The payroll department is responsible for both updating the employee records and writing paychecks.

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Instructor Manual

• Introduction To Payroll And Fixed Asset Processes. The chapter addresses the acquisition and maintenance of valuable resources used in a business, namely, human resources and capital resources.  Specifically, the processes involve: (1) paying wages and salaries to employees (payroll), and (2) accounting for property, plant and equipment (fixed assets).  Payroll processes include the polices and procedures that employees follow in acquiring and maintaining human resources, capturing and maintaining employee data, paying employees for time worked, and recording the related cash and payroll-related liabilities and expenses.  Fixed asset processes include the policies and procedures related to purchasing property, capturing and maintaining relevant data about the assets, paying for the assets, and recording the related assets, depreciation, and other expenses, gains or losses.  These processes are triggered by events that tend to occur irregularly, such as the hiring or firing of an employee and the purchase or disposal of a machine.  This means that they have features of both routine and non-routine processes.
• Payroll Processes. The payroll process is initiated when employees are hired by the company.  The hiring of employees is typically considered a non-routine process.  Accordingly, members of management are required to specifically approve all employees hired by the company.  The Human Resources department is responsible for maintaining records for each job and each employee within the organization, as well as tracking job vacancies and supporting the company’s recruitment efforts.  Personal information must also be maintained, such as the employee’s address, social security number, employment history, etc.  One unique feature of the information contained in an individual personnel file is that it is accessed frequently, but changed relatively infrequently.

  Once an employee’s personnel file is complete and the term of employment has begun, routine activities take place regarding payroll processing.  A time sheet is the record of hours worked for an employee for a specific payroll period.   At the end of each pay period, employees submit completed time sheets to their departmental supervisors for approval.  Once time sheets have been approved, they are forwarded to the payroll department, where the computation is performed to determine the amount of net pay to be included on each paycheck.  A payroll register is a complete listing of salary or wage detail for all employees for a given time period.   A payroll voucher authorizes the transfer of cash from the company’s main operating account into the payroll cash account.  Before signed paychecks can be given to employees, the company must be sure that it has sufficient cash on hand to cover the total amount of the payroll.  A payroll disbursements journal is prepared to provide a listing of all paychecks written, in check number sequence, with the total supporting the amount of payroll funds transferred to the payroll bank account.  Another responsibility of the payroll department is the preparation of payroll deposits and the related tax forms.

• Controls And Risks Of Payroll Processes.
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  • Authorization Of Transactions. Departmental supervisors must be certain that all time sheets represent actual time worked by currently active employees.  Employee personnel files should contain evidence of proper authorization for various payroll amounts.  Included in the files should be approval for pay rate adjustments, hiring, promotion, and termination (authorized by management) as well as approval for all deductions (designated by individual employees).  Designated members of management should be given authority for the approval of the paychecks, noted by their signatures on the face of the check.
  • Segregation Of Duties. Payroll functions such as authorizing, timekeeping, record keeping, and custody of the paychecks should all be separated.  Authorizing new employee hiring and maintaining personnel files in HR, should be separate from the payroll time reporting and record keeping functions, performed primarily by the payroll, cash disbursements, and general ledger departments.  In addition, employees in each of these departments should not have check-signing authority and should not have access to the signed checks or cash account.  The person who distributes paychecks to employees, often referred to as a paymaster, should not have responsibility for any of the related payroll accounting functions and should not have custody of cash.
  • Adequate Records And Documents. Personnel files and the payroll register are the fundamental records in the payroll process.  There are numerous forms and reports that must be filed at designated times throughout the year with various taxing authorities and other organizations to summarize and remit amounts withheld from employees’ paychecks.  The practice of issuing paychecks on pre-numbered checks from a separate bank account is another control that helps to create clear records of the payroll transactions.
  • Security Of Assets And Documents. Access to personnel files and payroll records should be limited to designated persons.  Electronic controls and physical controls shou  statistics for business decision making ld be in place to ensure the confidentiality of payroll information.  Access to payroll cash should be limited to the authorized paycheck signers.  Blank payroll checks should be protected by the use of physical controls.  Unclaimed paychecks should not be maintained by the human resources or payroll functions.
  • Independent Checks And Reconciliations. The number of hours reported on time sheets should be reconciled to the payroll register, and time sheets may be reconciled with production reports.   The payroll register should be reconciled to the general ledger on a regular basis.  Someone separate from the payroll processing functions should reconcile the bank statement for the payroll cash account on a monthly basis.
  • Cost/Benefit Considerations. The more employees a company has and the more frequently it pays its employees, the more important it becomes to implement strong internal controls surrounding these processes.  Conditions that may warrant the need for especially strong controls include the existence of irregular pay schedules, complex withholding arrangements, frequent changes in pay rates, or a decentralized payroll function.
• IT Systems Of Payroll Processes. Even the smallest companies may find it worthwhile to enhance their payroll processing with computerized systems.  Routine payroll processing occurs at specified time intervals – on weekly, bi-weekly, or monthly pay dates.  Because of this infrequency, and the sequential nature of the payroll process, many companies find that batch processing is well-suited for payroll activities.  The timekeeper can accumulate all time sheets and enter them in the computer system in batches.  An alternative to manual batch accumulations is the use of electronic timekeeping devices, such as time clocks or badge readers.  These systems accumulate data throughout the time period and automatically calculate batch totals.  The data batches are then used to prepare paychecks and the payroll register.  With integrated systems, real-time personnel data is available, and the general ledger and production system can be automatically updated at the end of the payroll period.  The Internet can be used for employees to send relevant information to their supervisors for timely updating of time and attendance records.  In some cases, employees may even make changes to their payroll deductions via the Internet or intranets, and their pay stubs can be sent to them via e-mail.  The World Wide Web also provides many resources for employees in the human resources and payroll departments, such as access to current legislative changes that may affect payroll deductions.  Another popular use of the Internet involves the outsourcing of payroll services.  Many companies use independent, Internet-based service providers to handle their payroll processing.  IT systems also allow electronic transfer of paychecks, and companies can use electronic transfers to make payments of tax deposits and other payroll withholdings.
• Fixed Asset Processes. A fixed assets pool can include vehicles, office equipment and computers, machinery and production equipment, furniture, and real estate (such as land and buildings).  For many companies, the investment in fixed assets is often the largest asset reported on the balance sheet.  Companies continually add to or replace items in their fixed assets pool as the old items become used, worn, or outdated.  Due to this frequency of change, it is important that clear accounting records exist so that the status of fixed assets accounts can be determined at any point during their useful life.
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  • Fixed Assets Acquisition. Acquisitions of fixed assets are carried out in much the same way as inventory purchases described in Chapter 9.  Two notable differences here are the placement of the acquired assets in the user department (rather than a warehouse), and the inclusion of a fixed assets department (instead of the inventory control department).  Fixed assets acquisitions are generally initiated when a user department identifies a need for a new asset, either to replace an existing asset or to enhance its current pool.   Large fixed asset acquisitions would be regarded as non-routine transactions that require specific authorization.  Some companies require that large cash outlays for fixed assets be included in the capital budget.  In addition, the company may require that an investment analysis or feasibility study be conducted in order to assess the merit of the purchase request in terms of the relative costs and benefits.  Upon receipt, new fixed assets are inspected by the receiving department.  A receiving report is prepared and the items are sent to the user department for installation and use.  Accounts payable and cash disbursement activities are also initiated at this time, in the same manner as for the expenditure process.  In addition, a fixed asset subsidiary ledger will be prepared so that a detailed listing of the company’s fixed assets is available.
  • Fixed Assets Continuance. The fixed assets continuance phase refers to the processes of maintaining accurate and up-to-date records regarding all fixed assets throughout their useful lives.    New costs should be capitalized whenever the expenditure causes the fixed asset to become enhanced, either in terms of increased efficiency or an extended useful life.  Fixed asset accounting depends on the use of estimates for useful life and estimated salvage value.  The use of estimates also means that recorded amounts may need to be changed as time passes and new information is discovered that renders the original estimates misleading.  The fixed assets subsidiary ledger may need to be adjusted from time-to-time as the company makes changes in the estimates that feed its depreciation calculations.  A depreciation schedule is the record detailing the amounts and timing of depreciation for all fixed asset categories except land.
  • Fixed Assets Disposal. When an asset becomes old, outdated, inefficient or damaged, the company should dispose of it and adjust its records accordingly.  Disposing of an asset may include selling or exchanging it, discarding it (throwing it away), or donating it to another party who may be able to use it.  There are four basic steps in accounting for the disposal: (1) date of disposal is noted and depreciation computations are updated through this date; (2) disposed assets are removed from the fixed asset subsidiary ledger; (3) depreciation accounts related to disposed assets are removed from depreciation schedule and fixed asset subsidiary ledger; and (4) gains or losses are computed.
• Controls And Risks Of Fixed Asset Processes.
  • Authorization Of Transactions. Designated members of management should be assigned responsibility for authorizing the purchase of new fixed assets, as well as the disposal or transfer of existing fixed assets.  In the case of high-dollar items, there should be a strict approval process requiring the authorization of top management or the initiation of the capital budgeting procedures.  These strict procedures for purchasing fixed assets should include at least three formal steps: (1) investment analysis; (2) comparison to the capital budget; (3) review of the proposal and specific approval by the appropriate level of management.
  • Segregation Of Duties. Custody of fixed assets needs to be separate from the related record keeping.  Adequate segregation of duties reduces the risk of undetected errors or fraud by requiring separate employees to handle the different transactions that occur in each phase of the asset’s life.  Ideally, those with custody of fixed assets should not perform any duties in the purchasing, receiving, or fixed asset accounting departments.  In addition, key IT functions such as programming, operations, data input, and security should be segregated from each other and from the related accounting duties.
  • Adequate Records And Documents. Fixed asset subsidiary ledgers are used to control the physical custody, cost, and accumulated depreciation of fixed assets. Like the expenditures process for inventory purchases, fixed asset purchases should be supported by a purchase requisition, PO, receiving report and vendor invoice.  Fixed asset tags may be used to account for the numerical sequence of items acquired.  Management should prepare and follow a capital budget.
  • Security Of Assets And Documents. Adequate supervision is an important control concerning the security of fixed assets because fixed assets tend to be located throughout the company where many employees could have access to them.  Physical controls should also be in place to protect fixed assets from unauthorized use, and electronic controls are needed to control access to automated records.  A company should also protect its investment in fixed assets by maintaining adequate insurance coverage and conducting regular preventative maintenance procedures.
  • Independent Checks And Reconciliations. Actual fixed asset expenditures should be compared with the capital budget, and additional approval should be required if budgets are exceeded.  In addition, periodic counts of fixed assets should be made by someone not otherwise responsible for fixed asset-related activities, and the physical counts should be reconciled with the accounting records.  Also, performing independent verifications to match key purchasing documents and the related accounts payable reports may uncover errors or fraud within these records.
  • Cost/Benefit Considerations. Additional factors that indicate the need for strong internal controls over fixed asset processes include large quantities of fixed assets, large quantities of fixed asset changes (such as additions, transfers, and disposals), high likelihood of obsolescence due to technological changes, the existence of assets under capital leasing arrangements, and widely dispersed fixed asset locations.
• IT Systems Of Fixed Asset Processes.  Due to the abundance of fixed asset data, the time-consuming and tedious requirements for tracking changes, and the intricacy of the tax laws, most companies can justify the investment in computerized systems dedicated to fixed asset accounting.  IT systems have evolved into simple, customized applications that may be integrated with other accounting software.  These fixed assets applications automate the processes of creating and maintaining the financial records and tax documents required for adequate fixed assets management.  With automated fixed asset management systems, information related to fixed asset acquisitions and changes to existing assets are input into the software by an employee in the fixed asset accounting department.  This can be done in real-time or in batches, depending upon the company’s reporting needs and the volume of transactions.   For most companies, fixed asset acquisitions are considered non-routine processes because they require specific authorization and are carried out infrequently.  Thus, the online approach is most reasonable.
• Ethical Issues Related To Payroll And Fixed Assets. The payroll system is the target of several types of fraud schemes.  The most common means of defrauding a company involves dishonest employees’ falsification of time sheets in an effort to receive excess compensation.  Misuse of sick days or vacation days results in employees taking more time off work than they have earned.  These types of frauds are actually a form of theft from the company; since the employees receive unearned compensation, they are actually stealing the company’s cash and receiving it in their paychecks.  A ghost employee is someone who receives a paycheck who does not actually work for the company.  It is often initiated by the unethical conduct of someone within the company’s payroll function.  Bogus documentation is typically created in order to circumvent the company’s internal controls and carry out these types of fraud.

  Managers may turn to unethical conduct in fixed asset accounting in order to massage its accounting numbers.  This unethical practice is commonly referred to as earnings management.  Fixed assets are one area where earnings management may be prevalent, due to the judgmental nature of the underlying data.  This could occur through extending the lives of fixed assets beyond their reasonable usefulness so that the cost of the assets is spread over a greater length of time, increasing the amount of estimated salvage value, or misclassifying repair and maintenance expenses as capitalized costs.

• Corporate Governance In Payroll And Fixed Assets. Payroll funds and fixed assets do not belong to managers of the organization.  Managers are stewards, or temporary managers of those funds. Corporate governance policies and procedures must be in place to insure that funds are expended only to benefit the organization and its owners; not to benefit the managers or employees personally.  In addition, corporate governance policies should prevent a manager or employee from using fixed assets for personal use.

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