Accounting Information System - Marshall B. Romney & Paul John Steinbart
CHAPTER 15
THE HUMAN
RESOURCES MANAGEMENT/PAYROLL CYCLE
SUGGESTED
ANSWERS TO DISCUSSION QUESTIONS
15.1 This chapter noted many of the benefits that can arise by
integrating the HRM and payroll databases. Nevertheless, many companies
maintain separate payroll and HRM information systems. Why do you think this is
so? (Hint: Think about the
differences in employee background and the functions performed by the HRM and
payroll departments.)
Payroll
and HRM systems are separate in many companies because integration was
generally not feasible using early data processing technology. Also, different events generate data and two
different professions were interested in using the data. As a result, many companies (and their
employees) became accustomed to having payroll data processed by the accounting
function and personnel data processed by the human relations function. Now that modern information technology makes
integration more feasible, employees in some companies are still likely to
resist suggestions for change because they are comfortable with the old way of
doing things. In addition, employees
within the accounting and personnel functions probably feel some degree of
"ownership" of "their" data, and this is taken away when
control of these data is transferred to a centralized data base function.
Reasons for integrating the personnel and HRM
systems include the following:
·
Integration
will improve decision-making by providing access to more of the relevant data
needed for monitoring employee development.
·
It is
logical, since both systems are organized around the same entity: the employee.
·
It
should facilitate the retrieval and utilization of employee data when the data
required would otherwise have to be obtained from both data bases.
·
It should
facilitate the process of updating employee data, since a single update process
would replace two separate updating processes.
·
It
should simplify the development and implementation of more complex compensation
schemes, such as flexible benefits or incentive pay.
·
Centralizing
the administration of employee data under the control of database management
software should enhance data security.
·
It
should minimize or eliminate the cost of storing identical data in two
different databases.
·
It
should minimize or eliminate the confusion that might otherwise arise when two
different databases use different data definitions, or report different values,
for the same data item.
15.2 Some accountants have advocated that a company’s human assets be
measured and included directly in the financial statements. For example, the
costs of hiring and training an employee would be recorded as an asset that is
amortized over the employee’s expected term of service. Do you agree or
disagree? Why?
This
question should generate some debate. The issue is the trade-off between
“subjectivity” in measuring the value of a company’s investment in the
knowledge and skills of its employees versus the usefulness of at least
attempting to explicitly measure those assets.
In
the “information era” the value of a company’s employee knowledge base is
increasingly important. Attempting to measure it should facilitate more
effective management of this resource by focusing more attention on it.
Some
companies, such as Dow Chemical and Skandia, have attempted to formally provide
stockholders with information about the company’s intellectual capital, but
such efforts have not become mainstream because of the inherent subjectivity.
15.3 You are responsible for implementing a new employee performance
measurement system that will provide factory supervisors with detailed
information about each of their employees on a weekly basis. In conversation
with some of these supervisors, you are surprised to learn they do not believe
these reports will be useful. They explain that they can already obtain all the
information they need to manage their employees simply by observing the shop
floor. Comment on that opinion.
Formal
reports on employee performance are not intended to replace direct observation,
but to supplement it. Direct observation is important, but a manager cannot
observe all employees all the time. It
is also difficult to accurately summarize detailed observations across time.
How could formal reports supplement and enhance what the supervisors
learn by direct observation?
Well-designed
reports provide quantitative summary measures of aspects of employee
performance that are believed to be important to the achievement of the
organization’s goals. Quantitative measures facilitate tracking performance
trends over time. These benefits, however, will be difficult for many managers
to understand until they have had experience in using such reports.
There
are also legal issues at stake. If an employee or former employee brings suit against
the employer, supporting documentation may justify the employer’s position.
15.4
One of the threats associated with having employees telecommute
is that they may use company-provided resources (e.g., laptop, printer, etc.)
for a side business. What are some other threats?
Other
threats are:
1. Not working or working less productively than
if the employees were working onsite.
2. Security risks, such as the employee not
proactively maintaining proper antivirus and patch management practices or not protecting and/or backing up their data
adequately.
3. Inappropriate use of company hardware (e.g.,
gambling, visiting pornographic websites, etc.).
4. An increased risk of loss of confidentiality
and privacy if sensitive data is stored on the remote computer. Such remote
storage may also violate privacy regulations, such as HIPAA.
What controls can mitigate the risk of
these threats?
The solutions to these potential threats
primarily involve monitoring and the use of security controls discussed in
chapter 8. For example, software exists to enable companies to monitor
employees, including what they do on the Internet.
In
addition, a company could require that telecommuting employees login their
company’s network and store all work related files on the company’s network and
not on their home machines. The VPN connection could be configured to restrict
what employees can do, such as preventing local storage of sensitive data and
mandatory updates of anti-virus and security software. The VPN software should
also be designed to prevent employees from simultaneously opening a VPN
connection to the corporate network and a second connection to their ISP (i.e.,
disable split-tunneling).
15.5 How would you respond to the
treasurer of a small charity who tells you that the organization does not use a
separate checking account for payroll because the benefits are not worth the
extra monthly service fee?
A separate payroll account limits the organization’s exposure to only
the amount of cash deposited into the payroll account.
A separate account is also easier to reconcile and to detect any errors
or irregularities.
15.6 This chapter discussed how the HR
department should have responsibility for updating the HRM/payroll database for
hiring, firing, and promotions. What other kinds of changes may need to be
made?
Other
types of changes include name changes (usually due to change in marital
status), number of dependents, voluntary extra withholdings, and address
changes.
What controls should be
implemented to ensure the accuracy and validity of such changes?
- Allow employees to make these changes through a web-based application available on the organization’s intranet. The application should include processing integrity checks to prevent invalid entries.
- Closed loop verification (displaying all changes to the employee) should also be used.
- To ensure validity, multi-factor authentication should be required to enter such changes
- Strict access controls should be implemented to protect the master database.
- A detective control is to separately notify the employee of changes that were made and ask for confirmation that they are valid.
SUGGESTED
ANSWERS TO THE PROBLEMS
15.1 Match the
terms in the left column with the appropriate definition from the right column.
1. _e__ Payroll service bureau
|
a. A list of each employee’s gross
pay, payroll deductions, and net pay in a multicolumn format.
|
2. _h__ Payroll clearing account
|
b. Used to record the activities
performed by a salaried professional for various clients.
|
3. _g__ Earnings statement
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c. Used to record time worked by an
hourly-wage employee.
|
4. _a__ Payroll register
|
d. An organization that processes
payroll and provides other HRM services.
|
5. _c__ Time card
|
e. An organization that processes
payroll.
|
6. _b__ Time sheet
|
f. A list of all the deductions for
each employee.
|
g. A document given to each employee
that shows gross pay, net pay, and itemizes all deductions both for the
current pay period and for the year-to-date.
|
|
h. Special general ledger account
used for payroll processing.
|
15.2 What internal control procedure(s) would be most effective in
preventing the following errors or fraudulent acts?
a. An inadvertent
data entry error caused an employee’s wage rate to be overstated in the payroll
master file.
•
Have the
personnel department maintain a hash total of employee wage rates
•
Check hash total against payroll master
file total after each update.
•
Test the reasonableness of wage rate
changes during data entry to detect large errors.
•
Have supervisors review departmental
payroll expenses as a way of detecting these kinds of problems.
b. A fictitious employee payroll record was
added to the payroll master file.
•
Use strong multifactor authentication
techniques to restrict access to the payroll master data to authorized
personnel in the HR department..
•
Have the personnel department maintain a
record count of the number of employees and check it against a record count
generated during each payroll-processing run.
Require positive identification
of recipients as each paycheck is distributed.
This would likely result in the paycheck not being claimed, which would
then trigger an investigation.
•
Periodically print and verify all
changes to the payroll master file
c. During data entry, the hours worked on an
employee’s time card for one day were accidentally entered as 80 hours, instead
of 8 hours.
·
Use a limit check during data entry to
check the hours-worked field for each employee transaction record. Management
would set a limit that makes sense in their organization. If overtime was never allowed, they could use
8 hours for the limit. If overtime was
permitted, they might decide instead to use 9 or 10 hours.
d. A computer operator used an online terminal
to increase her own salary.
•
Use passwords and an access control
matrix to restrict access to authorized personnel.
•
Use a compatibility test on all
transactions entered to verify that the operator's password allows access and
modification authority.
•
Have the the personnel department maintain
a batch total of all salaries and check it against the corresponding total
generated during each payroll run as a backup control,
e. A factory supervisor failed to notify the HRM
department that an employee had been fired. Consequently, paychecks continued
to be issued for that employee. The supervisor pocketed and cashed those
paychecks.
- Implement a policy prohibiting supervisors from picking up or distributing paychecks. Instead, have the payroll department distribute all paychecks.
- Investigate all unclaimed paychecks.
f. A factory employee punched a friend’s time
card in at 1:00 p.m. and out at
5:00 p.m. while the friend played
golf that afternoon.
·
Use biometric controls to record time
in and time out
·
Observe (in person or by video
surveillance) time clock activity to uncover punching other people’s cards
·
Collect detailed job time data and prior to payroll processing reconcile it
with data
o Prepared or approved by factory supervisors, or
o Captured with automated data collection equipment
g. A programmer obtained the payroll master file
and increased his salary.
•
Implement physical access controls such
as a file library function to prevent programmers from having unsupervised
access to production databases
•
Implement authentication and
authorization controls such as user ID’s, passwords, and access control matrix
to limit access to all master files to
authorized personnel
•
Have supervisors review reports of all
changes to payroll master data to detect this type of fraud
•
Have the the personnel department
maintain a batch total of all salaries and check it against the corresponding
total generated during each payroll run as a backup control,
•
Batch total of all salaries maintained by
the personnel department that is checked against a corresponding total
generated during each payroll run.
h. Some time cards were lost during payroll
preparation; consequently, when paychecks were distributed, several employees
complained about not being paid.
- A record count of job time records should be prepared before the records are submitted for processing, and checked subsequent to data entry. In addition, reconciliation of job time records to employee clock cards should detect this.
- Prepare a record count of job time records before they are submitted for processing and compare record count subsequent to data entry against the number of paychecks prepared.
- Reconcile job time records to employee clock cards
- Print a payroll register report with the paychecks. The total number of employees should match the number in the payroll master file
- Promptly investigate any discrepancies.
i. A large portion of the payroll master file
was destroyed when the disk pack containing the file was used as a scratch file
for another application.
·
Use internal
and external file labels to identify the contents and expiration date of all
active files
·
Train
computer operators to carefully examine external file labels before file
processing begins.
·
Have all
programs check internal file labels prior to processing.
·
Maintain
backup copies of all current files.
j. The organization was fined $5000 for making
a late quarterly payroll tax payment to the IRS.
·
Use IRS
Publication Circular E, which provides instructions for making required
remittances of payroll taxes, to configure the system to make payroll tax
payments.
·
Set up a
quarterly “tickler” or reminder message to the cashier about making the
required payroll tax remittance.
15.3 You have been hired to evaluate the payroll system for the
Skip-Rope Manufacturing Company. The company processes its payroll in-house.
Use Table 15-1 as a reference to prepare a list of questions to evaluate
Skip-Rope’s internal control structure as it pertains to payroll processing for
its factory employees. Each question should be phrased so that it can be
answered with either a yes or a no; all no answers should indicate potential
internal control weaknesses. Include a third column listing the potential
problem that could arise if that particular control were not in place. (CPA Exam, adapted)
Question
|
Y/N
|
Threat if control missing
|
1. Are payroll changes (hires,
separations, salary changes, overtime, bonuses, promotions, etc.) properly
authorized and approved?
|
1. Unauthorized pay raises and
fictitious employees.
|
|
2. Are discretionary payroll
deductions and withholdings authorized in writing by employees?
|
2. Errors; employee lawsuits;
penalties if tax code violated.
|
|
3. Are the employees who
perform each of the following payroll functions independent of the other five
functions?
·
personnel
and approval of payroll changes
·
preparation
of payroll data
·
approval
of payroll
·
signing
of paychecks
·
distribution
of paychecks
·
reconciliation
of payroll account
|
3. Fraud; theft of paychecks.
|
|
4. Are changes in standard
data on which payroll is based (hires, separations, salary changes,
promotions, deduction and withholding changes, etc.) promptly input to the
system to process payroll?
|
4. Errors in future payroll;
possible fines and penalties.
|
|
5. Is gross pay determined by
using authorized salary rates and time and attendance records?
|
5. Over/under payment of
employees.
|
|
6. Are clerical operations in
payroll preparation verified?
|
6. Errors not detected.
|
|
7. Is payroll preparation and
recording reviewed by supervisors or internal audit personnel?
|
7. Errors not detected and
corrected.
|
|
8. Is access to payroll master data restricted to authorized
employees?
|
8. Unauthorized changes in pay rates or creation of fictitious
employees.
|
|
9. Are paychecks approved by reviewing
the payroll register before payroll checks are issued?
|
9. Fraudulent paychecks.
|
|
10. Is a separate checking
account used for payroll?
|
10. Greater risk of paycheck forgery; harder to reconcile payroll.
|
|
11. Is the payroll bank account
reconciled to the general ledger by someone not involved in payroll or
paycheck distribution?
|
11. Failure to detect errors
|
|
12. Are payroll bank reconciliations
properly approved and differences promptly followed up?
|
12. Failure to detect and correct problems.
|
|
13. Is the custody and follow-up
of unclaimed salary checks assigned to a responsible official?
|
13. Theft of paychecks. Failure to detect fake employees.
|
|
14. Are differences reported
by employees followed up on a timely basis by persons not involved in payroll
preparation?
|
14. Cover-up of fraud.
|
|
15. Are there procedures
(e.g., tickler files) to assure proper and timely payment of withholdings to
appropriate bodies and to file required information returns?
|
15. Fines and/or penalties.
|
|
16. Are employee compensation
records reconciled to control accounts?
|
16. Inaccurate records; failure
to detect and correct errors.
|
|
17. Is access to personnel and
payroll records, checks, forms, signature plates, etc. limited?
|
17. Fraudulent payroll.
|
|
18. Is payroll master data encrypted both in storage and during
transmission over the Internet?
|
18. Unauthorized disclosure of sensitive information.
|
|
19. Is payroll master data regularly backed up?
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19. Loss of data.
|
|
20. Are credentials of job applicants verified?
|
20. Hiring larcenous or unqualified employees.
|
|
21. Are hiring, firing, and performance evaluation processes
performed in accordance with applicable laws and such practices documented?
|
21. Possible violations of employment laws.
|
15.4 Although most medium and large companies have implemented
sophisticated payroll and HRM systems like the one described in this chapter,
many smaller companies still maintain separate payroll and HRM systems that
employ many manual procedures. Typical of such small companies is the Kowal
Manufacturing Company, which employs about 50 production workers and has the
following payroll procedures:
· The factory
supervisor interviews and hires all job applicants. The new employee prepares a
W-4 form (Employee’s Withholding Exemption Certificate) and gives it to the
supervisor. The supervisor writes the hourly rate of pay for the new employee
in the corner of the W-4 form and then gives the form to the payroll clerk as
notice that a new worker has been hired. The supervisor verbally advises the
payroll department of any subsequent pay raises.
· A supply of
blank time cards is kept in a box near the entrance to the factory. All workers
take a time card on Monday morning and fill in their names. During the week
they record the time they arrive and leave work by punching their time cards in
the time clock located near the main entrance to the factory. At the end of the
week the workers drop the time cards in a box near the exit. A payroll clerk
retrieves the completed time cards from the box on Monday morning. Employees
are automatically removed from the payroll master file when they fail to turn
in a time card.
· The payroll
checks are manually signed by the chief accountant and then given to the
factory supervisor, who distributes them to the employees. The factory
supervisor arranges for delivery of the paychecks to any employee who is absent
on payday.
· The payroll bank account is reconciled by the chief
accountant, who also prepares the various quarterly and annual tax reports.
a. Identify weaknesses
in current procedures, and explain the threats that they may allow to occur.
Weakness
|
Threat
|
1. Factory supervisor hires all job
applicants and forwards their W-4 form to the payroll clerk.
|
The factory supervisor could hire
fictitious employees and submit their W-4 form.
|
2. Factory supervisor verbally informs
payroll of all employee pay raises.
|
No documentation on pay raises could lead
to employee disputes and litigation.
The factory supervisor could give the
fictitious employees raises.
|
3. Factory supervisors determine pay rates
|
Factory supervisors can overpay or underpay
new hires
|
4.
Blank time cards are readily available.
|
An employee could have another employee
fill out a time card when they were late or not even at work.
|
5. Weekly time cards are not collected
until the next Monday.
|
Time cards could be altered over the
weekend with fictitious or false information in the case of a vendetta
against another employee.
Someone could “fire” an employee by
removing his timecard over the weekend
|
6
Employees
are automatically removed from the payroll master if they do not turn in a
timecard
|
A sick employee or one on vacation could be
“fired” because they did not turn in a timecard.
|
7. The factory supervisor distributes pay
checks.
|
The supervisor can conveniently keep the
pay checks of fictitious or fired employees.
|
b. Suggest
ways to improve the Kowal Manufacturing Company’s internal controls over hiring
and payroll processing. (CPA Examination, adapted)
1. A system of advice forms should be installed
so that new hires, terminations, rate changes, etc., are reported to the
payroll department in writing. Such
forms should be submitted by the employee and verified by the appropriate
supervisor.
2. Before applicants are hired, their
backgrounds should be investigated by contacting references to determine that
they are honest and have no undesirable personal characteristics.
3. The supply of blank time cards should be
removed. At the beginning of each week
the payroll department should provide each worker with a time card with his
name typed or printed on it.
4. The foreman should collect the time cards at
the end of the week, approve them, and turn them over to the payroll
clerk. All time cards should be
accounted for and any missing cards investigated.
5. The payroll checks should be distributed to
the workers by a responsible person other than the foreman. Unclaimed checks should be sent to internal
audit until claimed by the worker.
In addition, the following changes should be
made because the problem does not state that these procedures are being
followed:
·
If the
Company has a cost system that requires the workers to prepare production
reports or to account for their time by work tickets, the time cards and the
production reports or work tickets should be compared.
·
The
payroll checks should be prenumbered to control their issuance.
·
A
responsible person other than the chief accountant and the payroll clerks
should reconcile the payroll bank account.
·
From
time to time, an officer of the Company should witness a payroll distribution
on a surprise basis.
15.5 Arlington Industries manufactures and sells engine parts for
large industrial equipment. The company employs over 1,000 workers for three
shifts, and most employees work overtime when necessary. Figure 15-10 depicts
the procedures followed to process payroll. Additional information about payroll
procedures follows:
· The HRM
department determines the wage rates of all employees. The process begins when
a form authorizing the addition of a new employee to the payroll master file is
sent to the payroll coordinator for review and approval. Once the information
about the new employee is entered in the system, the computer automatically
calculates the overtime and shift differential rates for that employee.
· A local
accounting firm provides Arlington with monthly payroll tax updates, which are used
to modify the tax rates.
· Employees
record time worked on time cards. Every Monday morning the previous week’s time
cards are collected from a bin next to the time clock, and new time cards are
left for employees to use. The payroll department manager reviews the time
cards to ensure that hours are correctly totaled; the system automatically
determines if overtime has been worked or a shift differential is required.
· The payroll
department manager performs all the other activities depicted in Figure 15-10
· The system
automatically assigns a sequential number to each payroll check. The checks are
stored in a box next to the printer for easy access. After the checks are
printed, the payroll department manager uses an automatic check-signing machine
to sign the checks. The signature plate is kept locked in a safe. After the
checks have been signed, the payroll manager distributes the paychecks to all
first-shift employees. Paychecks for the other two shifts are given to the
shift supervisor for distribution.
· The payroll
master file is backed up weekly, after payroll processing is finished.
(CMA Examination, adapted)
a. Identify and
describe at least three weaknesses in Arlington Industries’ payroll process.
·
The
payroll processing system at Arlington Industries violates the principle of
segregation of duties. The same individual verifies time cards, inputs payroll
information into the master file, prints the checks, machine-signs the checks,
distributes the checks, and prepares the payroll journal entry.
·
There is
no authorization of employees' time cards by a supervisor or other objective
party such as a timekeeper.
·
Time
cards are not stored securely when completed on Fridays.
·
There is
no authorization of overtime.
·
The
payroll checks are not prenumbered nor are they properly stored. As a result, there is no audit trail to
verify check usage.
·
Supervisors
for the second and third shifts distribute paychecks.
b. Identify
and describe at least two different areas in Arlington’s payroll processing
system where controls are satisfactory.
·
The
personnel department determines the wage rate and initiates the setup of
payroll records, which is a good example of segregation of duties.
·
A backup
of the master file is made after each weekly processing of the payroll.
·
A local
accounting firm provides Arlington Industries with updates on tax rates.
·
Time
cards are reviewed for accuracy.
