Auditing for Continuous
Process Improvements
By Raeann Hofkin, CPP
PA Statewide Conference
September 2013
Raeann Hofkin, CPP
Biography:
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American Payroll Association
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2012 Special Recognition Award Recipient
Current Vice President Cordova First National Chapter
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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
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Payroll management concentrated in pharmaceuticals, healthcare,
manufacturing, customer service call centers, and the academia
industries both domestic and international.
Agenda
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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
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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;
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Automation
Elimination
General Observations
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The overall pay structures are complex which
contributes to inefficiencies
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In calculating payroll and,
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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
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Significant inefficiencies
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Multiple errors require much labor to
correct
Delay in relevant information
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Non integration
Complex Payroll Structure
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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
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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
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System limitations
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Lack of technology
Old technology
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Misuse of technology
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Not using all features
Not aware of all features
Lack of formal training
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Not in the budget to upgrade
Not available
Not in the budget
Technical manual
Self inflicted limitations
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Lack of integration between two systems
Manual workarounds/input
Lack of Payroll Process
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Staff limitations
Missing information
Convoluted pay structure
Lack of formal training
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Self taught
Not available
Not in the budget
Manual to technical
Not supported by vendor
Attitude
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“Always been done this way”
“Things will never change”
Potential Roadblocks
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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”
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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
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Communication/terminology
Perception is reality
Pull out handout – Exercise time
Challenges
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Unions
Upper Management
Lack of Budget
Human capital
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Lack of resources
Technology (or lack of it)
Employee push back
Lack of motivated employees
Ongoing Training
Ongoing maintenance
Solutions
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Prepare a list general goals for each
category
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Input
Output
Reports
What do you do well?
What needs improvement?
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Start here
Sample Goals
High Level – each company will need to create a customized list….
General Goals
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Analyze activities, processes, and procedures
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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
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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
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All payroll processes
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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
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Process for input
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Manual
Automated
Audit input
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Garbage in, garbage out, catch errors
before processing payroll
Rejected errors – find out why
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Get to the root of the problem
Output
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Error rates
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Multiple sources
Corrections may involve many people in
various departments
Get to the root of the problem
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Ultimately payroll/HR is responsible to fix errors
Investigate adjustments/exceptions
Reconciliations
Reports Provided
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Who?
What?
Why?
Addressing Root Cause
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Hold employees accountable for deadlines and lack of
attention.
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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
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Determine underlying mission of Payroll.
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Reduce the complexity of the pay structure.
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May need to negotiate with unions
Improve processes to
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Core and non-core activities
Reduces error rate, which
Reduces number of employee inquiries
Automate where possible
Formal Training on current systems
Eliminate what’s not necessary
Specific Recommendations
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Communicate any new or updated company policies.
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Standardization of guidelines and policies for all
departments, locations, divisions, regions.
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Website, emails, newsletters, and training
New hires, terms, adjustments, deadlines, timesheets, etc.
Develop/Enhance training
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New hires, approvers, managers, policy enforcers
Summary of
Recommendations
Should be customized to your company
Action Items
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Enhance workflow between departments
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Hold employees accountable
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Reduce duplicate entries
Time and attendance entries
Deadlines
Create better documentation for key
functions
Identify most troublesome error/issue for
YOUR payroll.
Action Items – Cont’d
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Communicate project purpose and value
throughout the department.
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Ensure buy in
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Develop/Determine your budget
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Zero? – low lying fruit
Unlimited – possible outside consultant
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Direct reports
Senior Management
Develop request for proposal
Gather all forms used in payroll processes
Action Items – Cont’d
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Develop Strategy to integrate payroll,
benefits, HR, and time and attendance.
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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
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Develop method of tracking number of exceptions,
adjustments, and errors
Set realistic improvement goals
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Establish grading scale to determine performance by
location.
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Friendly competition
Establish consequences for bad performers
Carry through with consequences
Implement procedures to instill proactive initiative
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Get employees involved
Improve Error Rate – Cont’d
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Create proactive troubleshooting
communication that documents the
causes for common errors.
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Allow employees to determine cause and
resolution of errors
Document Current Procedures
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Take stock of current processes
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You need to know where you are
Visualize what you want the processes
to look like
Map a plan to get there
Current Process
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Payroll Process
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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
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Taxes
Garnishments
Retirement
Current Processes – Cont’d
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Benefits
Taxes
General Ledger
Month End
Quarter End
Year End
Training
Mapping Process
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Determine the scope
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Identify current processes
Visualize success
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Beware of scope creep
Task plan
What does it look like to you?
What does it look like to your boss?
Start asking probing question….
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Break it down into categories, tasks, procedures
Analyze Off Cycle Checks
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Labor intensive & Time consuming
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Research & Analyze
Calculate & review
Processing correction
Track down check signer
What is the root cause?
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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
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Payroll and HR work to address delays
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Processing terminations
Missed deadlines
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New hire process
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Holding employees accountable
Realistic deadlines
Can paperwork be completed prior to start date?
Does the current processes conflict with payroll
processing policies or compliance?
Communication!!!
Probing Questions Overpayments
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What is the procedure to process overpayments?
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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?
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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?
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Is the perception and enforcement correct?
Does the repayment cross over years?
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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?
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What is the process for overpayment notifications that go unanswered?
Probing Questions
Payroll Processes
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Independent Contractors
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Don’t assume there aren’t any
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Correctly categorized?
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Think state and local tax nightmare
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How is their OT computed?
Exempt Employees
Any home agents?
Do you have hourly employees with more than one
rate?
Are all exception payments authorized?
Employees claiming exempt?
Pay frequencies
Probing Questions
Payroll Audit Process
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What are your audit procedures?
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Who performs the audits?
Does everyone interpret and perform the same
process?
Does the employee understand why the audit is
performed “this way”?
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Is there a better way to perform the audits?
Are the particular audits performed at the correct time?
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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
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Do you compare the final payroll to a
previous payroll (sanity check).
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Are the numbers way off or pretty close?
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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?
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Ensuring person making change has the
authority to make the changes.
Are the changes correct?
Probing Questions
Payroll Reconciliations
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What are your reconciliations procedures?
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Who performs the reconciliations?
Does everyone interpret and perform the same
process?
Does the employee understand why the
reconciliation is performed “this way”?
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Is there a better way to do it?
What is the timing of the reconciliations?
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Per pay, monthly, quarterly, yearly, some other
timeframe?
Probing Questions - PTO
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What is the process to request time off?
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Does everyone interpret and perform the
same process?
Does the employee understand the
process?
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Is there a better way to do it?
Probing Questions - Reports
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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
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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
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How are benefits deductions set up?
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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?
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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 Questions
Time and Attendance
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Do you allow rounding?
When does the pay period start? End?
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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 Questions
Time and Attendance – cont’d
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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
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What is your process for physical payouts?
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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”?
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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?
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Yearly?
Direct Deposit audit?
Probing Questions - Unions
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What is in the contract?
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Who is in the union?
What is the contract period?
Does everyone interpret the contract the same?
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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
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What is your process for recording the cost of
healthcare on W2’s?
What is your process for identifying
adjustments?
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Relocation
Auto Allowance
ESPP
Imputed Income – GTL
Stock Options
Probing Questions
First Pay of the Year
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How are deductions set up?
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Do you have a process to notify employees
claiming exempt on their W4?
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Roll over or reset?
Goals/limits
New form every Feb 15th
Process for updating tax requirements?
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Updating IRS tax levy amounts
Probing Questions Miscellaneous
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What other jobs/positions influence your
position?
What policies are posted on the intranet?
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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?
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How SHOULD they work?
Are they working correctly?
Probing Questions Miscellaneous
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What earnings go into overtime?
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Just the premium portion?
What are the other special earnings codes?
What is the procedure for rate increases?
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Mass change once a year
Anniversary dates
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Beginning of pay period for retros or exact date?
Uploaded or manual entry?
Is there a payroll check list?
Check List – see handouts
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Payroll Processing Check List
Payroll Audit Check List
Before Finalizing Payroll
Check List
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Employee receiving OT is eligible
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Employees do not exceed their PTO balances
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Within company policy
Are all employees receiving a pay?
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Authorized
Based on pay grade level
If not, why?
Is anyone receiving more than one check?
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If so, why?
Before Finalizing Payroll
Check List – Cont’d
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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
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Compare hours paid with hours pull
from time and attendance.
Review any deductions being refunded.
Compare W2 management report each
pay.
Ongoing Maintenance
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Determine if the implemented improvements
were successful.
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New reports needed?
Different workflows
Process changes
Keep Payroll Check List up to date
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Add any new audits
Keep a log of unusual issues and what was
done to ensure it doesn’t happen again.
Any Questions?
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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?