The Human Resources Management and Payroll Cycle ICN Raa After studying this chapter, you should be able to: 41. Describe the major business activities, key decisions, and information needs in the HRM/payroll cycle, the general threats to those activities, and the con- trols that can mitigate those threats. 2. Explain the payroll cycle activities, key decisions and information needs, the ‘threats to those activities, and the controls that can mitigate those threats. 3. Discuss and evaluate the options for outsourcing HRM/payrall cycle activities. INTEGRATIVE CASE [ERs Like many companies, Alpha Omega Electronics (AOE) did not fully implement all modules ofits new enterprise resource planning (ERP) system at the same time. It focused first on integrating the revenue and expenditure cycles with the production cycle while contin- ing to use its existing payroll and HRM systems. Thus, like many companies, AOE currently has separate HRM and payroll systems, The payroll system, which is under the accounting department’ control, produces employee paychecks and maintains the related records as required by government regulations. The payroll system uses batch processing because em- ployees are paid biweekly. The HRM system, which the human resources department runs, ‘maintains files on employee job history, skills, and benefits; these files are updated weekly. [Each aystem maintaine ite own acparate filen, sometimes storing the aame data, auch 22 pay rates, in different formats. This practice makes it difficult fr accounting personnel to pre- pare reports that combine HRM and pavroll data. Peter Wu, the new vice president for human resources at AOE, wants to address sev- ‘eral problems with AOE's payroll and HRM activities. Payroll processing costs have risen, and. ‘employees are unhappy with the lengthy delays required to obtain information about their benefits and retirement plans. In addition, the current HRM system makes it difficult to ac- ccurately track employee skill development, which impedes evaluating the effectiveness of ‘AOE’ investment in training and continuing education. Consequently, employees find it difficult and time-consuming to obtain approval to attend professional training classes. In ‘addition, managers have tended to hire externally to meet new staffing needs, rather than, 02promoting or transferring existing employees. These practices have hurt employee morale. Peter thinks that implementing the payroll and HRM modules of the ERP system will salve these problems. ‘eter meets with Elizabeth Venko and Ana Brandt to discuss the process of migrating fromAOE's current stand-alone payroll and HIM systems to integration of thowe functions {in the new ERP systema Elizabeth and Ann agres that such a conversion would improve bath the efficiency of payroll processing and the effectiveness of HEM. Theybegin developing 2 eta fametabe forthe system conversions. As you sead this chapter think about te re- latioaships between HRM and payroll activities and how an integrated databace can make both functions more efficient and effective, Introduction ‘The human resources management (HRM)ipayrolleyele isa recuring set of business activities and related data processing operations associated with effectively minaging the employee workforce. The more important tasks include the following: 1. Recruiting and hiring new employees 2. Training 3. Job assigament 44 Compensation (payroll) 5, Performance evlaation 6, Discharge of employees dae to voluntary or involuntary termination Tasks | and 6 are performed only once for each employee, whereas usks 2 through $ are performed repeatedly for as long as anemployee works for the company. In most companies, these six activities are spit heen two separate systems. Task 4, compensating employees, is the payroll system’s primary function. (In addition, as discussed in Chapter 14, the payroll system also allocates labor costs to products ard departments for use in product pricing and ‘mix decisions) The HRM system performs the other five tasks. In many companies these tO systems are organizationally separate: The HRM system is usually the esponsibility of the direcor of human resources, whereas the controller marages the payroll system, However, as Figure 15-1 shows, ERP systems integrate the two sets of activities. This chapter focuses primarily on the payroll system, because accountants have tradi- tionally been responsible for this function. We begin by describing the design of the inte- {grated HRM/payroll system and discuss the basic controls necessary’ to ersure thai provides ‘management with relabe information and complies with govemment regulations, We then describe in detail eack of the basic payroll cycle activities. We conclude with a discussion of ‘opicns for outsourcing both payroll and HRM functions.PARTI ACCOUNTING INFORMATION SYSTFMS APPLICATIONS, FIGURE 15-1 Worome the Ntsute Hep Centar Managing Employnes manu = HRM functions Integration of HRM and Payroll Functions in Typical ERP System Snane DID oh. HRM/Payroll Cycle Information System Figure 15.2 depicts the portion of an ERP system that supports the HRM/payroll cycle. The HIRNL-relted activities (information about hiring. fing, wansfss, taming ec) and the cl- lection of information about the use of employee time occur daily. The actual processing of payroll, however, occurs ealy periodically because in most organizations employees ae paid ‘on awceky, biweekly, or monthly bass raher than evry day Ths, payrollis one appication ‘that continues t be processed in batch mode. OVERVIEW OF HRM PROCESS AND INFORMATION NEEDS Organizational suecess depends on skilled and motivated employees because their knowledge and skills affect the quality of the goods and services provided to customers. Indeed. in pro- fessional serves organizations, such as accounting and law firms, employees’ knowledge and skill ar te principal component ofthe company's product. and labor cox present the major expense incurred in generaing evenves. Even in manufacturing firms, where direct labor coss reprctent only a fracton of total direct cost, employoct area key cost diver in thatthe quality of ther work affects both overall productivity and product defect ates. Thus it is no suprising {fied tat some stock enalyss beens thal employes sills nel knowledge my be went cra imes the value of company’s tangible asses, such as inventory, property, and equipment Toellecvely ullze the organization's employees, the HRMU/payiol system must collect and store the information managers nsed to answer the following kinds of questions: ‘© How many employees does the erganizaton need to accomplish is strategic plans? 12 Which employess posses specif ell?CHAPTER 15. THE HUMAN RESOURCES MANAGENENT AND PAYROLL CYCLE 465 Various Deporments Human Resources Factory Workstations [feet (Ce |__| Te ft} tee, Ce Atenas Dt = cs ‘counts Poyeble a er Payroll ‘eon menage Figure 152 Portin of ERP System That Supports Human Resources Management and Payrall © Which shits are in shor supply? Which skills ae in oversupply? © How effective are current tning programs in mainiaining and improving employee skill evel? © Isoverl performance improving cr declining? © Are there problems with tumover.turdiness. or absenteeism? ‘The HRM/payroll master database Figure 15-2) provides some of the information needed to answer those questions. However, ittypically cotairs only desripive information, such as which employees possess which skis and who has atlended various raining programs. Al- though such information enables managers to make stafing-related decisions, it does not help leverage the specific kiowledge and expertise possessed by their employees. To more effectively use employees knowledge and skill, many organizations have in- ‘ested in knowlede management systems. Knowledge management sysiems not only sere tones mnaserer asa directory identifying the areas of expertise possessed by individual employees but aso “i= Stare at ore ‘capture and sore that knowledge so that it can be shared and used by others. Knowleage Tiomenreanr ‘management systems can significantly improve productivity. For example, profesional con- Soa he wwcase one sulting firms often provide similar services to many different clices. Knowledge management “04nd by ctr. software enables conselants to store ther solution to specific problems in a share database. Oftentimes those solutions ean be use as a template t address the needs of oer clients.PART Ill ACCOUNTING INFORMATION SYSTEMS APPLICATIONS, Such reuse of knowledge saves time on future engagements. Access to the shared database also enables employees to leam fom geographically dispersed colleagues who bave had prior ‘experience in addressing particular ise ‘Recognizing the value of employees’ knowledge and skils can help companies beter understand the tue costs atseisted with exeeasive tarove. In addition othe Gect expenses associated withthe hiring process (advertising, background checks, interviewing candidates, {tc,), there are also the costs associated with biring temporary help, taining new employ. ‘es, and the reduced produetivty of new employees until they fully learn how to pesform ther tasks. Thus, estimates place the tol costs replace an employee at about 1S times the annual salary. Consequently, organizations that experience below-indusry-average turnover "ates reap considerable cost savings cempared to rivals with higher tumover rates. For ex- ample, consider two companies. each with 1,500 employees earning on average $50,000. One ‘company experiences 20% annial turnover. the other only 8%. The company’ with 208 anna ‘turnover would incur costs of $22.5 million (300 employees times $75,000) to replace em- ployees. compared to orly $9 milion (120 employees times $75.00) fo the company experi- ‘acing enly 8% annual wrnover OF course, some turnover wil aways oceur and may exc be desirable. For example, professional consulting organizations have traditionally encouraged ‘some level of tumover because they believe it provides an important source of new ideas. The ‘Key isto control and manage tumover rates so that they are not excessive. Enployee morale is also important. Low employee morale reates financial costs when it results in turnover. Conversely. theres increasing evidence that high employes morale pro- Vides financial benefits. For exemple, Sears collected detailed data on employee satisfaction, actual tehavior, and customer satisfaction. Statistical mnalysi revealed that employee att- tudes about thet jobs and the company significantly predicted law they behaved with ctor rs, which in turn affecied customer satisfaction as measured by repeat sales. Sears’ results are not isolated: research has found a positive corelation between employee attitudes and Financial performance, particularly in highly competitive industnes." Thus, it is aot surpasing ‘that many companies ae monitoring employee attitudes. Focus 15-1 describes some ofthe ‘methods companies use to better understand employees’ job-related concerns and how they ‘use that information to improve working conditions and morale. THREATS AND CONTROLS Figure 18.2 shows that all HRMpayrolycestvtes depen on the icgrated datas that csi iforation sb expos, pools waco expleos tne Three th st general rat ted in Tale TS is imccuat rinvaid master daa, Inaccurate empoyce ‘Ester data coud yesulin over or underatafing I can alo ae incficiencis dc om "ening employees to perform tks for which hey ae aot ily shied. nacre pol ‘ner dua hat reasin evo paying exployecs can eee giant maleic. In Iukiton the orzniration may incr fires or eons mae nine nao ttes Fear in tat about use of enmployes tine can rel in accurate perma evalatons and sis- tak incaleulaing the cs of the npaizatls prods aod eves ‘One wy tomtigats the tea of tacurate or teal wnt data in use he vast po ceasing inti control diced in Chapter 10to mini the rik of tata inet eer (Co trol 1) Itvaho important to restrict aces to ht dts and configure the system 0 that only sttorized explyecs can uke changes io mar data (control 12). Ths func changing the deft configuration of enployee resin ERP systems to apopraely spa incre ‘tile duties. For example, omc the station whew a pyell clerk types ate mane of Sccrployes whi ot ucoty inthe database Te df confghrates of un neat ERP stems would respond by asking whether theelsk was to eet a new employee fe- ond. Tis violas prepa des by peng the person whe dec the ering (hy toll) to alo aubori he creation of new accom: Sula the default cooiguations of {any sms permit payell staf wo nly to ead bt alc to Ghngs the salary taforation "ie may “De he Sok Mt Fly Vac Inti ple inion ad iy Po” ame [blo SSH cola ~in yiay Be Mone dy erway "The den Hts of Coen ‘the Reitomipeween Nena Mesure an Fate Fnacel Perermnce” Concriperary AoC Reser 243, FIDO pp. 65-793or € FOCUS 15-1 The Value of Understanding Employee Jobs and Attitudes {A growing number of companies, incLding Walt Disney, Continental Airlines, Sysco, and Amazen.com, periodically require some of their upperlevel executives to spend time in the trenches ta better understand job duties and pressures. The experience can help executives identify ‘needed changes in working conditions. For example, when the CEO ef Loews Hotels assumed the roles of bell: ‘man, pool attendant, and housekeeper ata Florida hotel, he found that the company’s polyester uniform caused eee ect eee reeled syle and material be altered forall employees. Immersion ‘experiences ao enable top executives to better empa- thize with rank-and-file workers. For example, after the vice president of DaVita Ine, a major provider ofcialysis ‘weatment, spent three days working in one ofthe com- pany’ clinics, she understood how physically demanding land stressful the work is. She also personaly experienced fee tee teal cet eater eee ‘an result in delay in completing corporate-mandated re ports. As a result ofthese experiences, the vice president ‘now strives to ensure that new initiatives and changes in procedures ae implemented in amanner that does ‘nf interfare with clinic technicians’ primary patient care esponstiliies [Executive immersion experiences are important be- cause there is growing body of evidence that employ fee: who have postive attitudes contnibite to improved proftabilty by being more wiling to take intative, to ep in when needed to help ful customer requests, and ‘0 promote the company when nat at work. Thus, itis not surprising to find that many companies -egularly survey employees to learn about their concerns These new sur ‘veys replace traditional questions about job satisfaction ee eel ‘tue attitudes about their job, coworkers, and managers. ‘The answers can help managers take specific steps to improve employee morale and motivatin. For example, such surveys informed the manager of fastfood fran chise in Houston that some employees were unhappy because they were assigned toa few hours to work but ‘hat others were unhappy because they had to work too SSS ‘work schedules forthe following month early enough to accommodate employees’ desires as mach as possible. ‘As with executive immersion experience follow-through con such survey datas tical because if companies do not ‘act on feedback obained from employees by these meth- ‘ds, employee morale and performance drop sharply in the employee payroll master file. These examples ae just some ofthe many ares that the ‘controller of CFO needs to review to emre that various user are assigned only tose privi- leges necessary o perform thie specified job duties. Although the procedures for modiying ‘configurations vary across different software packages knowing what changes needto be made requires only a sound understanding of proper sepregation of duties for different business pro- ‘cescs. However, since such preventive controls can never he 10% effective, Table 15-1 also Jndcates that an important detective control i to regularly produce a report of all changes to ‘master data and review them to verify tht the database remaes accurate (control 13) [A second general threat in the HRM/payrol cycle is unauthorized disclosure of sensitive {information sch salary and performance evaluations for inividal employees. Sach dicho sures can create mera problems if mployces lara that their pay differs significant from co- ‘worker, In addition, unauthorized disclosure of performance evaluations or reasons for fring employee may subject the organization o lawsuit The best contol procedure for reducing, the sk of unauthorized diselosur of payroll datas using mulifctor authentication and phys ‘eal security contels to restrict access to HRM/payrol master data to only those employees ‘who need such acess to perform their jos (control 2.1) Is also important to configure the system to limit employees ability to use the system's built-in query capabilites wo indirectly fer sensitive information. Fr example, queries about salary averages shouldbe allowed only ifthe query sets sulficienlly large. Otherwise, someone could infer another employees sal- ary by writing a query that calles the average salary forte pale: the query writer and the employee of ieret. Encrypting the database (contol 2.2) provides additional protection by making the information unintelligible to anyone who succeeds in obtaining unauthorized access to the datakuse. Encryption also prevents information technology (IT) employes who ‘do ot have access to the ERP system fom using operating system ublites to view semiive Snftntnan. Tokeniaton (coinol 23) uf camployor IDs ut Sonia Sevarity Nantes fants protects payroll data from “snooping” by the employees who ae authorized to run payroll498 PART IlI_ ACCOUNTING INFORMATION SYSTEMS APPLICATIONS ‘TABLE 15-1 Threats and Controls in the PayrollHHRM Cycle AcTVIY THREAT ‘CONTROLS (FRST NUMBER REFERS TO THE CORRESPONDING THREAT) General issues 1. Inaceurate orimvalid 1.1 Data processing intagty controls ‘throughout master data 1.2 Reston of access to master data centre HRM 2, Unauthorized 113 Review ofall changes to master data = aoe Pe information 22 Encryption 2. Lossor destruction 23 Tokentaton of data 2.1 Backup and disaster covery procedures 4, Hing unqualiied or 4:1 Sound hiing procedure, acuding verification of job applicants’ larcanous employees credential sl, references, and employment history 5. Wolaions employ. 4.2 Criminal Bekground mvesigaton checis ofall applicants fr nance mentlave falated postions 5.1 Thorough documentation of hing, performance evaluation, and dismistal 5.2 Continirg education on changes in employment laws ‘Update payroll 6. Unauthorized “6.1 Segregnion of duis: HRM cepanmene updates master data, but nly master dit changes to payroll payroll department issues paychacke taster data 6.2 Acces controls 7, Inaccurate updating 7.1 Data processing intagty controls of pay master data 7.2 Regular review ofall changes to master payel data Valiote tine 8) Inseam tne ancl 11 Source dota tortion fr dat copie ‘nd atte attendance data 22 Biometric authentication dance dat £2. Segregaton of dities (ecenciation of job-tme tickets tote car) 8.4 Supervise review Prepare payroll 9. Eom in processing 9.1 Data rocesting inti contol: batch tots, crose-foating ofthe payel paveoll reise, use ofa payroll clearing account and a 2erobalance check 92.2 Superdscry review of payel register and other reports 93 lasing earings statements to employees. 92.4 Review ofS guidelines to ensure proper cssiication of wokers a ther employees or independent contactor Disburse payroll 10. Theftor fraudulent 10.1 Restcton of physical acces to lank payro checks and the check datroution of ssgnature machine es 102 Reston af accent the FET ate 10.3 Prenumbering nd perodially accounting fr all payroll checs and review ofall EFT rect depos tansacions 10.4 Require proper supporting documentation fr all paychecks 1055 Use of separate checking account for payel maintained as an est fund 10.5 Seareaaton of duties (aster versus accounts payable: checklstibution| from biing/ring; independant reconcliatin ef the pay checingsecount) 10:7 Restriction of access to payroll master database 10.8 Verlicaten of identy of al employees receiving paychecks ECS tee ae page ee eee Disburse payroll 17. False to make 11 Configuration of eystem to make required payment using curent requted payments instructions fom IS Publeation Cveula E) ‘miscellnsous 12. Untinely payments 12.1 Sameas 11.1 a ee Ee eee eed 132 Supenrscy review of repos 13.3 Employee review of earnings statement A third general threat in the HRM/payroll cycle concerns the loss or destruction of master data. The best way to mitigate the risk of this threat isto employ the backup and disaster e- covery procedures (contol 3.1) that were discussed in Chapter 10. ‘A fourth general threat in the HRM/payroll eycle is hiring unqualified or larcenous employees. Hiring unqualified employees can increase production expenses, and hiring aCHAPTER 15. THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE. larcenous employee can result in the theft of assets. Both problems are hest dealt with by ap propriate hiring procedures (control 4.) Skill qualifications for each open postin shouldbe ated explicitly i the position control rcport Candidates shouldbe aed to signa atement ‘on the job application form that confirms the accuracy ofthe information Being subenited and provides their consent o thorough background check oftheir credentials and employ- ‘ent histo Independent verification o an applicants cede is mportant bscase résumés ‘often contain fake or embellished information. For example, in November 2008 the Wall Street Journal reported numberof cases where résumés for senior executives a companies ‘contained information that could not be verified. To reduce the risk of hiring larcenous em. ployees,erganizaions should hire a professional firm to perfam thorough background checks {control 42) ofall applicants for postions that involve access to Financial data and assets (0 ‘dently applicants with a prior criminal record “The fith general treatin the HRRM/payroll cycles violation of applicable laws and regula- tions concerning the proper hiring and dismissal of employees. The government imposes stiff penalties on fms thal volte provisions of employment a. [8 addition. organizations ca also be subject to civil suits by alleged victims of employment discrimination. Table 15-1 shows thatthe best conto procedure to mitigate these potential prolems isto carefully document all actions relating w adversing fo, ecuting and hiring new employees and t the dsmissal of ‘employees (con 5.1) this wll demonstrate compliance wih the applicable overamentregu- lations. Continued taining (contol 5.2)to keep current with mployment law is al important. Payroll Cycle Activities FFigure 15-3 presents a context diagram of the payroll system. It shows that there are five ma~ jot souroce of inputs tothe payvoll sysicm. The HRM depertice provides informtion about hiring, termination, and pay-rate changes due to raises and promotions. Employees initiate ‘changes in their discretionary deductions (eg, contributions o retirement plans). The various “departments provide data about actual hours employees work. Government agencies provide tax rates and instructions for meeting regulatory requirements. Similarly, insurance companies and other organizations provide instructions fo calculating azd reiting various withholdings. Figure 15-3 shows that checks (which may be electronic) are the payroll system's principal ‘output. Employees receive individual paychecks in compensation for ther services. A payroll ‘check is sent to the bank to transfer funds from the company’s regular accounts tits payroll account. Checks also ae issued to government agencies, insurance companies, and other orga- nizations to meet company obligations (¢-., taxes, insurance premiums). In ation, the pay- roll system produces a varity of repors. which we discuss later. fo internal and extemal use. Figure 15-4 shows the hasie activities performed in the payroll eyele. We row discuss ‘each of those activities. For each activity, we describe how the information needed to perform and manage the activity is collected, processed, and stored. We also explain the entrols nec- ‘essary to ensure not only the reliability ofthat information but also the safeguarding of the ‘organization's resources. HM Pel Changes fecheks Departed P| Employees ic Veron Poy Check = mot tte po) estan on f I ‘Agencies Tat fs ond Ishucions Checks ond Reports [Cte Componis FIGURE 15-3, Context Diagram of the Payroll Porton of the HRMV/Payrall Cycle470 PART ll ACCOUNTING INFORMATION SYSTEMS APPLICATIONS FIGURE 15.4 Level U vata How Diagram forthe Payroll Cycle UPDATE PAYROLL MASTER DATABASE “The fist activity athe HRMY/payrol cycle involves updating te payroll maser database 10 1e- ‘let various typesof intemallyiitiated changes: new hres, termination, changes in pay rates, for changesin discretionary withholdings (circle 1.0 in Figure 15-4). In addition, periodically the master data needs to be updated to reflect changes in tax raes and deductions for insurance. PROCESS Figure 15-2 slows that dhe HRM departed is responsible for updating the puyol ‘maser database for internally initiated changes related to employment, whereas the payroll, ddepartmen! updates information about tax rates and otter payroll deductions when it receives notification of changes from vasious government units and insurance companies. Although payrolls processed in bach mode, the HRM department has online acess to update the pay= oll master database oo thet all payoll change are entered ina timely manner and ure prep tnly selected in the neat pay period. Records of employees who quit cr are fced should act be deleted immediately, however, because some year-end tax epors, including W-2 forms, require data aboutall employees who worked fr the organization at any ime during the year. THREATS AND CONTROLS Unauthorized changes to poyroll maser da hr in Table 15.1) Ccnresit in incensed expenses from ijt poyacats u cployes, rope egrepsin of etics (contol 6.1 sth hey cone! procedre for dealing with thi heat. As shown in Figure 152, only the HEM depurtmen should he abe to update the payroll maser fe or hing. frmgs, sy rans, nd promotions HRM department employees in tr should aotCHAPTER 15 THE HUMAN RESOURCES MANAGEMENT AND PAYROLLCYCLE 471 “recy participate in payrll processing or paycheck distribution. This segregation of duties ‘prevents sommone with access to paychecks from cresting Scttions employees or altering py ‘ates and thea intercepting those frandulent checks. In addition all changes tothe payroll mas {er file should be reviewed and approved by somecne othe than the person recommending the ‘change. To facilate this review, the system should be configured to produce a report isting all payroll-rlated changes and send the report o each affected department supervisor fr review. ‘Controling access to the payroll system (control 6.2) is also important. The system should be configured to compare wer IDs and passwords with aa access contrel matrix that (1) defines what actions each employee is allowed to perform and (2) confirms wit files each ‘employee i allowed to acces. Another threat is inaccurate updating of payroll master data, which can result in errors in paying employees and fines for not remiting proper amounts of payroll taxes to the govern- ‘ment To mitgate ths threat, appropriate processing integrity contiols discussed in Chapter 10, such as valty checks on employee number and reasonableness tests forthe changes being ‘ade, should be applied to all payroll change transactions (contol 7.1) In addition, having ‘depariment managers review (control 7.2) reports ofall changes to employees in their depart- smcnt provides a timely way to detect error. VALIDATE TIME AND ATTENDANCE DATA “The second sep inthe payroll cycle isto validate each employee's time and attendance data (circle 2.0 in Figure 15-4). PROCESS How employee tine and attendance data i collected differs depending on the em- ployee's pay status. For employees paid on an hourly bass, many companies use atime eard torecord theemployce’s daily arival and departure times. Employees who earn fixed salary (eg, managers and professional staff) seldom recerd thei labor effort on time cards Instead, their supervisors informally monitor their presence on the job. ‘As discussed in Chapter 4, manufacturing companies also use job-time chets to record ‘dete data about bow employees use their time ie, which jobs they peeform). The job-time ticket data ae used to allocate labor costs among various departmests,costcenters, and produc tion jobs. Professionals in such service organizations as acounting, la, and consulting firms similarly trac the time they spend performing various tasksand for which clients, recording that “data on ime sheets ce Figare 15-5 for an example of a dita entry seen to track time). Their “employers use the time shee to assign costs and accurately bill clients for services provided. a ——SS = terete employee al =e (erpape men) sed 9y ‘Sitedprotesaneto rears Row tne we spent === i a Employee entors hours worked each day for each ‘customer, location, and nature of work FIGURE 155 Example of Data Eniry Screen to Tack Time (Time Sheet) SarceeD10© teeSales staff often are paid cither on a straight commission or on a salary plus commis- sion basis. This requires the sa to carefully ecord the amount of ther sales. In addition, ‘some siles staff are paid bonuses for exceeding targets. An increasing number of companies in the United States are extendieg such incentive bonuses to employecs other than sales staff {to motivate employees to improve their productivity and work quality. For example, Nucor (Corporation, oe ofthe largest stel producers in the United States, pays its steelworkers an ‘hourly rate set at approximately 60% of the indastry average, plus a bonus based on the tons of steel they produce and ship. Companies have long used stock options to reward executives; in recent years, many companies have extended this practice to their nonexccutine emplayect 44s well. The argument is that stock options mosivate employees to actively look for ways to improve service and cut costs so thatthe value of their compensation package rss Using incentives, commission, and bonuses require linking the payroll system and the in- formation systems of sales and ober eyces to collect the data usel to calculate banuses. More- ‘over, the honuslncentve scheme: must be propedy designed with ealistic. attainable goals that ‘can be objectively measured. Its also important that goals be congruent with comorate objec- tives and that managers monitor goals to ensure that they continue to be appropriate. Indeed, poorly designed incentive pay schemes can result in undesirable behavior. For example, Sears ‘Automotive experienced unintended negative elects from implementing @ new incentive plan inthe early 1000s that paid ite pair staff « commission hased onthe amount of pars soll an ‘number af hens worked ‘The ete wot fen exaplagees fected the company's bottom lin. The result, however, was a scandal in which it was alleged that Sears employees recommended unnecessary repre to boos their own pay. The alleged abuses ‘reduced public ust in Sears Auiomotive and led to lower revenues, Although Sears discontin- ‘ue use ofthis incentive system, it took years to flly regain the consumer trust ithad lot. Be- ‘sides the possibiity of eeating unintended and undesirable behaviors, poorly designed incentive pay schemes cap also run afoul of legal, tax, and regulatory requirements. Thus, 2s Focus 15-2 ‘explains, accountants should be involved in reviewing a company’s compensation practices. fmm on Hi fot af (RR 6 Focus 15.2. Accountants and Compensation Folcies Recent revelations of multimilion-dollar bonuses and when linking compensation to performance. To be use- large severance packages for top executives of compa SoS Se Sa the impresion that some top executives sre more con cerned about their own compensation than shareholders! interests. Asa result, eguators and Congress have be (un fo scntnize executive compensation practices more closely. Inpartculay, the use of stock options attracted 3 ‘great dea of attention. The Financial Accounting Stan ards Board (FASE issued new rules requiing that sock options be expensed, and the major U.S stock exchanges ‘ow requite companies oabtain shareholder approval of al equity based compensation. In the past op executives often were involved ind- ‘ect in enfing their own compensation pakapes by hi ing the conautans wno designed those packages. Now, in response to recent scandals, the role cf board com pensation sommftsesisinseasing.Accourtants can help, these committees improve ther company’s compensation plans by prwiting aces conceming the franca ant Ta ‘fects of proposed change in executive compensation. (One area nhere accountng experize canbe expecially helpfl isin identilying the appropriate merce to use ful, those metrics need to be liked to the factors most eet eae eee eee ‘this varies from company to company. For example, the key measures for areal organization such as Walmart or Home Depot wl be diffrent fom those used by an insur- ‘ance company such as Prudential, which wil differ from ‘those that are important to a basic manufacturer such a5 Alcoa, ‘Accountants can aso help board compensation com- ‘mittens comply with lagal and regulatry requirements For example, members of compensation committees may ‘not understard all the details of tax regulations, uch as the Employee Retirement Income Security Act (ERISA), which limit the allowable diferences between benefit [packages offered to executives and those made avaliable {to other employees. Accountants can review proposed ‘changes for compliance with such rules. Finally, accoun ‘ants can help companies improve shareholder relations by suggesting the Pes ways 9g ayranet minim se closure rules concerning executive compensition with- ‘out revealing information vital to continued competitiveCHAPTER 15. THE HUMAN RESOURCES MANAGEMENT AND PAYROLLCYCLE 473 THREATS AND CONTROLS ‘The main treat to this payroll activity i inaccunte ime and aten- ‘dance data. Inaccuracies in time and attendance recor can result im ineeased ler expeses ing time and attendance data. For example, badge readers canbe used to collet job-time data for production employees and automatically fed the data to the payroll processing system. Using technology to capture time and stendagce data can alo improve productivity and cut ‘cous: For exaniple, the real chain Majer, Inc. installed fingerpint reader it cash regie- tersso that employees could login and immediately hegin working The company estimates that this eliminated several minutes of wasted time spent walking from the time clock inthe back of the store to the ister. Saving a few minutes per employee may not sound dramatic, ‘but when multiplied across thousands of employees in an industry with a profit margin of less than 1%, the effect on the bottom line can be significant. Source data automation can also be used to collect time and attendance data for professional service staff. For example, AT&T's intemal service staff uses touch-one telephones to log in time spenton various tasks. ther-by ‘eliminating the use of paper time sheets. Various data processing integrity checks discussed in ‘Chapter 10, such 28a limit check on hours wosked and a vallity check on employee number, ‘ensare the accuracy ofthat information, TT can also reduce the risk of intentional inaccuracies in time and attendance data. For ‘example, some manufactaring companice now use biometric authentication technues (con trol 8.2), such as hind seans, to verify the idenity ofthe employee who is docking in and out ‘of work. The objective isto prevent an employze from leaving work early but having a friend falsely record that person as being at work. Sepregation of duties (contol 8.3) is also impor- tant Time card data, used for calculating payroll, sheuld be reconciled to the job-ime ticket dats, used for coming and managerial purposes, by someone not involved in generating that ‘datz The tal time spent on all asks, 25 reconled on te jobtime tickets, should not exceed the attendance time indicated on an employee's time card. Conversely, all ime spent at work shoud be accounted for onthe job-time ickets, In addition, requiring departmental supervisors to review and approve time cars and job- time tickets (see Figure 15-6, which ilutrates one way to implemeat contol 8.4) provides a “detective control on the accuracy of time and aendance data. Supervisory review is particu larly important for employees who telecommite. Analysis of system logs can provide assur- ance that telecommuters ae truly working the amount of time for which they are geting paid lndthat they are mt operating a personal business on the side, using company-provaded assets. eure awn Soames ‘Supervisor reviews each enry and checks "approve" to authorize pay FIGURE 15-6 «i Supenisory Approval of Tne Worked Seen Sar solo okebutee476 PARTIIL_ ACCOUNTING INFORMATION SYSTEMS APPLICATIONS FIGURE 15-7 Flowchart of Payall Batch Processing PREPARE PAYROLL "The third step inthe payroll cycle i preparing payroll (circle 3.0 ia Figure 15-4) PROCESS Figure 15-7 shows the sequence of activities in processing payroll First, payroll ‘wansacion data is edited, and the vaidated transactions are then sorted by employee aumber. If the organization is processing payrolls from several divisions, each ofthese payroll trans- action files must also be merged. The sorte payroll wansactions fle fs then used t prepare employee paychecks. For each employee, the payroll master file record and corresponding transaction record are read, and gross pay is calculated. For hourly employees, the number of hhours worked is multiplied by the wage rate. and then any applicable premiums for overtime for bonuses are aided. For salaried employees, gross pay is a fraction ofthe annual salary. ‘where the fraction reflects the length ofthe pay period. For example, salaried employees paid ‘monthly would receive one-twelth of their anual salary each pay period. Any applicable ‘commissions, boruses, and other incentives are also included in calculating gross pay. ‘Net, all payroll deductions are summed, and the total is subtracted from grozs pay to ‘obtain nat pay. Peyroll deductions fll into two broad categories: payroll tax withholdings and Computer Operations cashierCHAPTER 15 THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE eployenNa | None | Hows | fay Rete | Gres Poy Netfoy 7084 vera | 00 | 625 25000 15180 785 Ble | 88 | 65029510 wie 3788 linen | 00 | 675 77000 16510 3787 Dudas | 442 | 700 32410 20250 EnployseNNe | Nowe | Heck | tet | tener | Union Duss | Saving Bond | Tle Mie. 7184 Jens | 1040 | 550 | 7500 | 420 0.00 270 75 Ble | 140) 550 | 85 | az 10.00 401s sre88 ncn | 104 | 52 | a10 | 420 0.00 2790 787 Dowls | 1020 | 550 | 972 | azo 0.00 a2 FIGURE 158 Examples of Payrolland Deduction Rogistors voluntary deductions. The former includes federal, state, and local income taxes, a well as So- ‘ial Security taxes. Voluntary deductions include contributions to a peasion pln: premiums for ‘group life, health and disabity insurance: usion dues; and contributions to various charities. ‘Once net pay is calculated, the year-to-date fields for gross pay, deductions, and net pay in ‘each employee's record inthe payroll master file are updatel. Maintaining accurate cumula tive earings records isimpocant fortwo reasons. Fist, because Social Secunty tax withhold ings and other deductions have cutofls, the company must know when to cease deductions {or individual employees. Second, this information is needed to ensure tha the appropriate amounts of txes and other deductions are remitted to government agencies insurance com- panies, and various charitable organizations. This information also must be included inthe various repos filed with these agencies. ‘Next the payroll and deduction egisters are created. The payroll register lists each em: ployee’s gross pay, payroll deductions, and net pay in a multicolumn format. It also serves fs the supporting documentation to authorize transferring funds tothe organization's payroll ‘checking account. Tae deduction register lists the miscellaneous voluntary deductions for ‘each employee. Figure 15-8 presents examples of these two reports. Finally. the system prints employee paychecks (or facsimiles. in the cae of direct de- posi). These also typically include an earnings statement, which lists the amount of gross pay, deductions, and net pay forthe current period and year-to-date totals foreach category. ‘As each payroll ransaction i processed. the system also allocates labor cost othe appro- priate general ledger accounts by checking the code on the job-time ticket record. The system ‘aintain a running total of these allocations until ll employee payrall records have been pro- ‘costed. Thos: total, and the column totals isthe payoll repster, fom the ais forthe sum. ‘mary joural entry, which i posted tothe general edger afterall paychecks have been printed. ‘The payroll system also produces a numberof detailed reports. Table 15-2 desesbes the “content of the most common reports. Some of those a for ieteral we, but many are coud by various government agencies. Consequently, as Figure 15-9 shows, the HRM/payll por tion of ERP systems provides extersive support for meeting the reporting requirements of federal, state, and local governments THREATS AND CONTROLS. The complexity of payroll processing. ecpeially the vation tax law requirements, mes it ansceptble to errors (threat 9 in Table 15-1). Ravers obviously eo hhurt employee morale, particulary if paychecks are late. In addition to incorrect payroll ex- [pense records and reports, processing errors can lead to penalties ifthe erors result failure pel egetr Aling ot Poy foreach onpoyee {orapapel peiod. edction regia repre ‘hing te msclarcours (ay dedutuns roe See camigestatonet Argon Eng tect cl gro poy, ‘Setsons aod at poy SE ‘Sires perad athe arto" (Sion fr och ene.CHAPTER 15. THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE Employee, | Name | Hours | RayRote [ Gro Py ‘Wise NetPoy ‘7884 Joris | 400 | 625 | 25000 276015180 7885 fle | 226 | 650 | 29510 401s 17124 37885 lines | 400 | 675 | 27000 279016510 37887 Doug | 442 | 700 | 32410 2962 20250 Employee No, | Nome | Henthtna | tet | Rttement | Union Dues | Songs Bond | TobdWise ‘7884 Joris | 1040 | «550 | 750 400 000, 270) 7885 Berke | 1140/50 | BBS 40 1000 40s 706 uncle | 1040 | 520 | 810 40 000 2790 7887 Douglas | 1020 | 550 | 972 40 000 2982 FIGURE 15-8 Examples of Payroll and Deduction Registers ‘voluntary deductions. The former inces federal stat and local income taxes, swell 3s So- al Scour taxes. Voluntary deductions includ contrbutions oa pension plan: premiums for ‘group life, health and diab insurance: union des: and conrbuions o various cartes. ‘Once rt py calculate the year-to-date kl for gros pay. dedctons an et pay ‘each employee's record inthe payroll mastr file ae updated. Maataining accurate cumul ‘ive earnings records is important fortwo reasons. Fr, because Social Securit at withhold ings and oer deductions have cutoff, the company must know when to cease deductions {or individual employees. Second, his information needed to cxsure that the appropriate amounts of taxes and other deductions are remitted to government agencies. insurance com Panic, and various charlable organizations. This infermation also must be inlade inthe ‘Various reports filed with those agencies. ‘Next. the payroll and deduction registers ar ereaca. The payrll rite iss cach em- ployee’ zoss pa: payroll deductions and net pay ina multicolumn format Italso serves asthe supporting documentation to authorize transfering funds tothe organizatien's payroll ‘checking account. The deduction register lists the miscellaneous voluntary dedsctions for ‘each employee. Figure 158 presents examples of these wo reports. Finally, the system prints employee paychocks (or facsimiles inthe case of direct de- posi) These also typialy include an earnings statement, which ists the amount of gross ay, deductions, and net ay for the curent period and year-o-dte wal for each category. ‘As cach parol tansction is procased the syste! ls allocates labor cost othe appro- priate general ledger acounts hy checking the code the job-ime icket record, The system ‘aintains «runing total ofthese allocations uni all employee payrall records ave been pro- ‘esse. These totals, and the column alsin the payol ester, frm the basis forthe sum ‘ary joural cory, which s posted to the general ledger afterall paychecks have been printed. "The payroll sytem slso produces a number of detailed reports. Table 15-2 describes the content ofthe most common reports. Some ofthese ar for intemal we, ut many ae required by various government agencies. Consequently, as Figure 15-9 shows, the HRM/fayoll por. tion of ERP systems provides extensive support for meeting the reporting requirements of federal, tac, and local goverment. THREATS AND CONTROLS The complexity af payroll processing. especially the varie tax law requirements, makesit susceptible errors (threat 9 in Table 181) Errors obviously can hhurt employee morale, particularly if paychecks are late In addition to incorrect payroll ex- pense records and reports, processing erors can lead 1o penalties i he errors result in failure poyelragetar-Aliing of opal daar cchenpyee {ora payol peed. deucton agit - report ‘hing the nseliaour (ay aadcion or each rps caminge satemast.Arapot {Sing he amour poy, hdesone nde pny ore ‘Siren perio nthe yareo™ Sinai ter eat exer.CHAPTER 15. THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE Employeea | Namo | Hors | Roy Rete | Gros Poy | Fad Tox ‘Wise. NetPoy ‘7884 Jens 0 | 625 25000 | 3840 27a | 15180 7885 Bake 86 65029510 4240 ois 7124 27006 Uren | 00 | 675 27000 | 3920 2790 14510 7887 Doug 442 | 700 524104840 296 70250 employeea. | Nome | Henthina | teks. | tienen [Union Due | Soins Bond | Teal Mie ‘7884 Joris | 040 | 550 750 | (420 0.00 2760 7885 Berke | 1140 | 550 | BBS | 420 10.00 4015 7886 ines | 1040 | 520 B10 | 420 0.00 2790 7887 Dougls | 1020 | 550 | 972 | 420 0.00 a2 FIGURE 158 Examples of Payrall and Deduction Registors voluntary deductions. The former includes federal, state, and local income taxes, as well as So- ial Security taxes. Voluntary deductions include contributions to a pension pln: premiums for ‘group life, health, and disability insurance; union dues; and contributions to various charities. ‘Once net pay is calculated, the year-to-date fields for gross pay, deductions, and net pay in ‘each employee's record inthe payroll master file ae updated. Maintaining accurate cumula- tive earnings reconds is impocant for two reasons. First, because Social Security tax withhold ings and other deductions have cutoffs, the company must know when to ease deductions for individual employees. Second, this information is needed to ensure tha the appropriate amounts of txes and other deductions are emitted to government agencies insurance com- panies, and various charitable organizations This information also must be included in the various report filed with these agencies. ‘Next, the payroll and deduction registers are created. The payroll register lst each em: ployee’s ross pay, payroll deductions, and net pay in a multicolumn forma. It also serves fas the supporting documentation to authorize transferring funds tothe organization's payroll ‘checking account. The deduction register lists the miscellaneous voluntary deductions for ‘each employee. Figure 15-8 presents examples ofthese wo reports. Finally, the system prints employee paychecks (or facsimiles inthe case of direct de- poxit). These also typically include an earnings statement, which lists the amount of gross pay, deductions, and net pay for the curent period and year-to-date totals foreach category. ‘As each payroll transaction is processed the system also allocates labor costs to the appro- priate genera ledger accounts by checking the code onthe job-time ticket record. The system ‘aintains a running total of thse allocations unl ll emplyse payroll recores have been pro- ‘cessed. Thes: totals, and the column totals isthe payroll register, form the basis forthe sum- ‘ary journal entry, which is posted to the general ledger afl all paychecks have been printed. “The paycoll system also produces a number of detailed reports. Table 15-2 describes the ‘content ofthe most common reports. Some of these are for intemal use, but many are required by various government agencies. Consequenily, as Figure 15-9 shows, the HRM/payroll por tion of ERP systems provides extensive support for meeting the reporting requirements of federal, state, and local governments THREATS AND CONTROLS The complexity af payroll processing. especially the varions tax law requirersents, makes it susceptible to errors (threat in Table 15-1), Errors obviously can hhurtemployse morale, particularly if paychecks are late. In addition to incarrect payroll ex- pense records and reports, processing errors can lead to penalties i the erors result in failure el vegeta Alin of (Sha dar each entayee {ora pspol ped. eduction egiter- report ‘hing the nzanaour a (ay aac or cach rps caring tenant Araport ing the amount of rm poy, (Sedatons dnp fore ‘Siren period snd he yareo™ Siena tor each emery.Direct deposit is one way to improve the efficiency and reduce the cost of payroll process- ing. Employees who are paid by direct deposit generally receive a copy of the paycheck indica ‘ng the amount deposited along with an earings statement. The payroll system must generate & series of payroll depositfiles, ne for each bank through which payroll deposits are made. Each file contains a reeod foreach employce whose accounts maintained ata particular bank. Each recor includes the employee's name, Socal Security number, hank account number and net pay amount. These files are sent cleetroncally to each participating bank. The fund ae then elec- ‘wonically transferred from the employer's bank account to the employee's account. Diret depenit thus eliminates the need forthe cashier to sign individual payroll checks. The cashier does, how ver, sill have to authorize the release of funds from the onzanization's regular checking account. Direct deposit provides savings t0 employers by eliminating the cost of purchasing. pro- cessing, and distributing paper checks. It also reduces bank fees and postage expenses. Conse- ‘quently, most companies now offer their employees the option of direct deposit payment and encourage them to elect this form of payment. Some employees, however, may not have: bank accounts and, therefore, cannot elect diet deposit. Organizations can stl eliminate the need tw issue paper payroll checks by paying such employees with payroll debit cards Payroll debit cards are stored value cards that cannot be overdrawn, but they can be replenished with ad- ditional funds each payday. Employees can use payroll debit cards to make purchases and can withdraw available cash at ATM machines. THREATS AND CONTROLS As Table 15-1 indicates, another major threat in the payroll pro- cess is the theft of paychecks or the issuance of paychecks to fictitious o terminated employ- ces. This can result in increased expenses and the loss of cash. Applying to payroll the controls related to other cash disbursements, discussed in (Chapter 13, can mitigate this threat. Specifically: ‘© Access to blank payroll checks and tothe check signature machine should be restricted (control 10.1). Similarly, ability to authorize EFT transactions should be restricted (con- trol 102) and controlled through the use of strong multifactor authentication. ‘© All payroll checks should be sequentially renumbered and periodically accounted for (con- ‘wot 10:3)-IF payroll is made via direct deposi, all EFT transactions should be reviewed. ‘© The cashier should sign all payroll checks only when supported by proper documentation (the payroll register and disbursement voucher—control 10.4). In addition, payroll checks should not be drawn on the organization's regular bank ac- count, Instead, for control purposes, a separate payroll bank account should be used (control 10.5). Doing so limits the company’s loss exposure to the amount of cash in the separate payroll account. I also makes it easier to reconcile payroll and to detect paycheck forgery. Like petty cash, the payroll account should be operated as an imprest fund. Each payday, the amount of the check written (or EFT funds transfer) to replenish the payroll checking ac- count should equal the amount of net pay for that period. Thus, when al paychecks have been cashed, the payroll account should have a zero balance. A separate payroll checking account sasier to spot any fraudulent checks when the account is recanciled. As with sbursements discussed in Chapter 13, segregation of duties (control 10.6) is another important control. Thus, accounts payable has responsibility for recording payroll but the cashier is responsible for distributing paychecks. Is also important thatthe person who distributes paychecks or authorizes EFT transactions for direet deposit has no other HRM- related duties. To see why this Segregation of duties is so important, assume that the person responsible for hiring and fring employees also distributes paychecks. This combination of duties could enable that person to corwenienly forget to report an employee's termination and subsequently keep that employee's future paychecks. In addition, the payroll bank account should be reconciled by someone who performs no other payroll or HRM duties. Use of multifactor authentication and other controls to restrict access to the payroll mas- ter database (control 10.7) reduces the risk of creating checks for nonexistent employees. In addition, the person responsible for distributing paychecks should be required to positively identify each person picking up a paycheck (control 10.8). Further control is provided by hhaving the internal audit department periodically observe, ona surprise basis, the paycheck distribution process to verify that all paychecks are picked up by valid employees.CHAPTER 15 THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE 479 Special procedures should be wed tohandle unclimed paychecks because they indicate the possiblity ofa problem, such asa nonexistent or terminated employee. Unclaimed pay- ‘checks should be returned tothe treasurers office for promt redeposit (control 10.9) They seuld then be raced back to time records and matchel against dhe employee payroll mastcr fileto verily tha! they are indsed legitimate. CALCULATE AND DISBURSE EMPLOYER-PAID BENEFITS, TAXES, AND VOLUNTARY EMPLOYEE DEDUCTIONS ‘The final payroll activity ist calculate and remit payroll axes and employee benefits tothe appropriate government or otter enity (circle 5.0 in Figure 15-4). PROCESS Employers must pay Social Security taxes in addition to the amouats withheld from employee paychecks. Federal and state laws also zequire employers t conte «spec ified percentage of each employee's gross pay, up to a maximum annual mit, o federal and stale unemployment compensation insuraace funds. In adition to mandatory tax related disbursements, employers are sponsible for ensur. ing that ether funds deducted from employee paychecks are correctly calcilated and remitted ina timely manner tothe appropriate entity. Such deduction include cour-ordered payments for alimony, child supporto: bankruptcy. Many employers also contribute some or all ofthe amounts © pay for ther employees’ health, disability, and life insurance premiums as well as ‘making matching contbutions to retirement plas. ‘Many employers also offer their employees flexible benefits plans. under which each ‘employee chooses some minimum coverage in medical insurance, retirement plans, and chari- table contributions. Flexible benefit plans place increased demands on a company's HRM/ payroll system. For example, the HRM suff of a large company wit thousands of employees ‘can spend a considerable amount of time just responding to 401(k) plan inquires. Moreover, ‘employees want to be able to make changes in their investment decisions on a wey basis Organizations can satisfy employee demands for suck services without increasing costs by providing access to HRM/payrol information on the company's intranet. THREATS AND CONTROLS The primary threats inthis activity are failing to make the nec essary remittances, untimely remittances, or ecors ia those remittances (hreats 11-13 in ‘Table 15-1). These problems can result in fines from government agencies and employee com- plaints athe errors adversely affect their retirement or other bene, Circular E, Employer's Tax Guide, published by the IRS, provides detailed instretions bout an employers obligadons for withholding and remiting payroll wxcs and for fling ‘varous reports. To mitigate the threats of omitted or ustimely emitiances the information in Circular E should be used to configure the payroll system to automatically disburse the Funds ‘when payroll is processed (controls 11-1 and 12.1). Processing integrity controls (control 15.0, suchas erss-footing checks and batch totals, minimize the nsk of imeceuracies. Regular sujervisary review (contol 13.2) of payill ports provides a detetive conto. la addition, providing employees with earnings statements (control 13.3) enables them to timely detect land repor any problems. Outsourcing Options: Payroll Service Bureaus and Professional Employer Organizations In an effet to reduce costs, many erganizations ae outsourcing ther payroll and HRM func tions to payroll service bureaus and professional empioyer crganizations. A payroll service bureau maintain the payroll master daa for cach of itsclient and process payroll fother. A professional employer organization (PEO) not orly processes payrall but also provides HRM services sich as employee benefit design and administration. Because they provide & nmarower range of services, puyrol Service Bureaus are generally les expensive than PEOS. feie bee ple Aplin Chant theron aya seve burns Sgeumuon nara he ‘ovallmane a terech ch (Ethene ad pears tet Spec ocr protssionlamplo organ.[PART lI ACCOUNTING INFORMATION SYSTEMS APPLICATIONS, ‘When organizations ousource payroll processiag, they send sime and attendance data along with information about perscinel changes io the payroll service bureau or PEO athe ‘end of each pay period, The payroll service bureas or PEO then uses that data to prepare ex ployee paychecks earnings statements. and a payroll ster The payroll procenting tervice also periodically rodces employee W-2 forms and cher tax-reatel reports. Payroll service kureaus and PEOs are especially atractve to small and midsized busi- nesses for the following reasons (© Reduced coss. Payroll service bureaus an PEOs beaefit from the ecoaortes of sale associated with preparing paychecks fora large mamber of companies. They can charge ‘ec thal are typically less than the cos of doing payroll n-touse. A payroll service ‘bureau or PEO abo saves money by elimiaatag fhe ued wo develop and mainain the ‘exportoerequied to comply with the constadly changing tx lw. ‘= Witerrange of benefits PEOs pol the coss of sminivering benefits acre all their cients Consequently, a PEO erubles smaller companiesto afer the same wide inge ‘of benefits that large companies typically provide «© Freeing up of computer rewources, A payroll service bureau of PED eliminates one or ‘more ac eunuing informatie system (ALS) applications (payroll ana bens manage- ‘ment) The freed up computing resources can then be used to improve service ather fens sch ae sales err ety. ‘As the basis for sompetdive advange increasingly hinges on employers kia and keel ‘age. the effective and efficient management af the payroll snd HRM functions becomes increasingly important. Outsourcing may provide a way to reduce costs. However, compa nics need to be sure to cuefally mentor serve quality lo ensure thatthe outwourced system eflectvely integrates HRM and payroll dala in a manner thi supports effective mangement ‘of employees. Summary and Case Conclusion The HEMipayroll cycle information system consists of two lad, but separate, subsystems IRM snd payroll, The HRM system records and processes data about the activities of ocr ing. hiring taining. assigning. evauaing. and discharging employees. The payroll system. records and processes data used to pay employees frtheir services. "The HRM/payroll sytem must be dest to comply with « myriad of goneement regu lations related to both taxes and employment practices. In addition, adequate controls must {exist to prevent (1) ovespaying employees dueto invalid (ovesstuted) ime and attendance datz tnd (2)disbursing paychecks to Fittoes employees Thore two threats canbe best minimized by proper seregition of duties specifically by having the following functions pecfomed by ifleren individuals: 1L-Atthinising and wikia Chinges tthe yl aati le for sich event things, ings, and pay raises 2. Recorling and verifying time worked by employees 3. Prepasing paychecks 4 Disuibatiag paycocks , Revonsiing the poy bank aocount Altuough the HRM and payllsysems have traditionally been separated, many companies, jnchiding AOE, ae tying to integrate them to manage their human resources more elfstvely tnd to provide emplayecs with hetier henfits an service. Elizabeth Venko and Ann Brandt showed Peter Wu how AOE's new ERP system would facilitate integrating these two func- lions. Peter vas impressed with how easily he could retrieve data about employee skills and attendance at training classes from tis database. He agreed that this would satisfy the needs ‘of depertment managers for quick and easy acessto such information, Peter also realized that the HRM staff could sinilery nec this query capability to provide a quick respense to ex ployee requests for formation about her bene, deductions, orretrement plane He was‘even more impressed when Elizabeth and Ann explained that snother recently implemented felon feature woul alos allow caployecs wr via divest Uauges in tie etiam avis Sllseations, medical plan choices, and other henefit pions. Peter realized tha resing the HRM staf from these routize clerical asks would allow them to devote more time to helping him organize the informatica needed to make stratepi decision, suchas planning fer fete workforce needs, career counseling, employse development, and negotiations with service providers o improve benef, Elizabeth explained that payroll procesingitelf could continu to be pesformscdin batch sade, becetts there ie no need for Grine processing (employees would confions tobe paid ‘only a periodic intervals). However, she Wants to require employees to either siga up for “direct deposit of ther paychecks o reeive payroll debit cards thereby eliminating the need to issue paychecks, An access contol matix would be created io rainain adequate segege- toa of duties in the new system and protect the integrity of the HRM/payrll database, Fer ‘example, only HRMemployec: would ad new employees, and only Srom terminals located fhe HRM department Linda Spurgeon was pleased with Elizabeth snd Ann's work on improving the company’s HRM/payroll systems. She indicated that their aex task would be to work with Stephanie ‘Cromwell, AOE"s chief financlosicer,w improve the nancial closing process and tobelp ‘develop reports that would provide beter insight into AOE's performance.