Controls for Payroll (#14)

In this episode, we discuss the controls associated with payroll. This is an area in which fraud is more likely to occur because of such activities as buddy punching and the use of ghost employees, so controls are unusually necessary. Key points made in the podcast are noted within the following general classifications:

Manual system controls:

  • Verify that all time cards have been received from employees by matching them to the employee list

  • Verify all hours worked, and especially overtime, with supervisors

  • Gain proper approval for all pay rate changes

  • Have a second person verify all payroll calculations

  • Have recipients sign for their paychecks, to ensure that payments are not going to ghost employees

  • Compare cashed paychecks to the list of distributed checks, to see if additional checks were issued

  • Compare the addresses on employee checks, to see if more than one check is going to the same address

  • Look for double endorsements on checks, which are an indicator of ghost employee arrangements

Cash payment controls:

  • Have recipients sign for the amount of cash issued to them

  • Use a bill and coin requisition form, with approvals, to request the cash to be used for payments to employees

Computerized system controls:

  • Use a smart time clock to eliminate the need for manual approvals

  • Have supervisors manually override the smart clock to allow overtime selectively

  • Install biometric clocks to eliminate buddy punching

  • Install a surveillance camera over the time clock to foil buddy punchers

  • Review the payroll register for errors

  • Use variance reports to detect incorrect payments

  • Review self-service entries by employees and managers for errors

  • Install limit checks on self-service screens to control the date entry process

  • Email all payroll changes made back to the people requesting changes, to ensure that the changes match their intentions

  • Install extra controls over direct deposit change transactions

  • Do not use deposit slips for direct deposit information (use a cancelled check instead)

  • Look for duplicate pay-to bank accounts, which can indicate ghost employee transactions

  • Limit access to the employee master file, and keep a log of changes to it

  • Compare the company phone list to the payroll register, to see if anyone was excluded from a payroll, or if ghost employee payments are being made

Related Courses

Accounting Controls Guidebook
How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management