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Auditing for Continuous Process Improvements By Raeann Hofkin, CPP PA Statewide Conference September 2013 Auditing for Continuous Process Improvements By Raeann Hofkin, CPP PA Statewide Conference September 2013

Raeann Hofkin, CPP Biography: n American Payroll Association n n 2012 Special Recognition Award Raeann Hofkin, CPP Biography: n American Payroll Association n n 2012 Special Recognition Award Recipient Current Vice President Cordova First National Chapter n n n n n 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 n Payroll management concentrated in pharmaceuticals, healthcare, manufacturing, customer service call centers, and the academia industries both domestic and international.

Agenda n n n Don’t believe everything you hear Not hearing anything, doesn’t mean Agenda n n n 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 n n Ensure compliance with company policies and procedures. Ensure enforcement of Primary Purpose n n 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; n n Automation Elimination

General Observations n The overall pay structures are complex which contributes to inefficiencies • General Observations n The overall pay structures are complex which contributes to inefficiencies • • n n In calculating payroll and, 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 n Significant inefficiencies n n Multiple errors require much labor to correct Discussion Points n Significant inefficiencies n n Multiple errors require much labor to correct Delay in relevant information n Non integration

Complex Payroll Structure n n n n Types of employees Payment Schedules Amount of Complex Payroll Structure n n n n 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 n n n n Reduction in errors Decrease in time Benefits of Reducing Complexity n n n n 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 n System limitations n n Lack of technology Old technology n n Technological Limitations n System limitations n n Lack of technology Old technology n n Misuse of technology n n n Not using all features Not aware of all features Lack of formal training n n Not in the budget to upgrade Not available Not in the budget Technical manual Self inflicted limitations n n Lack of integration between two systems Manual workarounds/input

Lack of Payroll Process n n Staff limitations Missing information Convoluted pay structure Lack Lack of Payroll Process n n Staff limitations Missing information Convoluted pay structure Lack of formal training n n n Self taught Not available Not in the budget Manual to technical Not supported by vendor Attitude n n “Always been done this way” “Things will never change”

Potential Roadblocks n n n Requires human and financial resources Time and effort investment Potential Roadblocks n n n 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” n n n 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 n Communication/terminology Perception is reality Pull out handout – Exercise time Communication n Communication/terminology Perception is reality Pull out handout – Exercise time

Challenges n n Unions Upper Management Lack of Budget Human capital n n n Challenges n n Unions Upper Management Lack of Budget Human capital n n n Lack of resources Technology (or lack of it) Employee push back Lack of motivated employees Ongoing Training Ongoing maintenance

Solutions n Prepare a list general goals for each category n n n Input Solutions n Prepare a list general goals for each category n n n Input Output Reports What do you do well? What needs improvement? n Start here

Sample Goals High Level – each company will need to create a customized list…. Sample Goals High Level – each company will need to create a customized list….

General Goals n Analyze activities, processes, and procedures n n n n Analyze the General Goals n Analyze activities, processes, and procedures n n n n 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 n n n Compliance Ensure accuracy of paychecks Eliminate off cycle checks, Specific Goals n n n 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 n All payroll processes n n n • • • n Input Comprehensive Review n All payroll processes n n n • • • n 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 n Process for input n n n Manual Automated Audit input n n Input n Process for input n n n Manual Automated Audit input n n Garbage in, garbage out, catch errors before processing payroll Rejected errors – find out why n Get to the root of the problem

Output n Error rates n n n Multiple sources Corrections may involve many people Output n Error rates n n n Multiple sources Corrections may involve many people in various departments Get to the root of the problem n n n Ultimately payroll/HR is responsible to fix errors Investigate adjustments/exceptions Reconciliations

Reports Provided n n n Who? What? Why? Reports Provided n n n Who? What? Why?

Addressing Root Cause n Hold employees accountable for deadlines and lack of attention. n Addressing Root Cause n Hold employees accountable for deadlines and lack of attention. n n n 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 n Determine underlying mission of Payroll. n n Reduce the complexity of the Recommendations n Determine underlying mission of Payroll. n n Reduce the complexity of the pay structure. n n n May need to negotiate with unions Improve processes to n n 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 n Communicate any new or updated company policies. n n Standardization of Specific Recommendations n Communicate any new or updated company policies. n n Standardization of guidelines and policies for all departments, locations, divisions, regions. n n Website, emails, newsletters, and training New hires, terms, adjustments, deadlines, timesheets, etc. Develop/Enhance training n New hires, approvers, managers, policy enforcers

Summary of Recommendations Should be customized to your company Summary of Recommendations Should be customized to your company

Action Items n Enhance workflow between departments n n Hold employees accountable n n Action Items n Enhance workflow between departments n n Hold employees accountable n n 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 n Communicate project purpose and value throughout the department. n Action Items – Cont’d n Communicate project purpose and value throughout the department. n Ensure buy in n Develop/Determine your budget n n Zero? – low lying fruit Unlimited – possible outside consultant n n Direct reports Senior Management Develop request for proposal Gather all forms used in payroll processes

Action Items – Cont’d n Develop Strategy to integrate payroll, benefits, HR, and time Action Items – Cont’d n Develop Strategy to integrate payroll, benefits, HR, and time and attendance. n n 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 q q Develop method of tracking number of exceptions, adjustments, and Improve Error rate q q Develop method of tracking number of exceptions, adjustments, and errors Set realistic improvement goals n Establish grading scale to determine performance by location. n n Friendly competition Establish consequences for bad performers Carry through with consequences Implement procedures to instill proactive initiative n Get employees involved

Improve Error Rate – Cont’d n Create proactive troubleshooting communication that documents the causes Improve Error Rate – Cont’d n Create proactive troubleshooting communication that documents the causes for common errors. n Allow employees to determine cause and resolution of errors

Document Current Procedures n Take stock of current processes n n n You need Document Current Procedures n Take stock of current processes n n n You need to know where you are Visualize what you want the processes to look like Map a plan to get there

Current Process n Payroll Process n n n n New Hire/Term/changes Monitoring time and Current Process n Payroll Process n n n n 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 n n n Taxes Garnishments Retirement

Current Processes – Cont’d n n n n Benefits Taxes General Ledger Month End Current Processes – Cont’d n n n n Benefits Taxes General Ledger Month End Quarter End Year End Training

Mapping Process n Determine the scope n n Identify current processes Visualize success n Mapping Process n Determine the scope n n Identify current processes Visualize success n n n 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…. n Break it down into categories, tasks, procedures

Analyze Off Cycle Checks n Labor intensive & Time consuming n n n Research Analyze Off Cycle Checks n Labor intensive & Time consuming n n n Research & Analyze Calculate & review Processing correction Track down check signer What is the root cause? n n n 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 n Payroll and HR work to Addressing Root Cause – of Off Cycle Checks n Payroll and HR work to address delays n n Processing terminations Missed deadlines n n n New hire process n n n 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 n What is the procedure to process overpayments? n n Probing Questions - Overpayments n What is the procedure to process overpayments? n n n n 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? n 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? n n Is the perception and enforcement correct? Does the repayment cross over years? n n n What is the process to adjust W 2? Is there a process in place if overpayment can not be repaid? Is there a process to send the employee to collections? n What is the process for overpayment notifications that go unanswered?

Probing Questions Payroll Processes n Independent Contractors n n n Think state and local Probing Questions Payroll Processes n Independent Contractors n n n Think state and local tax nightmare n n Correctly categorized? n n Don’t assume there aren’t any 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 n What are your audit procedures? n n n Probing Questions Payroll Audit Process n What are your audit procedures? n n n Who performs the audits? Does everyone interpret and perform the same process? Does the employee understand why the audit is performed “this way”? n n Is there a better way to perform the audits? Are the particular audits performed at the correct time? n n 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 n Do you compare the final payroll to Probing Questions – Audit Processes Cont’d n Do you compare the final payroll to a previous payroll (sanity check). n Are the numbers way off or pretty close? n n n Bonus pay would differ PTO sell back would differ 3 rd pay of the month? First pay of the year? (tax changes, unemployment taxes) Who reviews audit trails? n n Ensuring person making change has the authority to make the changes. Are the changes correct?

Probing Questions Payroll Reconciliations n What are your reconciliations procedures? n n n Who Probing Questions Payroll Reconciliations n What are your reconciliations procedures? n n n Who performs the reconciliations? Does everyone interpret and perform the same process? Does the employee understand why the reconciliation is performed “this way”? n n Is there a better way to do it? What is the timing of the reconciliations? n Per pay, monthly, quarterly, yearly, some other timeframe?

Probing Questions - PTO n What is the process to request time off? n Probing Questions - PTO n What is the process to request time off? n n Does everyone interpret and perform the same process? Does the employee understand the process? n Is there a better way to do it?

Probing Questions - Reports n n n What reports are you providing to management? Probing Questions - Reports n n n 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 n n n What is your process for ensuring data Probing Questions Data Privacy n n n 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 n How are benefits deductions set up? n n n Probing Questions - Benefits n How are benefits deductions set up? n n n 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? n n n 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 n n Do you allow rounding? When does the Probing Questions Time and Attendance n n Do you allow rounding? When does the pay period start? End? n n n 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 n n n n What are the Probing Questions Time and Attendance – cont’d n n n n 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 n What is your process for physical payouts? n Probing Questions – Physical Payouts n What is your process for physical payouts? n n n 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”? n n n 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? n n Yearly? Direct Deposit audit?

Probing Questions - Unions n What is in the contract? n n n Who Probing Questions - Unions n What is in the contract? n n n Who is in the union? What is the contract period? Does everyone interpret the contract the same? n n n n 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 n n What is your process for recording the cost Probing Questions Year End n n What is your process for recording the cost of healthcare on W 2’s? What is your process for identifying adjustments? n n n Relocation Auto Allowance ESPP Imputed Income – GTL Stock Options

Probing Questions First Pay of the Year n How are deductions set up? n Probing Questions First Pay of the Year n How are deductions set up? n n n Do you have a process to notify employees claiming exempt on their W 4? n n Roll over or reset? Goals/limits New form every Feb 15 th Process for updating tax requirements? n Updating IRS tax levy amounts

Probing Questions - Miscellaneous n n What other jobs/positions influence your position? What policies Probing Questions - Miscellaneous n n What other jobs/positions influence your position? What policies are posted on the intranet? n n n 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? n n How SHOULD they work? Are they working correctly?

Probing Questions - Miscellaneous n What earnings go into overtime? n n n Just Probing Questions - Miscellaneous n What earnings go into overtime? n n n Just the premium portion? What are the other special earnings codes? What is the procedure for rate increases? n n Mass change once a year Anniversary dates n n n Beginning of pay period for retros or exact date? Uploaded or manual entry? Is there a payroll check list?

Check List – see handouts n n Payroll Processing Check List Payroll Audit Check Check List – see handouts n n Payroll Processing Check List Payroll Audit Check List

Before Finalizing Payroll Check List n Employee receiving OT is eligible n n n Before Finalizing Payroll Check List n Employee receiving OT is eligible n n n Employees do not exceed their PTO balances n n Within company policy Are all employees receiving a pay? n n Authorized Based on pay grade level If not, why? Is anyone receiving more than one check? n If so, why?

Before Finalizing Payroll Check List – Cont’d n n n Check retirement plan limits. Before Finalizing Payroll Check List – Cont’d n n n 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 n n n Compare hours paid with Before Finalizing Payroll Check List – Cont’d n n n Compare hours paid with hours pull from time and attendance. Review any deductions being refunded. Compare W 2 management report each pay.

Ongoing Maintenance n Determine if the implemented improvements were successful. n n New reports Ongoing Maintenance n Determine if the implemented improvements were successful. n n New reports needed? Different workflows Process changes Keep Payroll Check List up to date n n Add any new audits Keep a log of unusual issues and what was done to ensure it doesn’t happen again.

Any Questions? n n n What stories do you have to share? What did Any Questions? n n n 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?