ACCT 373: Chapter 17 - Human Resources Management and Payroll Cycle

Human resource management (HRM)/payroll cycle

A recurring set of business activities and related data-processing operations associated with effectively managing an organization's employee workforce.

Knowledge management system

Software used to identify employees' areas of knowledge and expertise and to capture, store, and share that knowledge throughout the organization.

Payroll master database

A master file containing relatively permanent employee and payroll information, such as employee identification information, addresses, pay rates, deductions, and other payroll-related data.

Time card

A record of an employee's arrival and departure times for each work shift; most commonly used for hourly employees.

Time sheet

A record used to report how much time an employee spends performing specific tasks or working for particular clients, locations, or charge codes.

Job-time ticket

A document or electronic record showing how much time an employee spends on a particular production job or task; used to allocate labor costs.

Payroll register

A multicolumn report listing each employee's gross pay, payroll deductions, and net pay for a payroll period; it supports authorization of payroll disbursement.

Deduction register

A report listing the miscellaneous voluntary deductions for each employee, such as insurance, retirement contributions, union dues, and savings deductions.

Earnings statement

A statement given to an employee showing gross pay, deductions, and net pay for the current period and usually year-to-date totals.

Payroll clearing account

A general ledger account used to verify the accuracy and completeness of payroll costs and their allocation; after all payroll entries are posted, the account should have a zero balance.

Flexible benefits plan

A benefits arrangement under which employees choose among various benefit options, such as medical insurance, retirement plans, and other benefits.

Payroll service bureau

An outside organization that maintains the payroll master file for clients and performs payroll processing activities for a fee.

Professional employer organization (PEO)

An outside organization that processes payroll and also provides broader HRM services, such as employee benefit design and administration.

HRM process tasks

Recruiting and hiring employees; training; job assignment; compensation or payroll; performance evaluation; and discharge through voluntary or involuntary termination.

Payroll cycle activities — order

1. Update payroll master data; 2. Validate time and attendance data; 3. Prepare payroll; 4. Disburse payroll; 5. Disburse payroll taxes and miscellaneous deductions.

Update payroll master data — purpose and inputs

Update employee payroll records for changes such as hiring, firing, promotions, pay-rate changes, tax rates, insurance rates, and employee withholding or deduction elections.

Validate time and attendance data — purpose and source documents

Verify the time employees worked before payroll is calculated. Important source documents include time cards, time sheets, and job-time tickets.

Prepare payroll — purpose

Use validated time and attendance data together with payroll master data to calculate gross pay, deductions, and net pay and to prepare payroll records and reports.

Disburse payroll — purpose

Pay employees after payroll has been reviewed and approved, usually through checks, direct deposit, or other authorized electronic payment methods.

Disburse payroll taxes and miscellaneous deductions — purpose

Calculate and remit payroll taxes, employee deductions, employer-paid benefits, and other required amounts to government agencies, insurers, retirement plans, and other organizations.

Source data automation

The use of technology to capture payroll or attendance data automatically and transmit it directly into the system, reducing manual data-entry errors and costs.

Biometric authentication

Authentication based on a person's physical characteristics, such as a fingerprint or hand scan; used in payroll to verify employee identity when recording time.

Buddy punching

A payroll fraud in which one employee clocks another employee in or out, making it appear that the other employee worked when that person did not.

Segregation of duties in payroll

Separating authorization, timekeeping, payroll preparation, payroll distribution, and payroll bank reconciliation so one employee cannot both commit and conceal payroll fraud.

Batch totals

Control totals calculated for a group of payroll transactions and compared at different stages of processing to detect missing, duplicate, or incorrectly processed records.

Cross-footing the payroll register

A processing control that verifies that total gross pay minus total deductions equals total net pay.

Separate payroll checking account / imprest fund

A separate bank account used only for payroll and funded with the amount needed for payroll; after all payroll payments clear, the account should return to approximately zero.

Direct deposit

An electronic funds transfer in which an employee's net pay is transferred directly from the employer's bank account to the employee's bank account.

Ghost employee

A fictitious or nonexistent employee added to payroll so that an unauthorized person can collect the fraudulent employee's wages.

Cumulative earnings register

A report containing cumulative year-to-date gross pay, net pay, and deductions for employees; used for employee information and annual payroll reports.

Workforce inventory

A report listing employees by department; useful for workforce information and labor-related reporting.

Position control report

A report listing each authorized position, required qualifications, budgeted salary, and whether the position is filled or vacant; used for workforce planning.

Skills inventory report

A report listing employees and their current skills; useful for planning future workforce needs and employee training.

Form 941

The employer's quarterly federal tax return showing wages subject to tax and amounts withheld for federal income tax and FICA; used to reconcile quarterly payroll tax liabilities.

Form W-2

A report provided to each employee showing annual wages and tax withholdings for use in preparing an individual income tax return.

Form W-3

A summary of all Forms W-2 that an employer submits to the federal government.

Form 1099-MISC

A report used to report certain income paid to independent contractors or other nonemployees.

Service Organization Controls (SOC) report

A report concerning controls at an outside service organization; companies may obtain one from an outsourced payroll provider to understand the provider's controls and the controls the client organization must still perform.

General HRM/payroll — Inaccurate or invalid master data

Threat: Incorrect or invalid HRM/payroll master data can cause incorrect payroll, decisions, or reporting. Controls: data-processing integrity controls; restrict access to master data; review all changes to master data.

General HRM/payroll — Unauthorized disclosure of sensitive information

Threat: Unauthorized people may gain access to confidential employee information such as salaries, Social Security numbers, or performance data. Controls: access controls; encryption; tokenization.

General HRM/payroll — Loss or destruction of data

Threat: Important HRM/payroll information may be lost or destroyed. Control: backup and disaster-recovery procedures.

General HRM/payroll — Hiring unqualified or larcenous employees

Threat: Hiring employees who lack necessary qualifications or who may commit fraud can harm the organization. Controls: sound hiring procedures including verification of credentials, skills, references, and employment history; criminal background investigations for applicants to finance-related positions.

General HRM/payroll — Violations of employment laws

Threat: The organization may violate laws and regulations governing hiring, employment, evaluation, or dismissal. Controls: thorough documentation of hiring, performance evaluation, and dismissal procedures; continuing education about changes in employment laws.

Update payroll master data — Unauthorized changes to payroll master data

Threat: Someone may improperly change employee records, pay rates, or employment status. Controls: segregation of duties so HRM updates master data while payroll issues paychecks; access controls.

Update payroll master data — Inaccurate updating of master data

Threat: Payroll master data may be updated incorrectly, causing incorrect employee payments or deductions. Controls: data-processing integrity controls; regular review of all changes to payroll master data.

Validate time and attendance — Inaccurate time and attendance data

Threat: Incorrect time records may cause employees to be overpaid or underpaid and may incorrectly allocate labor costs. Controls: biometric authentication or other source-data automation; segregation of duties by reconciling job-time tickets to time cards; supervisory review.

Prepare payroll — Errors in payroll processing

Threat: Mistakes in calculating gross pay, deductions, net pay, or worker classification can cause incorrect payments and financial or regulatory problems. Controls: data-processing integrity controls including batch totals, cross-footing the payroll register, payroll clearing account, and zero-balance check; supervisory review of payroll register and reports; earnings statements to employees; review IRS guidance for proper employee versus independent-contractor classification.

Disburse payroll — Theft or fraudulent distribution of paychecks

Threat: Payroll checks or electronic payments may be stolen, diverted, or issued fraudulently. Controls: restrict physical access to blank checks and check-signing equipment; restrict EFT-system access; prenumber and account for payroll checks and review EFT transactions; require supporting documentation; use a separate payroll checking account maintained as an imprest fund; segregate cashier, accounts-payable, hiring/firing, check-distribution, and bank-reconciliation duties; restrict payroll-master-database access; verify identities of employees receiving checks; redeposit and investigate unclaimed checks.

Disburse taxes and miscellaneous deductions — Failure to make required payments

Threat: The organization may fail to remit required payroll taxes, benefits, or deductions. Control: configure the system to make required payments using current IRS instructions, including Publication Circular E.

Disburse taxes and miscellaneous deductions — Untimely payments

Threat: Required payroll taxes and other amounts may be remitted late, creating penalties or employee problems. Control: configure the system to make required payments using current IRS instructions, including Publication Circular E.

Disburse taxes and miscellaneous deductions — Inaccurate payments

Threat: Incorrect amounts may be remitted for payroll taxes, benefits, or employee deductions. Controls: processing-integrity controls; supervisory review; employee review of earnings statements.

Payroll outsourcing — main reasons

Organizations may outsource payroll to reduce costs and processing errors, obtain access to a broader range of employee benefits, simplify benefits administration, and free internal computer resources for other uses.

Payroll outsourcing — payroll service bureau vs. PEO

A payroll service bureau primarily maintains payroll records and processes payroll; a PEO performs payroll processing and also provides broader human-resource services such as employee benefit design and administration.

Payroll master data — segregation of duties

Changes in employment status and pay rates should be handled by HRM, while payroll processing and paycheck distribution should be handled by non-HRM personnel to prevent someone from creating a fictitious employee or unauthorized pay change and then collecting the payment.

Payroll changes — independent review

All changes to payroll master data should be reviewed and approved by someone other than the person who recommended or entered the change.

Supervisory approval of time records

Department supervisors should review and approve employee time cards, job-time tickets, or time sheets to provide independent evidence that the recorded time is accurate.

Employee review of earnings statement

Employees should examine their earnings statements for incorrect pay, deductions, or other errors, providing an additional detective control over payroll processing.

Unclaimed payroll checks

Unclaimed payroll checks can indicate a fictitious, terminated, or otherwise problematic employee record; they should be promptly redeposited and the cause investigated.

Payroll bank reconciliation

The payroll bank account should be reconciled by someone independent of payroll and HRM duties so fraudulent or incorrect payroll payments are more likely to be detected.