRM system is also important because the knowledge and skills of employees are valuable assets, so HRM systems should: </li></ul><ul><ul><li>Help assign these assets to appropriate tasks; and </li></ul></ul><ul><ul><li>Help monitor their continuous development. </li></ul></ul>
  12. 12. INTRODUCTION <ul><li>There are five major sources of input to the payroll system: </li></ul><ul><ul><li>HRM department provides information about hirings, terminations, and pay-rate changes. </li></ul></ul><ul><ul><li>Employees provide changes in discretionary deductions (e.g., optional life insurance). </li></ul></ul><ul><ul><li>Various departments provide data about the actual hours worked by employees. </li></ul></ul><ul><ul><li>Government agencies provide tax rates and regulatory instructions. </li></ul></ul><ul><ul><li>Insurance companies and other organizations provide instructions for calculating and remitting various withholdings. </li></ul></ul>
  13. 13. INTRODUCTION <ul><li>Principal outputs of the payroll system are checks: </li></ul><ul><ul><li>Employees receive individual paychecks . </li></ul></ul><ul><ul><li>A payroll check is sent to the bank to transfer funds from the company’s regular account to its payroll account. </li></ul></ul><ul><ul><li>Checks are issued to government agencies, insurance companies, etc., to remit employee and employer taxes, insurance premiums, union dues, etc. </li></ul></ul><ul><li>The payroll system also produces a variety of reports. </li></ul>
  14. 14. INTRODUCTION <ul><li>Employees are an organization’s most valuable assets: </li></ul><ul><ul><li>Their knowledge and skills affect quality and quantity of goods and services. </li></ul></ul><ul><ul><li>Labor costs are a major expense in generating revenues and a key cost driver. </li></ul></ul><ul><li>The traditional AIS has not measured or reported on the status of a company’s human resources: </li></ul><ul><ul><li>Financial statements do not regard employees as assets. </li></ul></ul><ul><ul><li>Under GAAP, the value of human services is not measured until they have been consumed. </li></ul></ul>
  15. 15. INTRODUCTION <ul><li>However, some companies are now creating positions for a direction of intellectual assets. </li></ul><ul><li>Some may even include HR info in their annual report, including reports on: </li></ul><ul><ul><li>Human capital: The knowledge employees possess, which can be enhanced. </li></ul></ul><ul><ul><li>Intellectual capital: The knowledge that’s been captured and implemented in decision support systems, expert systems, or knowledge databases, so that it can be shared. </li></ul></ul>
  16. 16. INTRODUCTION <ul><li>Because employees are so valuable, turnover is expensive: </li></ul><ul><ul><li>Average cost of replacement is 1.5 times the employee’s annual salary. </li></ul></ul><ul><ul><li>Turnover rates need to be managed so they’re not excessive. </li></ul></ul>
  17. 17. INTRODUCTION <ul><li>Employee morale is also important. </li></ul><ul><ul><li>Bad morale leads to high turnover. </li></ul></ul><ul><ul><li>Employee attitudes affect customer interactions and are positively correlated with profitability. </li></ul></ul><ul><ul><li>Employees need to: </li></ul></ul><ul><ul><ul><li>Believe they have the opportunity to do what they do best </li></ul></ul></ul><ul><ul><ul><li>Believe their opinions count </li></ul></ul></ul><ul><ul><ul><li>Believe their coworkers are committed to quality </li></ul></ul></ul><ul><ul><ul><li>Understand the connection between their jobs and the company’s mission. </li></ul></ul></ul>
  18. 18. INTRODUCTION <ul><li>To effectively track intellectual capital and human resources, the AIS must do more than just record time and attendance and prepare paychecks. </li></ul><ul><li>Payroll should be integrated with HRM so management can access data about employee-related costs and employee skills and knowledge. </li></ul>
  19. 19. PAYROLL CYCLE ACTIVITIES <ul><li>Let’s take a look at payroll cycle activities. </li></ul><ul><li>The payroll application is processed in batch mode because: </li></ul><ul><ul><li>Paychecks are issued periodically. </li></ul></ul><ul><ul><li>Most employees are paid at the same time. </li></ul></ul>
  20. 20. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  21. 21. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  22. 22. UPDATE PAYROLL MASTER FILE <ul><li>The HRM department provides information on new hires, terminations, changes in pay rates, and changes in discretionary withholdings. </li></ul><ul><li>Appropriate edit checks, such as validity checks on employee number and reasonableness tests are applied to all change transactions. </li></ul><ul><li>Changes must be entered in a timely manner and reflected in the next pay period. </li></ul><ul><li>Records of terminated employees should not be deleted immediately as some year-end reports (e.g., W-2s) require data on compensation for all employees during the year. </li></ul>
  23. 23. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  24. 24. UPDATE TAX RATES AND DEDUCTIONS <ul><li>The payroll department receives notification of changes in tax rates and other payroll deductions from government agencies, insurers, unions, etc. </li></ul><ul><li>These changes occur periodically. </li></ul>
  25. 25. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  26. 26. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Information on time and attendance comes in various forms depending on the employee’s pay scheme. </li></ul>
  27. 27. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Some employees are paid on an hourly basis. </li></ul><ul><ul><li>Many companies use a time card to record their arrival and departure time. </li></ul></ul><ul><ul><ul><li>This document typically includes total hours worked during a pay period. </li></ul></ul></ul><ul><ul><li>Some use electronic time clocks , where employees swipe their badge through a reader when they come and go. </li></ul></ul><ul><ul><li>Manufacturing companies may use job time tickets to record not only time present but also time dedicated to each job. </li></ul></ul>
  28. 28. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Some employees earn a fixed salary, e.g., managers and professional staff. </li></ul><ul><ul><li>Usually don’t record their time, but supervisors informally monitor their presence. </li></ul></ul><ul><ul><li>Professionals in accounting, law, and consulting firms must track their time on various assignments to accurately bill clients. </li></ul></ul>
  29. 29. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Sales staff are often paid on a straight commission or base salary plus commission. </li></ul><ul><li>Some may also receive bonuses for surpassing sales targets. </li></ul><ul><ul><li>Requires careful recording of their sales. </li></ul></ul>
  30. 30. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Increasingly, laborers may be paid partly on productivity. </li></ul><ul><li>Some management and employees may receive stock to motivate them to cut costs and improve service. </li></ul>
  31. 31. VALIDATE TIME AND ATTENDANCE DATA <ul><li>The payroll system needs to link to the revenue cycle and other cycles to calculate these payments. </li></ul><ul><li>It’s also important to design bonus schemes with realistic, attainable goals that: </li></ul><ul><ul><li>Can be measured </li></ul></ul><ul><ul><li>Are congruent with corporate objectives </li></ul></ul><ul><ul><li>Are monitored by management for continued appropriateness </li></ul></ul><ul><ul><li>Are legal </li></ul></ul>
  32. 32. VALIDATE TIME AND ATTENDANCE DATA <ul><li>Accountants and Compensation Policies </li></ul><ul><ul><li>Recent corporate scandals have led to scrutiny and criticism of executive compensation plans: </li></ul></ul><ul><ul><ul><li>FASB issued new rules requiring that stock options be expensed. </li></ul></ul></ul><ul><ul><ul><li>Major U.S. stock exchanges now require companies to obtain shareholder approval of stock compensation. </li></ul></ul></ul>
  33. 33. VALIDATE TIME AND ATTENDANCE DATA <ul><ul><li>Compensation boards are being created to design compensation plans, rather than having executives create their own. </li></ul></ul><ul><ul><li>Accountants can help by: </li></ul></ul><ul><ul><ul><li>Advising on financial and tax effects of proposals. </li></ul></ul></ul><ul><ul><ul><li>Identifying appropriate metrics to measure performance. </li></ul></ul></ul><ul><ul><ul><li>Enabling compliance with legal and regulatory requirements. </li></ul></ul></ul><ul><ul><ul><li>Suggesting appropriate public disclosures. </li></ul></ul></ul>
  34. 34. VALIDATE TIME AND ATTENDANCE DATA <ul><li>How can information technology help? </li></ul><ul><ul><li>Collecting time and attendance data electronically, e.g.: </li></ul></ul><ul><ul><ul><li>Badge readers </li></ul></ul></ul><ul><ul><ul><li>Electronic time clocks </li></ul></ul></ul><ul><ul><ul><li>Data entered on terminals </li></ul></ul></ul><ul><ul><ul><li>Touch-tone telephone logs </li></ul></ul></ul><ul><ul><li>Using edit checks to verify accuracy and reasonableness when the data are entered. </li></ul></ul>
  35. 35. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  36. 36. PREPARE PAYROLL <ul><li>The employee’s department provides data about hours worked. </li></ul><ul><li>A supervisor confirms the data. </li></ul><ul><li>Pay rate information is obtained from the payroll master file. </li></ul>
  37. 37. PREPARE PAYROLL <ul><li>Procedures: </li></ul><ul><ul><li>The payroll transaction file is sorted by employee number (same sequence as master file). </li></ul></ul><ul><ul><li>For each transaction, the payroll master file is read for pay rates, etc., and gross pay is calculated. </li></ul></ul><ul><ul><ul><li>Hourly Employees: Gross pay = (hours worked x wage rate) + Overtime + Bonuses </li></ul></ul></ul><ul><ul><ul><li>Salaried Employees: Gross pay = annual salary x fraction of year worked </li></ul></ul></ul>
  38. 38. PREPARE PAYROLL <ul><ul><li>Payroll deductions are summed and subtracted from gross pay to obtain net pay. There are two types of deductions: </li></ul></ul><ul><ul><ul><li>Payroll tax withholdings </li></ul></ul></ul><ul><ul><ul><li>Voluntary deductions </li></ul></ul></ul><ul><ul><li>Year-to-date totals for gross pay, deductions, and net pay are calculated, and the master file is updated. Cumulative records are important because: </li></ul></ul><ul><ul><ul><li>Social Security and other deductions cease or decline at certain levels. </li></ul></ul></ul><ul><ul><ul><li>The information will be needed for tax reports. </li></ul></ul></ul>
  39. 39. PREPARE PAYROLL <ul><ul><li>The following are printed: </li></ul></ul><ul><ul><ul><li>Paychecks for employees--often accompanied by an earnings statement , which lists pay detail, current and year-to-date. </li></ul></ul></ul><ul><ul><ul><li>A payroll register which lists each employee’s gross pay, deductions, and net pay in a multi-column format: </li></ul></ul></ul><ul><ul><ul><ul><li>Is used to authorize the transfer of funds to the company’s payroll bank account. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>May be accompanied by a deduction register , listing miscellaneous voluntary deductions for each employee . </li></ul></ul></ul></ul>
  40. 40. PREPARE PAYROLL <ul><ul><li>As payroll transactions are processed, labor costs are accumulated by general ledger accounts based on codes on the job time tickets. </li></ul></ul><ul><ul><ul><li>The totals for each account are used as the basis for a summary journal entry to be posted to the general ledger. </li></ul></ul></ul><ul><ul><li>Other payroll reports and government reports are produced. </li></ul></ul>
  41. 41. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  42. 42. DISBURSE PAYROLL <ul><li>Most employees are paid either by: </li></ul><ul><ul><li>Check </li></ul></ul><ul><ul><li>Direct deposit </li></ul></ul><ul><ul><li>In some industries, such as construction, cash payments may still be made, but does not provide good documentation </li></ul></ul>
  43. 43. DISBURSE PAYROLL <ul><li>Procedures: </li></ul><ul><ul><li>When paychecks have been prepared, the payroll register is sent to accounts payable for review and approval. </li></ul></ul><ul><ul><li>A disbursement voucher is prepared to authorize transfer of funds from checking to the payroll bank account. </li></ul></ul><ul><ul><ul><li>For control purposes, checks should not be drawn on the company’s regular bank account </li></ul></ul></ul><ul><ul><ul><li>A separate account is created for this purpose </li></ul></ul></ul><ul><ul><ul><ul><li>Limits the company’s loss exposure </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Makes it easier to reconcile payroll and detect paycheck forgeries </li></ul></ul></ul></ul>
  44. 44. DISBURSE PAYROLL <ul><ul><li>The approved disbursement voucher and payroll register are sent to the cashier. The cashier: </li></ul></ul><ul><ul><ul><ul><li>Reviews the documents. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Prepares and signs the payroll check to transfer the funds. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reviews, signs, and distributes employee paychecks (which separates authorization and recording from distribution of checks). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Re-deposits unclaimed checks in the company’s bank account. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sends a list of these paychecks to internal audit for investigation. </li></ul></ul></ul></ul>
  45. 45. DISBURSE PAYROLL <ul><ul><ul><ul><li>Returns the payroll register to payroll department, where it is filed with time cards and job time tickets. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sends the disbursement voucher to accounting clerk to update general ledger. </li></ul></ul></ul></ul>
  46. 46. DISBURSE PAYROLL <ul><li>Efficiency Opportunity: Direct Deposit </li></ul><ul><ul><li>Direct deposit can improve efficiency and reduce costs of payroll processing </li></ul></ul><ul><ul><ul><li>Employee receives a copy of the check and an earnings statement </li></ul></ul></ul><ul><ul><ul><li>Each bank receives a record of the payroll deposits for that bank via EDI. The record includes: </li></ul></ul></ul><ul><ul><ul><ul><li>Employee number </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Social Security number </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bank account number </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net pay amount </li></ul></ul></ul></ul>
  47. 47. DISBURSE PAYROLL <ul><ul><ul><li>Savings occur because: </li></ul></ul></ul><ul><ul><ul><ul><li>While the cashier does authorize release of funds, he/she does not sign each check. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Eliminates costs of buying, processing, and distributing paper checks. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Eliminates postage. </li></ul></ul></ul></ul><ul><ul><ul><li>Additional costs: </li></ul></ul></ul><ul><ul><ul><ul><li>Elimination of float between when check is distributed and when it is deposited by employee. </li></ul></ul></ul></ul><ul><ul><ul><li>Savings typically outweigh costs </li></ul></ul></ul>
  48. 48. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  49. 49. CALCULATE EMPLOYER-PAID BENEFITS AND TAXES <ul><li>The employer pays some payroll taxes and employee benefits directly </li></ul><ul><ul><li>The employer withholds federal and state taxes from employee paycheck, along with Medicare tax, and the employee’s share of Social Security. </li></ul></ul><ul><ul><li>May also withhold voluntary deductions such as union dues, United Way contributions, credit union savings, retirement contributions, etc. </li></ul></ul>
  50. 50. CALCULATE EMPLOYER-PAID BENEFITS AND TAXES <ul><li>In addition, the employer pays: </li></ul><ul><ul><li>A matching amount of Social Security </li></ul></ul><ul><ul><li>Federal and state unemployment taxes </li></ul></ul><ul><ul><li>The employer share of health, disability, and life insurance premiums, as well as pension contributions </li></ul></ul><ul><li>Some companies offer flexible benefit plans, sometimes called cafeteria-style benefit plans. </li></ul><ul><ul><li>These plans offer a menu of options. </li></ul></ul>
  51. 51. CALCULATE EMPLOYER-PAID BENEFITS AND TAXES <ul><li>Benefit programs increase the demands on the HRM/payroll system for gathering employee data, disbursing payments and information, etc. </li></ul><ul><li>Providing access to payroll/HRM information through a company intranet can help reduce costs. </li></ul>
  52. 52. PAYROLL CYCLE ACTIVITIES <ul><li>The seven basic activities in the payroll cycle are: </li></ul><ul><ul><li>Update payroll master file </li></ul></ul><ul><ul><li>Update tax rates and deductions </li></ul></ul><ul><ul><li>Validate time and attendance data </li></ul></ul><ul><ul><li>Prepare payroll </li></ul></ul><ul><ul><li>Disburse payroll </li></ul></ul><ul><ul><li>Calculate employer-paid benefits and taxes </li></ul></ul><ul><ul><li>Disburse payroll taxes and miscellaneous deductions </li></ul></ul>
  53. 53. DISBURSE PAYROLL TAXES AND MISCELLANEOUS DEDUCTIONS <ul><li>The company must periodically prepare checks or EFT to pay tax and other liabilities. </li></ul>
  54. 54. OUTSOURCING OPTIONS <ul><li>Many entities outsource payroll and HRM to: </li></ul><ul><ul><li>Payroll service bureaus </li></ul></ul><ul><ul><ul><li>Maintain the payroll master file and perform payroll processing activities </li></ul></ul></ul><ul><ul><li>Professional employer organizations (PEOs) </li></ul></ul><ul><ul><ul><li>Perform the services of the payroll service bureau </li></ul></ul></ul><ul><ul><ul><li>Also administer and design employee benefit plans </li></ul></ul></ul><ul><ul><ul><li>Generally more expensive than payroll service bureaus </li></ul></ul></ul>
  55. 55. OUTSOURCING OPTIONS <ul><li>When organizations outsource payroll processing, they send the service bureau or PEO at the end of each period: </li></ul><ul><ul><li>Personnel changes </li></ul></ul><ul><ul><li>Employee time and attendance data </li></ul></ul><ul><li>The service bureau or PEO then: </li></ul><ul><ul><li>Prepares paychecks, earnings statements, and a payroll register </li></ul></ul><ul><ul><li>Periodically produces tax documents </li></ul></ul>
  56. 56. OUTSOURCING OPTIONS <ul><li>Outsourcing is especially attractive to small and mid-size businesses because: </li></ul><ul><ul><li>It’s often cheaper for smaller companies </li></ul></ul><ul><ul><li>The bureau or PEO may provide a wider range of benefits </li></ul></ul><ul><ul><li>It frees up the company’s computer resources for other areas </li></ul></ul><ul><li>However, companies must carefully monitor service quality to ensure that these systems integrate HRM and payroll data in a manner that supports effective management of employees. </li></ul>
  57. 57. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the HRM/payroll cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul>
  58. 58. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>There are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include: </li></ul><ul><ul><li>Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability). </li></ul></ul><ul><ul><li>Using appropriate application controls, such as validity checks and field checks (enhances accuracy and reliability). </li></ul></ul><ul><ul><li>Providing space on forms to record who completed and who reviewed the form (encourages proper authorizations and accountability). </li></ul></ul>
  59. 59. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><ul><li>Pre-numbering documents (encourages recording of valid and only valid transactions). </li></ul></ul><ul><ul><li>Restricting access to blank documents (reduces risk of unauthorized transaction). </li></ul></ul>
  60. 60. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>Following is a discussion of threats to the HRM/payroll system, organized around three areas: </li></ul><ul><ul><li>Employment practices </li></ul></ul><ul><ul><li>Payroll processing </li></ul></ul><ul><ul><li>General control issues </li></ul></ul>
  61. 61. THREATS IN EMPLOYMENT PRACTICES <ul><li>Objective: </li></ul><ul><ul><li>Effectively hire, retain, and dismiss employees. </li></ul></ul><ul><li>The major threats in the employment practices area are: </li></ul><ul><ul><li>THREAT 1: Hiring Unqualified or Larcenous Employees </li></ul></ul><ul><ul><li>THREAT 2: Violation of Employment Law </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  62. 62. THREATS IN EMPLOYMENT PRACTICES <ul><li>THREAT 1: HIRING UNQUALIFIED OR LARCENOUS EMPLOYEES </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Can increase production expenses </li></ul></ul></ul><ul><ul><ul><li>Can result in theft of assets </li></ul></ul></ul><ul><ul><ul><li>Can result in civil and criminal penalties for the company (e.g., if an employee attempts to make a bribe) </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>State skill qualifications for each position explicitly in the position control report </li></ul></ul></ul><ul><ul><ul><li>Ask candidates to sign a statement confirming the accuracy of the information on their application </li></ul></ul></ul>
  63. 63. THREATS IN EMPLOYMENT PRACTICES <ul><ul><ul><li>Recent honesty surveys indicate that 30% of Americans are dishonest, 30% are situationally honest, and 40% are honest. Therefore, ask candidates to consent to a thorough background check of their credentials, employment history, and credit: </li></ul></ul></ul><ul><ul><ul><ul><li>You cannot conduct these checks without a written consent </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Discard candidates who refuse to consent </li></ul></ul></ul></ul>
  64. 64. THREATS IN EMPLOYMENT PRACTICES <ul><ul><ul><ul><li>Conduct the background checks and verify skills and references, including college degrees earned: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Data released in March 2004 indicate that 50% of resumes contain false or embellished information. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Check at least three references, and regard it as a negative signal if at least one is not gratuitously positive. </li></ul></ul></ul></ul></ul>Return to Threat Menu Go To Next Threat
  65. 65. THREATS IN EMPLOYMENT PRACTICES <ul><li>THREAT 2: VIOLATION OF EMPLOYMENT LAW </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Can result in stiff government penalties as well as civil suits </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Carefully document all actions relating to advertising, recruiting, hiring new employees, and dismissal of employees, to demonstrate compliance </li></ul></ul></ul><ul><ul><ul><li>Provide employees with continual training to keep them current with employment law </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  66. 66. THREATS IN PAYROLL PROCESSING <ul><li>Objective: </li></ul><ul><ul><li>Efficiently and effectively compensate employees for services provided . </li></ul></ul><ul><li>The major threats in the employment practices area are: </li></ul><ul><ul><li>THREAT 3: Unauthorized Changes to the Payroll Master File </li></ul></ul><ul><ul><li>THREAT 4: Inaccurate Time Data </li></ul></ul><ul><ul><li>THREAT 5: Inaccurate Processing of Payroll </li></ul></ul><ul><ul><li>THREAT 6: Theft or Fraudulent Distribution of Paychecks </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  67. 67. THREATS IN PAYROLL PROCESSING <ul><li>THREAT 3: UNAUTHORIZED CHANGES TO THE PAYROLL MASTER FILE </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Can increase expenses if wages, salaries, commissions, or base rates are falsified </li></ul></ul></ul><ul><ul><ul><li>Can result in inaccurate reporting and erroneous decisions </li></ul></ul></ul>
  68. 68. THREATS IN PAYROLL PROCESSING <ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Proper segregation of duties: </li></ul></ul></ul><ul><ul><ul><ul><li>Only HRM department should be able to update payroll master file. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>HRM employees should not directly participate in payroll processing or distribution. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Prevents the creation of ghost employees and fraudulent checks. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Changes to the payroll master file should be reviewed and approved by someone other than the person recommending the change. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Department supervisors should receive copies of these documents for review. </li></ul></ul></ul></ul></ul>
  69. 69. THREATS IN PAYROLL PROCESSING <ul><ul><ul><li>Restrict logical and physical access to the payroll system: </li></ul></ul></ul><ul><ul><ul><ul><li>Utilize user IDs, passwords, and an access control matrix. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Control terminals from which payroll data and programs can be accessed. </li></ul></ul></ul></ul>Return to Threat Menu Go To Next Threat
  70. 70. THREATS IN PAYROLL PROCESSING <ul><li>THREAT 4: INACCURATE TIME DATA </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Can result in payments for services not rendered </li></ul></ul></ul><ul><ul><ul><li>Inaccurate or missing checks can damage employee morale </li></ul></ul></ul><ul><ul><ul><li>Can result in inaccurate labor reporting </li></ul></ul></ul>
  71. 71. THREATS IN PAYROLL PROCESSING <ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Automation can reduce unintentional inaccuracies with: </li></ul></ul></ul><ul><ul><ul><ul><li>Badge readers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bar code scanners </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Online terminals </li></ul></ul></ul></ul><ul><ul><ul><li>Data entry programs should include edit checks: </li></ul></ul></ul><ul><ul><ul><ul><li>Field checks for employee number and hours worked </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Limit checks on hours worked </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Validity checks on employee numbers </li></ul></ul></ul></ul>
  72. 72. THREATS IN PAYROLL PROCESSING <ul><ul><ul><li>Segregation of duties can reduce intentional inaccuracies: </li></ul></ul></ul><ul><ul><ul><ul><li>People who process payroll should not have access to payroll master file. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Supervisors should approve all changes. </li></ul></ul></ul></ul><ul><ul><ul><li>Time clock data should be reconciled to job time tickets by an independent party. </li></ul></ul></ul><ul><ul><ul><li>Supervisors should approve all time cards and job time tickets. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  73. 73. THREATS IN PAYROLL PROCESSING <ul><li>THREAT 5: INACCURATE PROCESSING OF PAYROLL </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Errors damage employee morale, especially if they cause late paychecks. </li></ul></ul></ul><ul><ul><ul><li>Penalties can accrue if: </li></ul></ul></ul><ul><ul><ul><ul><li>Proper payroll taxes are not remitted to the government </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Court-ordered paycheck garnishments are not made appropriately </li></ul></ul></ul></ul>
  74. 74. THREATS IN PAYROLL PROCESSING <ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Batch totals: </li></ul></ul></ul><ul><ul><ul><ul><li>Run and reconcile batch totals before and after processing and at the end of each stage, including hash totals of employee numbers </li></ul></ul></ul></ul><ul><ul><ul><li>Cross-footing of payroll register </li></ul></ul></ul><ul><ul><ul><ul><li>Make sure that sum of rows equals sum of columns, i.e., total of net pay column should equal total of gross pay minus deduction totals. </li></ul></ul></ul></ul>
  75. 75. THREATS IN PAYROLL PROCESSING <ul><ul><li>Payroll clearing account </li></ul></ul><ul><ul><ul><li>A general ledger account used in a two-step process </li></ul></ul></ul><ul><ul><ul><ul><li>First step: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Payroll control account is debited for amount of gross pay </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cash is credited for net pay </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Various liabilities are credited for withholdings </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Second step </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cost accounting process distributes labor costs to various expense categories and credits payroll control account for sum of the allocations. </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Result should be a zero balance in the control account. </li></ul></ul></ul>
  76. 76. THREATS IN PAYROLL PROCESSING <ul><ul><li>Review decisions to hire temporary or outside help to make sure workers are properly classified as employees or independent contractors. </li></ul></ul><ul><ul><ul><li>Improper classification can result in significant back taxes, interest, and penalties. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  77. 77. THREATS IN PAYROLL PROCESSING <ul><li>THREAT 6: THEFT OR FRAUDULENT DISTRIBUTION OF PAYCHECKS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Payments may be made to fictitious (ghost) or terminated employees, resulting in: </li></ul></ul></ul><ul><ul><ul><ul><li>Increased expenses </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loss of cash </li></ul></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Restrict access to blank payroll checks and check signing machine. </li></ul></ul></ul><ul><ul><ul><li>All checks should be sequentially prenumbered and accounted for periodically. </li></ul></ul></ul>
  78. 78. THREATS IN PAYROLL PROCESSING <ul><ul><ul><ul><li>Cashier should sign all checks, but only when supported by proper documentation. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>An imprest payroll bank account should be used. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Someone independent of the payroll process should reconcile the payroll bank account. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Segregate duties between those who authorize and record payroll and those who distribute checks and transfer funds. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Have internal audit observe payroll distribution on a surprise basis. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Unclaimed checks should be returned to the treasurer’s office for prompt re-deposit and should be investigated. </li></ul></ul></ul></ul>Return to Threat Menu Go To Next Threat
  79. 79. GENERAL THREATS <ul><li>Two general objectives pertain to activities in every cycle: </li></ul><ul><ul><li>Accurate data should be available when needed </li></ul></ul><ul><ul><li>Activities should be performed efficiently and effectively </li></ul></ul><ul><li>The general threats are: </li></ul><ul><ul><li>THREAT 7: Loss, Alteration, or Unauthorized Disclosure of Data </li></ul></ul><ul><ul><li>THREAT 8: Poor Performance </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  80. 80. GENERAL THREATS <ul><li>THREAT 7: LOSS, ALTERATION, OR UNAUTHORIZED DISCLOSURE OF DATA </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss or alteration of payroll data can result in delayed and/or inaccurate paychecks and reports. </li></ul></ul></ul><ul><ul><ul><li>Unauthorized disclosure of confidential employee data can violate state and federal laws and damage employee morale. </li></ul></ul></ul>
  81. 81. GENERAL THREATS <ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Payroll files should be backed up regularly. </li></ul></ul></ul><ul><ul><ul><ul><li>At least one backup on site and one offsite. </li></ul></ul></ul></ul><ul><ul><ul><li>All disks and tapes should have external and internal file labels to reduce chance of accidentally erasing important data. </li></ul></ul></ul><ul><ul><ul><li>Access controls should be utilized </li></ul></ul></ul><ul><ul><ul><ul><li>User IDs and passwords </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Compatibility matrices </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Controls for individual terminals (e.g., so the receiving dock can’t enter a sales order). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Logs of all activities, particularly those requiring specific authorizations, should be maintained. </li></ul></ul></ul></ul>
  82. 82. GENERAL THREATS <ul><ul><ul><li>Default settings on ERP systems usually allow users far too much access to data, so these systems must be modified to enforce proper segregation of duties. </li></ul></ul></ul><ul><ul><ul><li>Sensitive data should be encrypted in storage and in transmission. </li></ul></ul></ul><ul><ul><ul><li>Websites should use SSL for secure employee communications. </li></ul></ul></ul><ul><ul><ul><li>Payroll service bureaus and PEOs can help provide security for data. </li></ul></ul></ul><ul><ul><ul><li>VPNs should be used to exchange data with service bureaus or PEOs. </li></ul></ul></ul><ul><ul><ul><li>Parity checks, acknowledgment messages, and control totals should be used to ensure transmission accuracy. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  83. 83. GENERAL THREATS <ul><li>THREAT 8: POOR PERFORMANCE </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>May damage employee relations. </li></ul></ul></ul><ul><ul><ul><li>Reduces profitability </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Prepare and review performance reports </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  84. 84. KEY DECISIONS AND INFORMATION NEEDS <ul><li>The payroll system should be integrated with cost data and HR information so management can make decisions with respect to the following types of issues: </li></ul><ul><ul><li>Future work force staffing needs </li></ul></ul><ul><ul><li>Employee performance </li></ul></ul><ul><ul><li>Employee morale </li></ul></ul><ul><ul><li>Payroll processing efficiency and effectiveness </li></ul></ul>
  85. 85. KEY DECISIONS AND INFORMATION NEEDS <ul><li>Benefits of an integrated HRM/payroll model: </li></ul><ul><ul><li>Access to current, accurate information about employee skills and knowledge. </li></ul></ul><ul><ul><li>HRM activities can be performed more efficiently and costs reduced. </li></ul></ul><ul><ul><ul><li>EXAMPLE: Employment application terminals in Wal-Mart. </li></ul></ul></ul><ul><ul><li>Recruiting costs can be reduced, when applicant data is electronically accessible. </li></ul></ul>
  86. 86. SUMMARY <ul><li>You’ve learned about the basic business activities and data processing operations that are performed in the HRM/payroll cycle, including recruiting, hiring, training, assigning, compensating, evaluating, and discharging employees. </li></ul><ul><li>You’ve also learned about key procedures in payroll processing. </li></ul><ul><li>You’ve learned how IT can improve the efficiency and effectiveness of these processes. </li></ul>
  87. 87. SUMMARY <ul><li>You’ve learned about decisions that need to be made in the HRM/payroll cycle and what information is required to make these decisions. </li></ul><ul><li>You’ve also learned about the major threats that present themselves in the HRM/payroll cycle and the controls that can be instigated to mitigate those threats. </li></ul>

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