www.bdo.ca
PrivateCo Series: Talent
HUMAN RESOURCES AND
PAYROLL ACCOUNTABILITY
Business issues impacting private companies
What processes does your Human Resources department
use to make sure they get all relevant information
collated and keep it right? The repercussions of error
can impact regulatory compliance, financial reporting,
employee trust and dissatisfaction, as well as increase
the propensity and likelihood for fraud. Well thought out
processes and controls, coordinated with Finance, can
mitigate these risks.
The payroll process in most organizations is
much more than just preparing pay cheques. It
represents a true supply chain of processes and
the movement of critical information, which
needs to be managed closely for secure, accurate
and timely processing. The life cycle of these
processes includes:
•
Hiring employees and creating personal
profiles
•
Recording time worked and incentive
compensation eligibility
•
Calculating payments, disbursement of
payroll (including income continuance)
•
Regulatory reporting and processing
terminations
These processes typically will be owned and
carried out by both HR and Finance department
functions in an organization. The processes are
complex, require the intervention of many, and
need to be accurately executed. Automation of
processes usually provides the basis for more
accurate and secure processing but, at the same
time, introduces other processing risks that
need to be managed. The repercussions of error
can impact regulatory compliance, financial
reporting, employee trust and dissatisfaction,
as well as the propensity for fraud. How can an
organization manage its payroll risks in a way
that will minimize its exposures to error?
Regardless of size, an organization needs to
ensure there is close interaction and effective
coordination of effort between HR and
Finance. The root cause for many ineffective
payroll environments is the lack of clarity of
ownership and accountability. Where does the
responsibility of Human Resources end and
where does it begin for Finance? The results
of how an organization decides this may vary
based on size, systems complexities (HRIS
interfaces with payroll systems) and outsourcing
situations. The principles of defining ownership
and accountability must be in place. There are
three key steps that should be considered when
developing a system of internal control over the
payroll process.
Ownership of your personnel information
The first important question an organization
needs to ask is who owns the personnel data?
In almost all organizations the answer will be
HR. Assuming this, it makes sense to let HR take
ownership and set the ground rules of how the
information needs to flow in order for the payroll
system to work as it needs to.
A common and very effective way to outline
ownership and accountabilities is through a
service level agreement (SLA) between HR and
Finance. The SLA is intended to describe the full
supply chain of processes required for payroll, as
well as identify who does what together with the
expectations of how – parameter setting with
performance measurements.
HUMAN RESOURCES AND PAYROLL ACCOUNTABILITY
It goes to the level of detail, which will require:
•
•
•
•
•
Documented process mapping of all key processes
Definition of exceptions and approval authorities
Setting of company policy for information protection/ privacy
Documenting user access levels to the system
Setting guidelines for outsourcing, if necessary
The SLA is a very detailed document and, prior to finalization and
agreement, will require Finance involvement and input.
Processing guidelines
The supply chain can be broken down into three major areas:
•
•
•
Benefits changes (deductions for insurance, savings or taxable benefits)
Vacation entitlement
Systems access control levels
Systems generated reports can be designed to highlight all changes and
provide the means to have an independent person validate the accuracy of
these changes.
In addition to managing these, it is important that a complete validation of
the system is performed at least once a year. This exercise is similar to an
inventory count to verify balance sheet assets. HR represents a significant
expense to an organization and it is important to be able to demonstrate
and attest that only legitimate staff are being paid – that all staff exist and
can be accounted for.
1. Entry of personnel into the organization
Exit of personnel
2. Maintenance of payroll payments
It is critical to ensure personnel profiles are retired accurately and on time.
It can be a concern if pay cheques continue after someone has no longer
any entitlement to receive payment. Regular validation edits are important
to ensure only valid employees continue to be on the payroll register and
continue to be paid.
3. Exiting personnel from the organization.
Each of these includes risks and considerations for HR to mitigate.
Entry of personnel
A significant amount of paperwork is completed when a person first joins
an organization. It is important that the sources for all inputs into a person’s
profile (used for payroll) is defined and retained. HR needs to ensure that
processes include input and validation checks and balances, and that
authorization levels cannot be compromised. The set-up process is critical
to ensure proper payment.
HR should send out an inventory listing to each cost centre as a periodic and
independent validation of completeness and accuracy of the payroll register.
HR is also at risk for income continuance, in which case an employee has
been terminated with severance. Rather than a payout, the arrangements
are to continue to pay the employee for an agreed amount of time. It is
important that these situations are monitored and do not continue beyond
the agreed end date.
Maintenance of payroll payments
Compliance with regulatory requirements
Changes to personal profiles create the big challenges and the real risk
to the payroll system. HR needs to identify all change situations and
incorporate regular edits or validation processes to ensure the changes have
been executed correctly. Some of the more critical changes would include:
It is very important that HR understands the regulatory environments in
which its organization operates. This will include everything from minimum
wage and vacation rates to tax deduction remittance requirements. Each
requirement needs to be carefully overlaid onto the process maps so that
control processes can be tested to ensure compliance is in effect. The
sensitivities around identity theft and privacy of information (including the
regulatory requirements) have heightened the need for tight data security.
HR needs to be in a situation that can demonstrate how data is secured.
•
•
•
Salary
Promotion or rate changes
Incentive payouts
HUMAN RESOURCES AND PAYROLL ACCOUNTABILITY
Conclusion
HR plays a key role in ensuring the integrity of an organization’s payroll
system. Many organizations have tenured HR and Finance personnel
who have managed the payroll processes for years without issues. While
experience is important to a large degree and can be relied upon when
managing risk, in today’s environment it is not enough. Organizations
are becoming more complex, compensation structures more varied and
regulatory requirements around privacy more restrictive. It is incumbent
upon every organization to demonstrate a documented understanding of
its processes and control environment, specifically its ability to maintain an
accurate, complete and secure data base of personnel information.
Third party audits are very common. Typically, these will be performed by
the organization’s external auditors and periodically by the regulators. HR
would be well positioned to take the lead in demonstrating how its supply
chain of processes and controls operate. These must be documented and
stand the test of time – i.e. updated, current and relevant to its process
owners.
PrivateCo Series: Business Issues Impacting Private Companies
With over 90 years of experience closely working with private companies in Canada, we help our clients approach the significant challenges and
opportunities they face in a competitive and evolving marketplace. Our professionals offer accounting, taxation and advisory services to over
50,000 clients across Canada, combined with strategic advice and an emphasis on delivering excellent client service. We help organizations gain
their footing as they strive to expand into new markets, plan for the future, manage risks, develop innovations, and improve their bottom lines.
The PrivateCo Series of articles addresses the eight business issues that we see our clients face on a regular basis through the life cycle of their
businesses. To learn more about BDO and our services for private companies, please visit our website:
www.bdo.ca/private-companies
If you have any questions on the above, please speak to your usual BDO advisor.
This article in our PrivateCo Series was developed in partnership with Nick Bako of Nick Bako and Associates.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international
BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.