The most common weaknesses in payroll internal control systems can be put into four categories: Risks, impact, mitigation and monitoring. Each of these categories has a number of weaknesses that need to be considered when organizing a payroll process. Knowing how to address these problems can help reduce the chances of loss over time.
• Risks - Risks within the payroll internal control system include a number of financial reporting problems. These problems can be recognized as understatements of the payroll and employee benefit related reliabilities or as misclassifications of labor costs. Operational inefficiency may occur if there are phantom or terminated employees still existing on the payroll. Any violations of the federal and state wage and hour laws can compromise regulatory compliance.
• Impact - The problems of financial, reputation and legal impacts on payroll systems will vary depending on their size, timing and nature. In order to address these impacts properly it is necessary to really understand them. Financial reporting errors may result in poor management decisions that, in turn, can negatively affect stakeholders and investors. Again, payments to phantom employees can have a negative impact on liquidity and increase tax burdens.
• Mitigation - When implementing payroll control systems, businesses need to be very careful that the benefits do not outweigh the cost. Classification problems can be identified by reviewing employee labor classifications between direct and indirect costs, while appropriate management and supervisor training can help increase regulatory compliance. If segregation of duties is not cost effective, companies may need to carry out a higher level management review where they consider the approval of pay rates, job changes and terminations.
• Monitoring - without monitoring the design and effectiveness of payroll controls over time, it is possible for any internal control system to become ineffective. This is because of the changes that occur in the personnel and business process over time through inappropriate management.
• Risks - Risks within the payroll internal control system include a number of financial reporting problems. These problems can be recognized as understatements of the payroll and employee benefit related reliabilities or as misclassifications of labor costs. Operational inefficiency may occur if there are phantom or terminated employees still existing on the payroll. Any violations of the federal and state wage and hour laws can compromise regulatory compliance.
• Impact - The problems of financial, reputation and legal impacts on payroll systems will vary depending on their size, timing and nature. In order to address these impacts properly it is necessary to really understand them. Financial reporting errors may result in poor management decisions that, in turn, can negatively affect stakeholders and investors. Again, payments to phantom employees can have a negative impact on liquidity and increase tax burdens.
• Mitigation - When implementing payroll control systems, businesses need to be very careful that the benefits do not outweigh the cost. Classification problems can be identified by reviewing employee labor classifications between direct and indirect costs, while appropriate management and supervisor training can help increase regulatory compliance. If segregation of duties is not cost effective, companies may need to carry out a higher level management review where they consider the approval of pay rates, job changes and terminations.
• Monitoring - without monitoring the design and effectiveness of payroll controls over time, it is possible for any internal control system to become ineffective. This is because of the changes that occur in the personnel and business process over time through inappropriate management.
