More Than Hours and Rates — Internal Controls over Payroll

When most finance managers think about internal controls over payroll, they are most worried about fraud — for example, paying for unearned overtime. However, that’s not the only risk: ensuring employees are paid accurately is just as important. And as important as preventing mistakes is to you, it’s even more important to your employees. Remember, what seems like a small error to you is a big deal to the person whose check it is.

Payroll controls fall into three broad categories: validating inputs, verifying pay calculations and segregating duties. Do you have all of these controls in place at your company?

Validating inputs

Employees — both salaried and hourly — have a variety of different contract terms that affect their pay calculations. Payroll must include processes for confirming variables such as:

  • Contract or wage rate
  • Hours worked — ensuring that supervisors sign off on time and overtime for hourly employees
  • Leave time — confirming that paid leave was approved
  • Deductions and withholding amounts, including taxes, insurance, garnishments for child support or other debts, and paid or unpaid leave

Verifying pay calculations

When payroll staff use verified information from those inputs, there must also be procedures in place to confirm that pay to each employee is correct. Payroll managers must put controls in place to confirm that:

  • Pay calculations, including tax and withholdings, are accurate and appropriately reviewed by someone other than the preparer
  • Accrual of leave time is correct
  • Costs have been allocated properly by function, particularly when part of an employee’s salary is paid by a grant program
  • Amounts from period to period are fairly consistent and any variations have been explained

Segregating duties

Just as every accounting function does, payroll must segregate key duties to provide a layer of protection against errors and fraud. For example:

  • The person entering pay rates, stipends and withholding information into the payroll system should not be the same person who performs the payroll calculation
  • The person who verifies pay rates and hours worked should not be the same person who signs the checks
  • The recording of payments should be segregated from the disbursement of funds and reconciliation of the payroll bank account, just as they are in purchasing

The last word

When an employee leaves, final details must be wrapped up:

  • Confirmation that the final paycheck is accurate and contains all final deductions or credits
  • Processes to remove the employee from the payroll system
  • Coordination with HR and the employee’s supervisor to collect company equipment (technology, uniforms, etc.), remove the employee from health insurance, and deactivate IT access

Verifying timesheets is only the most obvious internal control over payroll. To protect your company, make sure you also have a variety of processes in place to confirm inputs and outputs, check calculations and separate key responsibilities.

Contact Weaver to find out how we can help you improve your payroll processes and overall financial operations.