Question

The following is the description of the payroll system of a manufacturing company:

Employees of the company use a time clock in an unsupervised area to record their time on the job. The site supervisor tries to monitor the recording process. However, due to other duties, the supervisor is often distracted. The site supervisor collects the time cards from employees every Friday. The supervisor then reviews and approves the time cards and send them to payroll clerk.

The payroll clerk uses a stand-alone workstation to record the employees’ earnings in the employee records and print two hard copies of payroll register. One copy of the payroll register is sent to the accounting department and the other copy is filed with the time cards in the payroll department.

The accounting clerk receives the payroll register, reviews it for accuracy, and use the department computer to record the transaction by posting to salary expenses, cash and various withholding accounts at general ledger and subsidiary ledgers. The clerks then prints the hard copy of pay cheques, which are written on the general cash account.

The accounting clerk signs the pay cheques and sends them to the site supervisor who distribute them to the employees. The clerk then files the payroll register in the accounting department.

Discuss the uncontrolled risks associated with the company’s payroll system.

Answer 1

Payroll iifraud iiis iithe iisource iiof iiaccounting iifraud iiand iiemployee iitheft, iiwhich iihappens iiin ii27% iiof iiall iibusinesses. iiIn iifact, iioccupational iifraud iior iifraud iicommitted iiby iian iiemployee iion iian iiemployer iicauses iimore iifinancial iiloss iito iiorganizations iithan iithose iicommitted iiby iithird iiparties.

Oftentimes, iischemes iicommitted iiby iidishonest iiemployees iilast iian iiextended iiperiod iiof iitime iias iithey iiattempt iito iihide iitheir iitheft iiwhile iicontinuing iito iiwork iifor iitheir iiemployer.

In-house iiglobal iipayroll iisystems iithat iiare iiharder iito iipolice, iilike iithose iiin iilarge iiorganizations iiwith iihigh iiemployee iiturnover iior iia iidispersed iiworkforce, iiare iian iieasy iitarget iifor iitheft. iiBut, iismall iibusinesses iiare iialso iiat iirisk, iiespecially iiif iitheir iipayroll iisystem iiis iimanaged iior iioverseen iiby iione iiperson. iiTypically, iiwhen iiany iicompany’s iipayroll iifunction iiis iicentrally iimanaged iiin-house, iiand iithere iiare iino iiinternal iicontrol iimeasures iiin iiplace iito iidetect, iitrack iiand iireport iifraud, iia iidishonest iiemployee iiis iimore iilikely iito iitake iiadvantage iiof iithe iiopportunity.

There iiare iiseveral iiways iiin iiwhich iipayroll iifraud iiis iicommitted iiand iiconcealed, iiso iihere iiare iisome iiexamples iiof iithe iimost iiprevalent iitypes iiof iiin-house iipayroll iifraud;

1. Payroll ii“ghosts”

When iia iinon-existent iiemployee iiis iigetting iia iipaycheck, iiyou iihave iia iipayroll iighost. iiSometimes iiemployees iiwho iileave iithe iiorganization iiare iinever iiremoved iifrom iipayroll iiand iibecome iighosts—an iioversight iimore iilikely iiin iimultinational iicompanies iiwith iino iicomprehensive iioffboarding iiprocess. iiBut iimore iioften, iithis iitype iiof iifraud iihappens iiwhen iia iitrusted iiemployee iiblatantly iimanipulates iipayroll, iiso iithey iican iipocket iithe iipaycheck iiof iia iifake iiemployee. iiThis iiperson iiis iitypically iia iipayroll iimanager iiwith iiaccess iito iithe iipayroll iisystem, iiwho iiis iiauthorized iito iiadd iiand iidelete iiemployees iifrom iithe iiregister.

2. Falsified iiwages

Payroll iifraud iithrough iifalsified iiwages iican iihappen iiwhen iian iiemployee iimanipulates iitheir iiwage iirate, iitampers iiwith iitheir iiactual iipaycheck iior iiincreases iitheir iisales iinumbers iifor iimore iicommission iipay. iiWage iirates iican iibe iiadjusted iiwhen iia iiworker iifinds iia iiway iito iiavoid iipaying iimandated iideductions. iiOr iilike iiin iithe iicase iiexample, iiemployees iican iiclaim iiinappropriate iibenefit iileave iipayouts iior iiunauthorized iibonuses iito iienhance iitheir iiwages.

3. Timesheet iifraud

Workers iiare iiable iito iisteal iitime iiin iia iivariety iiof iiways iiincluding: iirecording iiinaccurate iitimes, iisoliciting iia iicolleague iito iiclock iithem iiin, iiconducting iipersonal iiactivities iiwhile iion iithe iiclock, iior iitaking iifrequent iibreaks. iiMost iiof iithese iiactivities iiresult iifrom iiblurred iilines iibetween iiprofessional iiand iipersonal iitime iirather iithan iiblatant iitheft iimaking iithis iitype iiof iifraud iimore iinebulous iito iiidentify.

4. Expense iiand iireimbursement iifraud

For iimany iiemployers, iifraud iicould iibe iihiding iiin iiplain iisight iiin iithe iiform iiof iifalse iiexpense iiclaims. iiThis iicommonly iioverlooked iitype iiof iitheft iioccurs iiwhen iian iiemployee iigets iipaid iiback iifor iiexpenses iiclaims iithat iiare:

a. Personal

b. Overstated

c. False

d. Replicated

Dishonest iireimbursement iiclaims iimay iibe iiauthorized iiby iisomeone iiin iiyour iiorganization iiwith iilittle iiexperience iior iiknowledge. iiOr iiperhaps iiapproving iiexpense iiclaims iiis iia iiminor ii“side iiof iithe iidesk” iitask, iiwhich iiis iinot iigiven iiproper iiattention iiand iiconsideration. iiWithout iiprocedures iiin iiplace iito iiverify iiand iicontrol iiemployee iiexpense iiclaims, iiyou iiare iiat iirisk iiof iiincurring iisignificant iilosses.

Payroll iiControls

1. Audits, iichange iilogs, iisegregation iiof iiduties

This iisounds iilike iia iilot iiof iiwork, iiand iiit iiis. iiTo iicontrol iithe iiaccess iito iidata, iiit’s iiimportant iito iiensure iiyou iihave iian iiindependent iiauditor iiperiodically iilook iiat iiyour iibooks. iiYou iishould iialso iionly iiallow iichanges iito iiimportant iiemployee iiinformation iiby iistaff iiwith iipassword iiaccess iithat’s iitracked iito iithe iiminute. iiAnd iiwhen iiit iicomes iitime iito iiprocess iipayroll, iihave iione iiperson iiprepare, iianother iito iiauthorize iiand iianother iito iiactually iirun iithe iichecks.

2. Calculation iicontrols

If iiyou iimanually iirun iipayroll, iialways iihave iisomeone iias iibackup iito iireview iithe iinumbers. iiBe iisure iito iiinclude iihours iiworked, iipay iirates, iideductions iiand iiwithholdings iiin iiyour iireview.

3. Check iipayment iicontrols

Be iisure iito iiremove iicheck iiauthorizers iiwhen iithey iileave iithe iicompany. iiHand iichecks iito iiemployees iito iiprevent iipaying iithose iighost iiemployees. iiPay iiemployees iifrom iia iiseparate iichecking iiaccount iithat iimirrors iiexactly iiwhat iiyou’re iicalculating iion iithe iibooks.

4. Regular iiVariance iiAnalyses

You iishould iirun iipayroll iivariance iianalyses iimonthly. iiBe iisure iito iisplit iithe iidata iiby iidepartment, iifunction iior iidivision iiand iirun iithe iiresults iiagainst iiyour iibudget iiand iiprior iiyear. iiSee iiany iimajor iichanges iiwithout iian iiexplanation? iiInvestigate! iiTo iifind iiadditional iioutliers, iitry iilooking iiat iisalary iiper iiFTE, iipayroll iitax iiratios iiand iiemployee iibenefits iiratios. iiBe iisure iito iiconsider iirunning iithese iipayroll iireports iifor iierror-free iipay iiruns.

At iithe iiend iiof iithe iiday, iirunning iipayroll iishouldn’t iibe iithis iicomplicated! iiAnd iiwith iithe iiright iiHR ii& iipayroll iiprovider iiit’s iinot. iiYou iican iisave iiyourself iihours iieach iiweek iiand iimitigate iicompliance iirisk iiby iisimply iiautomating iiyour iipayroll iiprocesses. iiBe iisure iito iiview iiour iicomprehensive iiarticle iion iiall iithe iiareas iiwhere iiHR iican iihelp iiwith iirisk iimanagement.