Auditing for Continuous Process Improvements

By Raeann Hofkin, CPPPA Statewide Conference

September 2013

Raeann Hofkin, CPPBiography: American Payroll Association

2012 Special Recognition Award Recipient Current Vice President Cordova First National Chapter

Online Study Group Facilitator, since 2001 Contributing Author Workforce Asset Management Book of

Knowledge, Wiley Publisher 2013 Contributing Author Controller’s Report Monthly Newsletter Authored the Quick Reference to Payroll Compliance, 2010

and 2011 editions Pennsylvania Payroll Professional Award Winner - 2010 Southeastern PA Chapter President 2005-2008 Meritorious Service Award Winner 2008 Donald W. Sharper Education Grant Winner – 2006 & 2013 Certified Payroll Professional since 1999

27+ years payroll/HR experience Payroll management concentrated in pharmaceuticals,

healthcare, manufacturing, customer service call centers, and the academia industries both domestic and international.

Agenda

Don’t believe everything you hear Not hearing anything, doesn’t mean there is

nothing wrong. Just because its always been done that way,

doesn’t mean it’s being done correctly. Don’t assume anything. The quality of your answers are directly

dependent on the quality of your questions. Interactive – I don’t all have the answers to

everything, we all have different experiences, and we can all learn something from everyone. 

Primary Purpose Ensure compliance with company

policies and procedures. Ensure enforcement of company

policies. Ensure compliance with Federal, State,

and Local laws. Review procedures for areas of

improvements; Automation Elimination

General Observations

The overall pay structures are complex which contributes to inefficiencies• In calculating payroll and,• Errors in employee’s pay.

The payroll process is affected by several departments, locations, and functions within the company including the HR, Benefits, Payroll and Time and Attendance, etc.

Terminology/Communication

Discussion Points

Significant inefficiencies Multiple errors require much labor to

correct Delay in relevant information

Non integration

Complex Payroll Structure

Types of employees Payment Schedules Amount of Earnings Codes, Deduction

Codes, Memo Codes, Codes in general Union Contracts Special Calculations (some manual) Attendance/PTO policies Bonus Pays Compliance constantly changing

Benefits of Reducing Complexity

Reduction in errors Decrease in time spent calculating

retroactive pays or collecting overpayments

Saves payroll labor dollars Reduction of special calculations Standardization Increase accuracy Eliminate manual processes

Technological Limitations

System limitations Lack of technology Old technology

Not in the budget to upgrade Misuse of technology

Not using all features Not aware of all features Lack of formal training

Not available Not in the budget Technical manual

Self inflicted limitations Lack of integration between two systems Manual workarounds/input

Lack of Payroll Process

Staff limitations Missing information Convoluted pay structure Lack of formal training

Self taught Not available Not in the budget Manual to technical Not supported by vendor

Attitude “Always been done this way” “Things will never change”

Potential Roadblocks

Requires human and financial resources Time and effort investment Past history to measure future success Lack of strategic direction Environmental and/or economical considerations “That’s the way it was always done”

If no one knows why something is done a certain way, then figure out what is done and work backwards.

Take good notes Communication – Banana Theory Exercise

Communication

Communication/terminology Perception is reality Pull out handout – Exercise time

Challenges

Unions Upper Management Lack of Budget Human capital

Lack of resources Technology (or lack of it) Employee push back Lack of motivated employees Ongoing Training Ongoing maintenance

Solutions

Prepare a list general goals for each category Input Output Reports

What do you do well? What needs improvement?

Start here

Sample Goals

High Level – each company will need to create a customized list….

General Goals

Analyze activities, processes, and procedures

Analyze the interpretation of company policies Analyze the enforcement of company policies May involve discussions with various employees/depts.

Improve productivity Improve efficiency Ensure compliance Increase accuracy

Specific Goals

Compliance Ensure accuracy of paychecks Eliminate off cycle checks, adjustments,

overpayments, etc. Automation Ensure calculations & deductions are

working correctly. Payroll transactions accurately reflected

in GL

Comprehensive Review

All payroll processes Input Output Reports• Goal is to simplifying the process • Ensure they add value • Maintain a strong commitment to

quality and customer service Eliminate what doesn’t work

Input

Process for input Manual Automated

Audit input Garbage in, garbage out, catch errors

before processing payroll Rejected errors – find out why

Get to the root of the problem

Output

Error rates Multiple sources Corrections may involve many people in

various departments Get to the root of the problem

Ultimately payroll/HR is responsible to fix errors

Investigate adjustments/exceptions Reconciliations

Reports Provided

Who? What? Why?

Addressing Root Cause

Hold employees accountable for deadlines and lack of attention.

Exceptions quickly turn into standard process Payroll constantly in ‘reactive’ mode rather than

proactive mode Provide guidance/setting policy Create off cycle/Adjustment policy Training repeat offenders

Recommendations

Determine underlying mission of Payroll. Core and non-core activities

Reduce the complexity of the pay structure. May need to negotiate with unions

Improve processes to Reduces error rate, which Reduces number of employee inquiries

Automate where possible Formal Training on current systems Eliminate what’s not necessary

Specific Recommendations

Communicate any new or updated company policies.

Website, emails, newsletters, and training

Standardization of guidelines and policies for all departments, locations, divisions, regions.

New hires, terms, adjustments, deadlines, timesheets, etc.

Develop/Enhance training New hires, approvers, managers, policy enforcers

Summary of Recommendations

Should be customized to your company

Action Items

Enhance workflow between departments Reduce duplicate entries

Hold employees accountable Time and attendance entries Deadlines

Create better documentation for key functions

Identify most troublesome error/issue for YOUR payroll.

Action Items – Cont’d

Communicate project purpose and value throughout the department. Ensure buy in

Direct reports Senior Management

Develop/Determine your budget Zero? – low lying fruit Unlimited – possible outside consultant

Develop request for proposal

Gather all forms used in payroll processes

Action Items – Cont’d

Develop Strategy to integrate payroll, benefits, HR, and time and attendance. Information technology plan Educate Senior Management of benefits

Define scope and objectives

Consider Employee Self Services and/or outsourcing selected payroll activities.

Improve Error rate

Develop method of tracking number of exceptions, adjustments, and errors

Set realistic improvement goals Establish grading scale to determine performance by

location. Friendly competition

Establish consequences for bad performers Carry through with consequences

Implement procedures to instill proactive initiative Get employees involved

Improve Error Rate – Cont’d

Create proactive troubleshooting communication that documents the causes for common errors. Allow employees to determine cause

and resolution of errors

Document Current Procedures

Take stock of current processes You need to know where you are

Visualize what you want the processes to look like

Map a plan to get there

Current Process

Payroll Process New Hire/Term/changes Monitoring time and attendance Calculating gross to net Distributing net pay Calculating and reporting retirement Collecting overpayments Vacation, sick, PTO accruals Disbursing withholdings

Taxes Garnishments Retirement

Current Processes – Cont’d

Benefits Taxes General Ledger Month End Quarter End Year End Training

Mapping Process

Determine the scope Beware of scope creep Task plan

Identify current processes Visualize success

What does it look like to you? What does it look like to your boss?

Start asking probing question…. Break it down into categories, tasks,

procedures

Analyze Off Cycle Checks

Labor intensive & Time consuming Research & Analyze Calculate & review Processing correction Track down check signer

What is the root cause? Delays in paperwork – Why? New hires not input into system timely – Why? Timesheets not approved – Why? Data entry errors – Audit? Special Request – Bonus, late paperwork, etc.

Addressing Root Cause –of Off Cycle Checks

Payroll and HR work to address delays Processing terminations Missed deadlines

Holding employees accountable Realistic deadlines

New hire process Can paperwork be completed prior to start date?

Does the current processes conflict with payroll processing policies or compliance?

Communication!!!

Probing Questions - Overpayments

What is the procedure to process overpayments? How is this policy interpreted by direct reports? How is this policy enforced? Is the perception and enforcement correct? Is there a policy or guidance to collect overpayments? Is there a process in place to identify the root cause in order to address any

holes in the current policy? Do you address who is to notify payroll of the overpayment?

Most adjustments are not due to payroll errors When termed employee does make a repayment, do you have a

process in place to adjust the taxable earnings? Is the perception and enforcement correct? Does the repayment cross over years?

What is the process to adjust W2? Is there a process in place if overpayment can not be repaid? Is there a process to send the employee to collections?

What is the process for overpayment notifications that go unanswered?

Probing Questions Payroll Processes

Independent Contractors Don’t assume there aren’t any

Exempt Employees Correctly categorized?

Any home agents? Think state and local tax nightmare

Do you have hourly employees with more than one rate?

How is their OT computed? Are all exception payments authorized? Employees claiming exempt? Pay frequencies

Probing Questions Payroll Audit Process

What are your audit procedures? Who performs the audits? Does everyone interpret and perform the same

process? Does the employee understand why the audit is

performed “this way”? Is there a better way to perform the audits? Are the particular audits performed at the correct time?

What good does it do if the payroll is already processed?

Do you check taxable wages before finalizing payroll?

Probing Questions – Audit Processes Cont’d

Do you compare the final payroll to a previous payroll (sanity check). Are the numbers way off or pretty close?

Bonus pay would differ PTO sell back would differ 3rd pay of the month? First pay of the year? (tax changes,

unemployment taxes) Who reviews audit trails?

Ensuring person making change has the authority to make the changes.

Are the changes correct?

Probing Questions Payroll Reconciliations

What are your reconciliations procedures? Who performs the reconciliations? Does everyone interpret and perform the

same process? Does the employee understand why the

reconciliation is performed “this way”? Is there a better way to do it? What is the timing of the reconciliations?

Per pay, monthly, quarterly, yearly, some other timeframe?

Probing Questions - PTO

What is the process to request time off? Does everyone interpret and perform

the same process? Does the employee understand the

process? Is there a better way to do it?

Probing Questions - Reports

What reports are you providing to management?

Who gets these reports? Why are you providing these reports? Are you providing paper copies or

electronic files? How often are you providing the

reports?

Probing Questions Data Privacy

What is your process for ensuring data privacy of personal information?

Is the payroll system adequately protected from misuse or unauthorized access?

Do you have a data privacy policy? How do you process employee

verifications? Do you have a clean desk policy?

Probing Questions - Benefits

How are benefits deductions set up? Do they roll over or reset every year?

Are all the locations receiving standard benefits? What is the FMLA process and how is FMLA tracked? Pretax deductions correctly calculated? Are Holiday and PTO payments valid within

company policy and legislative requirements? What’s in the summary plan document?

What are the eligible wages? What is excluded from matching funds? Are retirement deductions accurately calculated, deducted,

and paid to the third party vendor correctly? Timely?

Probing QuestionsTime and Attendance

Do you allow rounding? When does the pay period start? End?

Day of the week Time of day

What is the payroll frequency? Does the punch in or punch out

determine what day the hours from that shift are reported?

Do you have a procedure for daylight savings?

Probing QuestionsTime and Attendance –

cont’d What are the standard shifts? What are the exceptions? Do you have a seniority system? Do you have an attendance points

system? Do you allow shift swapping? Do you have a mill turn? Do you have shift differential?

Probing Questions – Physical Payouts

What is your process for physical payouts? Who performs the physical payouts? Does everyone interpret and perform the

same process? Does the employee understand why the

physical payout is performed “this way”? Is there a better way to do it? What is the process if a ghost employee is

discovered? What is the timing for the physical payouts?

Yearly? Direct Deposit audit?

Probing Questions - Unions

What is in the contract? Who is in the union? What is the contract period? Does everyone interpret the contract the same?

What is the employees interpretation? What is the administration interpretation? How does payroll handle the unique requirements? How does the time and attendance handle the unique

requirements? Manual or automated? Any outliers?

Seniority? Breaks in service? Point system?

Probing Questions Year End

What is your process for recording the cost of healthcare on W2’s?

What is your process for identifying adjustments? Relocation Auto Allowance ESPP Imputed Income – GTL Stock Options

Probing QuestionsFirst Pay of the Year

How are deductions set up? Roll over or reset? Goals/limits

Do you have a process to notify employees claiming exempt on their W4? New form every Feb 15th

Process for updating tax requirements? Updating IRS tax levy amounts

Probing Questions - Miscellaneous

What other jobs/positions influence your position?

What policies are posted on the intranet? Are they up to date? Are they compliant?

What is the percentage of direct deposit users?

What makes up ‘regular’ wages? Do you have accruals?

How SHOULD they work? Are they working correctly?

Probing Questions - Miscellaneous

What earnings go into overtime? Just the premium portion?

What are the other special earnings codes? What is the procedure for rate increases?

Mass change once a year Anniversary dates

Beginning of pay period for retros or exact date? Uploaded or manual entry?

Is there a payroll check list?

Check List – see handouts

Payroll Processing Check List Payroll Audit Check List

Before Finalizing Payroll Check List

Employee receiving OT is eligible Authorized Based on pay grade level

Employees do not exceed their PTO balances Within company policy

Are all employees receiving a pay? If not, why?

Is anyone receiving more than one check? If so, why?

Before Finalizing Payroll Check List – Cont’d

Check retirement plan limits. Compare standard deductions to what

was taken. All union employees have union dues

deduction. Anyone not having any taxes withheld? Compare number of employees with

number of checks.

Before Finalizing Payroll Check List – Cont’d

Compare hours paid with hours pull from time and attendance.

Review any deductions being refunded.

Compare W2 management report each pay.

Ongoing Maintenance

Determine if the implemented improvements were successful. New reports needed? Different workflows Process changes

Keep Payroll Check List up to date Add any new audits Keep a log of unusual issues and what

was done to ensure it doesn’t happen again.

Any Questions?

What stories do you have to share? What did you learn the hard way? What issues did you uncover? What process did you put in place

to prevent the issue? What questions do you have for

me?