Question

You have just been hired as the payroll manager of a mid-sized manufacturing company. You notice that the time cards are paper documents that the employee submit at the end of the week into an open cardboard box outside of your office. The time cards contain the employee's name, pay rate, social security number, and division where he/she works. You ask the only employee currently in the payroll department, where the payroll files are and she points you to another large cardboard box inside your office. Finally, you ask about the tax forms (940, 941, and state unemployment) and she informs you they are also in that box but she really does not know that much about them or how to fill those forms out and just copies the same numbers from the forms she received when she started 2 years ago over and over again.

Based on what you have just learned, evaluate the risk associated with payroll at this company and the impact on the financial statements keeping in mind both auditing standards and managerial accounting concepts. Discuss how you would design an accounting information system to minimize the largest risk you have discovered.  

Answer 1

The time cards used by the employees in this company are paper documents that the employee submit at the end of the week into an open cardboard box.As the time cards are paper documents, following risks are associated with payroll at this company :-

(a) Unauthorized Modifications of Records :- Unauthorized modifications can easily be made in this paper form time cards for personal benefits.Incorrect input details may be filed in time cards to extract maximum benefits such as filing excess number of days worked in comparison to actual days worked and overtime.

(b) Salary paid to fictitious employees and accounts:- There may be instances where inherent fraud risks may arise on account of non segregation of duties where recruitment personal are also responsible for processing payroll.This may lead to payment of salaries to fictious employess and accounts.

(c) Overriding or inadequate controls:- In the current system payroll may be processed for dummy employess.Salary may be paid to unverified bank accounts.

(d) Collusion:- Collusion of payroll personnel with other employess may lead to extra personal benefits to both of them.Excess payments are processed by the payroll personnel and paid to the employees.These excess processed payments are later on shared by the payroll personnel and other employees.

(e) Wrong Calculations:-There may be instances where the reimbursement claims are made on the basis of improper bills submitted by the employees.These bills are not verified by the payroll personnel leading to excess and unreasonable payment to employees.  

The accounting information system can be designed keeping in mind the following points to minimize the largest risks associated with this payroll system:-

1. In place of paper document time cards, electronic time cards must be given to employees which should be connected to the electronic attendance system of employees. Before making payment the no.of days filed in the time cards must be checked with attendence system to avoid any excess payment to employees.

2. Formulate and implement employees referral policy that is used to prevent and detect instances of fraud.This also prevents chances of payment to dummy employees.

3. Delegate Authority should be constituted to ensure that only eligible employees have access to HR related information.No modifications can be made in reation no. of days worked and overtime charges because of constitution of delegated authority.

4. As the employees do not have information about filing of tax forms(940,941 and state unemployment) manual and online training must be conducted at regular intervals to provide information about filing of such tax forms, other employment related forms and faithfully discharging of employment related obligations.

5. Due Diligence should be conducted by the authorized personnel at regular intervals to ensure that employees are not involved in fraudulent practices either on their own or in collaboration with other employees.These due diligence helps in preventing frauds related to modifications in employees time cards such as claiming excess no. of days worked in comparison to actual no. of days worked and also claiming unreasonable overtime charges.