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Internal Control of Payroll

Payroll activities involve four functions: hiring employees, timekeeping,
preparing the payroll, and paying the payroll. For effective internal control, these
four functions should be assigned to different departments or individuals. To illustrate
these functions, we will examine the case of Academy Waterparks and
one of its employees, Mark Jordan.

TECHNOLOGY IN ACTION
No, it is not Halloween, but don’t get spooked by a ghost employee! In the
old days, when businesses were small and payroll was given in cash or paychecks
were given to employees in person, this was not a problem. With
technology and direct deposits, ghost employees seem to surface. Who are ghost employees?
These are people who do not exist in your casino, cruise ships, theme parks, and
hotels. They are fictitious employees that are created or are terminated or deceased employees
not removed from payroll records by the perpetrator. This dishonest person continues
to collect and cash paychecks for people who do not exist. What can be done? Detecting
fraud takes a team. Always check bank account numbers, Social Security or
identification numbers, addresses, deductions, work location and department, and the like.
It may not be a bad idea to also look at sick leave and vacation. Even ghosts need a break.
If someone on your payroll is not taking the normal level of sick leave and vacations, you
either have a very dedicated employee or a dead one. Either way, it is good for you to
find out so you can reward the former or delete the latter.

HIRING EMPLOYEES
The human resources (personnel) department is responsible for posting job openings,
screening and interviewing applicants, and hiring employees. From a control
standpoint, this department provides significant documentation and authorization.
When an employee is hired, the human resources department prepares an authorization
form. The one used by Academy Waterparks for Mark Jordan is shown
in Illustration 9-1.
The authorization form is sent to the payroll department, where it is used to
place the new employee on the payroll. A chief concern of the human resources department
is ensuring the accuracy of this form. The reason is quite simple: one of the
most common types of payroll frauds is adding fictitious employees to the payroll.
The human resources department is also responsible for authorizing changes
in employment status. Specifically, they must authorize (1) changes in pay rates and
(2) terminations of employment. Every authorization should be in writing, and a
copy of the change in status should be sent to the payroll department. Notice in
Illustration 9-1 that Jordan received a pay increase of $2 per hour.

Illustration 9-1
Authorization form prepared by the human resources department


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