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Use payroll reports to improve internal controls

payroll reportsPayroll reports, if properly designed, prepared, distributed and reviewed, assist with more than just cost control—they can help to significantly improve several internal controls.

Very simply put, internal controls include the activities, processes, policies and procedures which an organization implements to ensure that it meets its objectives. These objectives generally include efficiency; effectiveness; accurate and reliable financial information; compliance with laws, organizational policies and best practices; the prevention and detection of fraud; and other risk management goals.

The following are some of the ways in which payroll reports can improve internal controls:

  1. Cost control, to improve effectiveness and efficiency: Payroll reports provide cost information which an organization can use to control payroll hours and costs for each of its cost centres. A very basic but effective report compares actual payroll costs to budgeted payroll costs for each month in the fiscal year. This comparison should also be made on a year-to-date basis. These reports help cost centre managers to monitor payroll costs and ensure that there are no material variances from budget, or to ensure that they can proactively seek approval before exceeding budgeted costs. If one cost center has a budget deficit (that is, actual costs exceed budgeted costs) an organization may manage this variance by encouraging or taking advantage of offsetting budget surpluses (that is, actual costs are below budgeted costs) in other cost centres. Budget deficits and surpluses result from many different factors. For example, a budget deficit may arise because a cost centre failed to budget properly, and a budget surplus may arise because it takes another cost centre longer than anticipated to fill a vacant position.
  2. Capacity planning: By determining the periods during which a cost centre’s payroll hours or costs peak, an organization may be able to identify the reasons behind the peaks and implement plans to smooth out unwanted spikes. For instance, investigations may reveal excessive overtime to complete particular types of customer orders. If so, the organization may be able to implement creative strategies, beyond merely extending the delivery periods for the orders in question. Possible solutions include reallocating work to other teams within the organization or securing temporary help from a temp agency.
  3. Morale and job satisfaction may improve after management takes action to address capacity issues which payroll reports highlight. Both cost centre managers and their teams will likely appreciate management’s efforts to address and reduce the stress and disruption that excessive overtime and other staffing challenges create. Improved morale and job satisfaction are conducive to attaining organizational objectives.
  4. Fraud prevention and detection, and other risk management: Reports showing the usage and accumulation of leaves to which employees are entitled (commonly referred to as payroll “banks”) can highlight employees who have accumulated large vacation banks because they rarely take vacations. Management should also monitor sick leave and other banks. The monitoring process may reveal opportunities to manage several challenges which organizations may face, including:
    • Inadequate backup for a role or function: If employees cannot take vacations or meaningful vacations (that is, a break from work for more than a couple of days here and there) because they have no backup, this signals that cross-function training may be required.
    • Fraud: Many organizations discover frauds only after the individual who normally performs certain functions go on leave. The fraud is often exposed because the fraudster is not around to take their usual steps to conceal and thus perpetuate the fraud.
    • Excessive absenteeism: Attendance management reports depend on information from payroll, including the number of paid and unpaid sick days taken by each employee. Employees whose sick days exceed a pre-defined number of days within a pre-defined period may require attendance management, to help improve attendance or facilitate accommodation under human rights laws.
    • Exposure for directors and officers: Directors and officers may be personally liable to pay accrued vacation and other payroll amounts (subject to legislated maximums), if the organization is unable pay. This personal liability is often triggered by corporate insolvency or bankruptcy. Limiting the balances on payroll banks and accruals will help to limit the personal exposure of directors and officers.

If properly designed, implemented and analysed, payroll reports can significantly improve internal controls.

Policies and procedures are essential to managing payroll and compensation, but the work required to create and maintain them can seem daunting. Finance and Accounting PolicyPro, co-published by First Reference and Chartered Professional Accountants Canada (CPA Canada) contains sample policies, procedures and other documents, plus authoritative commentary in the areas of finance and accounting to save you time and effort in establishing and updating your internal controls. Not a subscriber? Request a free 30–day trial here.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here
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