DEFINITION The HRM/payroll cycle is a recurring set of business activities and related data processing operations associated with

h effectively managing the employee workforce. Human Resource Management (HRM) is the function within an organization that focuses on recruitment of, management of, and providing direction for the people who work in the organization. HRM can also be performed by line managers. INTRODUCTION The more important tasks performed in the HRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or involuntarily)

Segregation of Duties Human Resource System Recruiting and hiring new employees Training Job assignment Performance evaluation Discharge of employees (voluntarily or involuntarily) Payroll System Compensation (payroll)

Payroll costs are also allocated to products and departments for use in product pricing and mix decisions. HRM SYSTEM: i. is also important because the knowledge and skills of employees are valuable assets, so HRM systems should: ii. Help assign these assets to appropriate tasks; and iii. Help monitor their continuous development. PAYROLL SYSTEM: i. Accountants are traditionally responsible for its function. ii. Must be designed to meet: 1. Managements needs. 2. Government regulations. iii. Incomplete or erroneous payroll records: 1. Impair decision making. 2. Can result in fines and/or imprisonment.

iv. Input to the payroll system: 1. HRM department provides information about hiring, terminations, and pay-rate changes. 2. Employees provide changes in discretionary deductions (e.g., optional life insurance). 3. Various departments provide data about the actual hours worked by employees. 4. Government agencies provide tax rates and regulatory instructions. 5. Insurance companies and other organizations provide instructions for calculating and remitting various withholdings. v. Principal outputs of the payroll system are checks: 1. Employees receive individual paychecks. 2. A payroll check is sent to the bank to transfer funds from the companys regular account to its payroll account.

3. Checks are issued to government agencies, insurance companies, etc., to remit employee and employer taxes, insurance premiums, union dues, etc. vi. The payroll system also produces a variety of reports. IMPORTANCE OF HUMAN RESOURCE Organizational success depends on skilled and motivated employees: Their knowledge and skills affect quality and quantity of goods and services. Labor costs are a major expense in generating revenues and a key cost driver. The traditional AIS has not measured or reported on the status of a companys human resources: Financial statements do not regard employees as assets. Under GAAP, the value of human services is not measured until they have been consumed. In the 1990s companies began creating positions for a director of intellectual assets with responsibilities for developing and managing intellectual assets. Some may even include HR info in their annual report, including reports on: i. Human capital: The knowledge employees possess, which can be enhanced. ii. Intellectual capital: The knowledge thats been captured and implemented in decision support systems, expert systems, or knowledge databases, so that it can be shared. Because employees are so valuable, turnover is expensive: i. Average cost of replacement is 1.5 times the employees annual salary. ii. Turnover rates need to be managed so theyre not excessive. Employee morale is also important i. Bad morale leads to high turnover. ii. Employee attitudes affect customer interactions and are positively correlated with profitability. iii. Employees need to: 1. Believe they have the opportunity to do what they do best. 2. Believe their opinions count.

3. Believe their coworkers are committed to quality. 4. Understand the connection between their jobs and the companys mission. To effectively track intellectual capital and human resources, the AIS must do more than just record time and attendance and prepare paychecks. Payroll should be integrated with HRM so management can access data about employee-related costs and employee skills and knowledge. The payroll application is processed in batch mode because: i. Paychecks are issued periodically. ii. Most employees are paid at the same time. THE SEVEN BASIC ACTIVITIES IN THE PAYROLL CYCLE ARE: A. B. C. D. E. F. G. Update payroll master file Update tax rates and deductions Validate time and attendance data Prepare payroll Disburse payroll Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous deductions

Flow of Activities in a Payroll Cycle

A. UPDATE PAYROLL MASTER FILE The HRM department provides information on new hires, terminations, changes in pay rates, and changes in discretionary withholdings. Appropriate edit checks, such as validity checks on employee number and reasonableness tests are applied to all change transactions. Changes must be entered in a timely manner and reflected in the next pay period. Records of terminated employees should not be deleted immediately as some year-end reports (e.g., W-2s) require data on compensation for all employees during the year.

B. UPDATE TAX RATES AND DEDUCTIONS The payroll department receives notification of changes in tax rates and other payroll deductions from government agencies, insurers, unions, etc. These changes occur periodically.

C. VALIDATE TIME AND ATTENDANCE DATA Information on time and attendance comes in various forms depending on the employees pay scheme.

Most employees are paid either on an hourly basis or a fixed salary. Many companies use a time card to record their arrival and departure time. This document typically includes total hours worked during a pay period.

Manufacturing companies may use job time tickets to record not only time present but also time dedicated to each job.

Pay Schemes Employees that earn a fixed salary, e.g., managers and professional staff: Usually dont record their time, but supervisors informally monitor their presence. Professionals in accounting, law, and consulting firms must track their time on various assignments to accurately bill clients.

Sales staff are often paid on a straight commission or base salary plus commission. Some may also receive bonuses for surpassing sales targets. Requires careful recording of their sales.

Increasingly, laborers may be paid partly on productivity. Some management and employees may receive stock to motivate them to cut costs and improve service. The payroll system needs to link to the revenue cycle and other cycles to calculate these payments. Its also important to design bonus schemes with realistic, attainable goals that: Can be measured Are congruent with corporate objectives Are monitored by management for continued appropriateness Are legal

Accountants Role Accountants and compensation policies Recent corporate scandals have led to scrutiny and criticism of executive compensation plans: FASB issued new rules requiring that stock options be expensed. Major U.S. stock exchanges now require companies to obtain shareholder approval of stock compensation.

Compensation boards are being created to design compensation plans, rather than having executives create their own. Accountants can help by: Advising on financial and tax effects of proposals. Identifying appropriate metrics to measure performance. Enabling compliance with legal and regulatory requirements. Suggesting appropriate public disclosures.

How can information technology help? Collecting time and attendance data electronically, e.g.: Badge readers Electronic time clocks Data entered on terminals Touch-tone telephone logs

Using edit checks to verify accuracy and reasonableness when the data are entered.

D. PREPARE PAYROLL The employees department provides data about hours worked. A supervisor confirms the data. Pay rate information is obtained from the payroll master file. Procedures: a) The payroll transaction file is sorted by employee number (same sequence as master file). b) For each transaction, the payroll master file is read for pay rates, etc., and gross pay is calculated. Hourly employees: Gross pay = (hours worked x wage rate) + Overtime + Bonuses Salaried employees: Gross pay = Annual salary x Fraction of year worked

c) Payroll deductions are summed and subtracted from gross pay to obtain net pay. There are two types of deductions: Payroll tax withholdings Voluntary deductions

d) Year-to-date totals for gross pay, deductions, and net pay are calculated, and the master file is updated. Cumulative records are important because: Social Security and other deductions cease or decline at certain levels. The information will be needed for tax reports.

e) The following are printed: Paychecks for employeesoften accompanied by an earnings statement, which lists pay detail, current and year-to-date. A payroll register, which lists each employees gross pay, deductions, and net pay in a multi-column format: Is used to authorize the transfer of funds to the companys payroll bank account. May be accompanied by a deduction register, listing miscellaneous voluntary deductions for each employee.

f) As payroll transactions are processed, labor costs are accumulated by general ledger accounts based on codes on the job time tickets. The totals for each account are used as the basis for a summary journal entry to be posted to the general ledger.

g) Other payroll reports and government reports are produced. E. DISBURSE PAYROLL Most employees are paid either by: Check Direct deposit In some industries, such as construction, cash payments may still be made, but does not provide good documentation

Procedures:

a. When paychecks have been prepared, the payroll register is sent to accounts payable for review and approval. b. A disbursement voucher is prepared to authorize transfer of funds from checking to the payroll bank account. i. For control purposes, checks should not be drawn on the companys regular bank account ii. A separate account is created for this purpose. 1. Limits the companys loss exposure. 2. Makes it easier to reconcile payroll and detect paycheck forgeries. c. The approved disbursement voucher and payroll register are sent to the cashier. The cashier: 1. Reviews the documents. 2. Prepares and signs the payroll check to transfer the funds. 3. Reviews, signs, and distributes employee paychecks (which separates authorization and recording from distribution of checks). 4. Re-deposits unclaimed checks in the companys bank account. 5. Sends a list of these paychecks to internal audit for investigation. 6. Returns the payroll register to payroll department, where it is filed with time cards and job time tickets. 7. Sends the disbursement voucher to accounting clerk to update general ledger. Direct deposit Direct deposit can improve efficiency and reduce costs of payroll processing. Employee receives a copy of the check and an earnings statement. Each bank receives a record of the payroll deposits for that bank via EDI. The record includes: Employee number

Social security number Bank account number Net pay amount

Savings occur because: While the cashier does authorize release of funds, he/she does not sign each check. Eliminates costs of buying, processing, and distributing paper checks. Eliminates postage.

Additional costs: Elimination of float between when check is distributed and when it is deposited by employee.

Savings typically outweigh costs.

F. CALCULATE EMPLOYER-PAID BENEFITS AND TAXES The employer pays some payroll taxes and employee benefits directly. The employer withholds federal and state taxes from employee paycheck, along with Medicare tax, and the employees share of Social Security. May also withhold voluntary deductions such as union dues, United Way contributions, credit union savings, retirement contributions, etc.

In addition, the employer pays: A matching amount of Social Security. Federal and state unemployment taxes. The employer share of health, disability, and life insurance premiums, as well as pension contributions.

Some companies offer flexible benefit plans, sometimes called cafeteria-style benefit plans. These plans offer a menu of options.

Benefit programs increase the demands on the HRM/payroll system for gathering employee data, disbursing payments and information, etc.

Providing access to payroll/HRM information through a company intranet can help reduce costs.

G: DISBURSE PAYROLL TAXES AND MISCELLANEOUS DEDUCTIONS The company must periodically prepare checks or EFT to pay tax and other liabilities.

OUTSOURCING OPTIONS In an effort to reduce costs, many organizations are outsourcing their payroll and HRM functions.

Many entities outsource payroll and HRM to: Payroll service bureaus Maintain the payroll master file and perform payroll processing activities.

Professional employer organizations (PEOs) Perform the services of the payroll service bureau. Also administer and design employee benefit plans. Generally, more expensive than payroll service bureaus.

When organizations outsource payroll processing, they send the service bureau or PEO at the end of each period: Personnel changes. Employee time and attendance data.

The service bureau or PEO then: Prepares paychecks, earnings statements, and a payroll register. Periodically produces tax documents.

Outsourcing is especially attractive to small and mid-size businesses because: Its often cheaper for smaller companies. The bureau or PEO may provide a wider range of benefits. It frees up the companys computer resources for other areas.

However, companies must carefully monitor service quality to ensure that these systems integrate HRM and payroll data in a manner that supports effective management of employees.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the HRM/payroll cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair

There are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include: Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability). Using appropriate application controls, such as validity checks and field checks (enhances accuracy and reliability). Providing space on forms to record who completed and who reviewed the form (encourages proper authorizations and accountability). Pre-numbering documents (encourages recording of valid and only valid transactions). Restricting access to blank documents (reduces risk of unauthorized transaction).

Following is a discussion of threats to the HRM/payroll system, organized around three areas: Employment practices Payroll processing General control issues

THREATS IN HUMAN RESOURCE AND PAYROLL

a. Threats in Employment Practice i. Hiring unqualified or larcenous employees ii. Violation of employment law b. Threats in Payroll Processing

i. Unauthorized changes to the payroll master file ii. Inaccurate processing of payroll iii. Inaccurate time data iv. Theft or fraudulent distribution of paychecks c. General Threats i. Loss, alteration, or unauthorized disclosure of data ii. Poor performance

A. Threats in Employment Practices Threat 1: Hiring unqualified or larcenous employees This is one of the threats because of the problems that the employer may face like, it can increase production expenses, can lead to theft of assets and even result to civil and criminal penalties for the company if an employee attempts to make a bribe. This can be controlled by stating kill qualifications for each position explicitly in the position control report including verification of job applicant's skills, references, and employment history. Threat 2: Violation of employment law This can result in stiff government penalties as well as civil suits. By thorough documentation of hiring and discharge procedures and by conducting training on current developments in employment law, this can be controlled. B. Threats in Payroll Processing Objective: Efficiently and effectively compensate employees for services provided. The major threats in the employment practices area are: Threat 3: Unauthorized changes to the payroll master file By this, there will be an increase of expenses if wages, salaries, commissions, or base rates are falsified and may result to an inaccurate reporting and erroneous decisions. This can be controlled by segregation of duties, HRM, payroll calculation, and paycheck distribution, access controls, and audit and review of all changes to payroll master file. Threat 4: Inaccurate time data This may result payments for services not rendered, inaccurate or missing checks that can damage employee morale and may result to an inaccurate labor reporting. By these: automation of data collection, various edit checks and reconciliation of time card data with job-time ticket data, this threat can be controlled. Threat 5: Inaccurate processing of payroll These errors may damage employee morale, especially if they cause late paychecks. And penalties can accrue if proper payroll taxes are not remitted to the government and if court-ordered paycheck garnishments are not made appropriately.

It can be controlled by implementing batch totals and other application controls, payroll clearing account and review of Internal Review Service (IRS) regulations. Threat 6: Theft or fraudulent distribution of paychecks This is a problem because payments may be made to fictitious (ghost) or terminated employees that may result to the increase in expenses and loss of cash. This can be controlled by direct deposit, paycheck distribution by someone independent of payroll process, investigation of unclaimed paychecks, restricted access to blank paychecks, pre-numbering and periodic accounting for all paychecks, use of separate payroll checking account, maintained as an imprest fund, and reconciliation of payroll bank account by someone not involved in payroll processing.

C. General Threats Two general objectives Accurate data should be available when needed. Activities should be performed efficiently and effectively.

The general threats are: Threat 7: Loss, alteration, or unauthorized disclosure of data Loss or alteration of payroll data can result in delayed and/or inaccurate paychecks and reports. An unauthorized disclosure of confidential employee data can violate state and federal laws and damage employee morale. This can be controlled by providing at least one backup on site and one offsite of the payroll files, all disks and tapes should have external and internal file labels to reduce chance of accidentally erasing important data, access controls should be utilized, sensitive data should be encrypted in storage and in transmission and parity checks, acknowledgment messages, and control totals should be used to ensure transmission accuracy. Threat 8: Poor performance This can damage employee relations and can reduce the organizations profitability. By simple preparing and reviewing performance reports of the organization, this threat can be controlled.