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2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 87

C HAPTER 13

The Human ResourcesManagement and Payroll

Cycle

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INTRODUCTION

Questions to be addressed in this chapterinclude: What are the basic business activities and

data processing operations that areperformed in the human resourcesmanagement (HRM)/payroll cycle?

What decisions need to be made in this cycle,

and what information is needed to make thesedecisions?

What are the major threats and the controlsthat can mitigate those threats?

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INTRODUCTION

The HRM/payroll cycle is a recurring set ofbusiness activities and related dataprocessing operations associated witheffectively managing the employeeworkforce.

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INTRODUCTION

The more important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees

Training Job assignment Compensation (payroll) Performance evaluation

Discharge of employees (voluntarily or involuntarily) Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.

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INTRODUCTION

The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or

involuntarily) Payroll costs are also allocated to products and

departments for use in product pricing and mixdecisions.

These two tasks arenormally done only

once for eachemployee.

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INTRODUCTION

The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation

Discharge of employees (voluntarily or involuntarily) Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.

These tasks are donerepeatedly as long asthe employee works

for the company.

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INTRODUCTION

The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or involuntarily)

Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.

In most companies these sixactivities are split between apayroll system and an HRM

system.

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INTRODUCTION

The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or involuntarily)

Payroll costs are also allocated to products anddepartments for use in product pricing and mixdecisions.

The payroll system handlescompensation and comesunder the purview of the

controller.

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INTRODUCTION

The most important tasks performed in theHRM/payroll cycle are: Recruiting and hiring new employees Training Job assignment Compensation (payroll) Performance evaluation Discharge of employees (voluntarily or

involuntarily) Payroll costs are also allocated to products and

departments for use in product pricing and mixdecisions.

The HRM system handles theother five tasks and comes

under the purview of thedirector of human resources.

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INTRODUCTION

In this chapter, well focus primarily on thepayroll system: Accountants are traditionally responsible for

its function. Must be designed to meet:

Managements needs. Government regulations.

Incomplete or erroneous payroll records: Impair decision making. Can result in fines and/or imprisonment.

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INTRODUCTION

The design of the HRM system is alsoimportant because the knowledge andskills of employees are valuable assets, soHRM systems should: Help assign these assets to appropriate tasks;

and

Help monitor their continuous development.

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INTRODUCTION

There are five major sources of input to thepayroll system: HRM department provides information about

hiring, terminations, and pay-rate changes.

Employees provide changes in discretionarydeductions (e.g., optional life insurance). Various departments provide data about the

actual hours worked by employees. Government agencies provide tax rates and

regulatory instructions. Insurance companies and other organizations

provide instructions for calculating and remittingvarious withholdings.

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INTRODUCTION

Principal outputs of the payroll system arechecks: Employees receive individual paychecks . A payroll check is sent to the bank to transfer funds

from the companys regular account to its payrollaccount.

Checks are issued to government agencies,insurance companies, etc., to remit employee and

employer taxes, insurance premiums, union dues,etc. The payroll system also produces a variety of

reports.

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INTRODUCTION

Organizational success depends on skilled andmotivated employees: Their knowledge and skills affect quality and quantity

of goods and services.

Labor costs are a major expense in generatingrevenues and a key cost driver. The traditional AIS has not measured or

reported on the status of a companys humanresources: Financial statements do not regard employees as

assets. Under GAAP, the value of human services is not

measured until they have been consumed.

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INTRODUCTION

In the 1990s companies began creatingpositions for a director of intellectual assetswith responsibilities for developing andmanaging intellectual assets.

Some may even include HR info in theirannual report, including reports on: Human capital: The knowledge employees

possess, which can be enhanced.

Intellectual capital: The knowledge thats beencaptured and implemented in decision supportsystems, expert systems, or knowledgedatabases, so that it can be shared.

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INTRODUCTION

Employee morale is also important Bad morale leads to high turnover. Employee attitudes affect customer interactions

and are positively correlated with profitability. Employees need to:

Believe they have the opportunity to do what they dobest.

Believe their opinions count. Believe their coworkers are committed to quality. Understand the connection between their jobs and the

companys mission.

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INTRODUCTION

To effectively track intellectual capitaland human resources, the AIS must domore than just record time andattendance and prepare paychecks.

Payroll should be integrated with HRM

so management can access data aboutemployee-related costs and employeeskills and knowledge.

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PAYROLL CYCLE ACTIVITIES

Lets take a look at payroll cycleactivities.

The payroll application is processed inbatch mode because: Paychecks are issued periodically.

Most employees are paid at the sametime.

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The seven basic activities in the payroll cycleare: 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

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deductions

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UPDATE PAYROLL MASTER FILE

The HRM department provides information on newhires, terminations, changes in pay rates, andchanges in discretionary withholdings.

Appropriate edit checks, such as validity checks onemployee number and reasonableness tests areapplied to all change transactions.

Changes must be entered in a timely manner andreflected in the next pay period.

Records of terminated employees should not bedeleted immediately as some year-end reports (e.g.,W-2s) require data on compensation for allemployees during the year.

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deductions

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UPDATE TAX RATES AND DEDUCTIONS

The payroll department receivesnotification of changes in tax rates andother payroll deductions fromgovernment agencies, insurers,unions, etc.

These changes occur periodically.

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deductions

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VALIDATE TIME AND ATTENDANCEDATA

Information on time and attendancecomes in various forms depending onthe employees pay scheme.

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Most employees are paid either on anhourly basis or a fixed salary. Many companies use a t im e card to record

their arrival and departure time. This document typically includes total hours

worked during a pay period.

Manufacturing companies may use job timetickets to record not only time present but alsotime dedicated to each job.

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Sales staff are often paid on a straightcommission or base salary pluscommission.

Some may also receive bonuses forsurpassing sales targets.

Requires careful recording of their sales.

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Increasingly, laborers may be paidpartly on productivity.

Some management and employeesmay receive stock to motivate them tocut costs and improve service.

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The payroll system needs to link to therevenue cycle and other cycles to calculatethese payments.

Its also important to design bonus schemeswith realistic, attainable goals that: Can be measured Are congruent with corporate objectives Are monitored by management for continued

appropriateness Are legal

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Accountants and compensationpolicies Recent corporate scandals have led to

scrutiny and criticism of executivecompensation plans:

FASB issued new rules requiring that stockoptions be expensed.

Major U.S. stock exchanges now requirecompanies to obtain shareholder approvalof stock compensation.

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Compensation boards are being created todesign compensation plans, rather thanhaving 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 regulatoryrequirements.

Suggesting appropriate public disclosures.

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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 andreasonableness when the data are entered.

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deductions

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PREPARE PAYROLL

The employees department providesdata about hours worked.

A supervisor confirms the data. Pay rate information is obtained from

the payroll master file.

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PREPARE PAYROLL

Procedures: The payroll transaction file is sorted by

employee number (same sequence as master

file). For each transaction, the payroll master file isread for pay rates, etc., and gross pay iscalculated.

Hourly employees: Gross pay = (hours worked xwage rate) + Overtime + Bonuses Salaried employees: Gross pay = Annual salary x

Fraction of year worked

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PREPARE PAYROLL

Payroll deductions are summed andsubtracted from gross pay to obtain netpay. There are two types of deductions:

Payroll tax withholdings Voluntary deductions

Year-to-date totals for gross pay,deductions, and net pay are calculated,and the master file is updated. Cumulativerecords are important because:

Social Security and other deductions cease ordecline at certain levels.

The information will be needed for tax reports.

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PREPARE PAYROLL

The following are printed: Paychecks for employees often accompanied

by an earning s s tatem ent , which lists pay

detail, current and year-to-date. A payrol l reg is ter , which lists each employeesgross pay, deductions, and net pay in a multi-column format:

Is used to authorize the transfer of funds to thecompanys payroll bank account. May be accompanied by a deduc t ion reg i s te r ,

listing miscellaneous voluntary deductions for eachemployee .

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PREPARE PAYROLL

As payroll transactions are processed,labor costs are accumulated by generalledger 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 postedto the general ledger.

Other payroll reports and governmentreports are produced.

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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 gooddocumentation

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DISBURSE PAYROLL

Procedures: When paychecks have been prepared, the

payroll register is sent to accounts payable forreview and approval.

A disbursement voucher is prepared toauthorize transfer of funds from checking tothe payroll bank account.

For control purposes, checks should not be drawn on thecompanys regular bank account

A separate account is created for this purpose. Limits the companys loss exposure. Makes it easier to reconcile payroll and detect paycheck

forgeries.

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DISBURSE PAYROLL

The approved disbursement voucher and payrollregister are sent to the cashier. The cashier:

Reviews the documents. Prepares and signs the payroll check to transfer the

funds. Reviews, signs, and distributes employee

paychecks (which separates authorization andrecording from distribution of checks).

Re- deposits unclaimed checks in the companysbank account. Sends a list of these paychecks to internal audit for

investigation.

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DISBURSE PAYROLL

Returns the payroll register to payroll department,where it is filed with time cards and job time tickets.

Sends the disbursement voucher to accountingclerk to update general ledger.

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DISBURSE PAYROLL

Efficiency opportunity: 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

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DISBURSE PAYROLL

Savings occur because: While the cashier does authorize release of

funds, he/she does not sign each check.

Eliminates costs of buying, processing, anddistributing paper checks. Eliminates postage.

Additional costs:

Elimination of float between when check isdistributed and when it is deposited byemployee.

Savings typically outweigh costs.

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deductions

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CALCULATE EMPLOYER-PAIDBENEFITS AND TAXES

The employer pays some payroll taxesand employee benefits directly. The employer withholds federal and state

taxes from employee paycheck, along withMedicare tax, and the employees share ofSocial Security.

May also withhold voluntary deductions suchas union dues, United Way contributions,credit union savings, retirement contributions,etc.

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In addition, the employer pays: A matching amount of Social Security. Federal and state unemployment taxes.

The employer share of health, disability, andlife insurance premiums, as well as pensioncontributions.

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

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Benefit programs increase the demandson the HRM/payroll system for gatheringemployee data, disbursing payments andinformation, etc.

Providing access to payroll/HRMinformation through a company intranet

can help reduce costs.

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deductions

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DISBURSE PAYROLL TAXES ANDMISCELLANEOUS DEDUCTIONS

The company must periodically preparechecks or EFT to pay tax and otherliabilities.

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OUTSOURCING OPTIONS

Many entities outsource payroll and HRMto: Payroll service bureaus

Maintain the payroll master file and perform payrollprocessing activities. Professional employer organizations (PEOs)

Perform the services of the payroll service bureau.

Also administer and design employee benefitplans. Generally, more expensive than payroll service

bureaus.

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OUTSOURCING OPTIONS

When organizations outsource payrollprocessing, they send the service bureauor 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.

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OUTSOURCING OPTIONS

Outsourcing is especially attractive to small andmid-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 systemsintegrate HRM and payroll data in a manner thatsupports effective management of employees.

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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES

In the HRM/payroll cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that thefollowing 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

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There are several actions a company can takewith respect to any cycle to reduce threats oferrors or irregularities. These include: Using simple, easy-to-complete documents with

clear instructions (enhances accuracy andreliability).

Using appropriate application controls, such asvalidity checks and field checks (enhances

accuracy and reliability). Providing space on forms to record who completed

and who reviewed the form (encourages properauthorizations and accountability).

CONTROL OBJECTIVES THREATS

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Pre-numbering documents (encouragesrecording of valid and only validtransactions).

Restricting access to blank documents(reduces risk of unauthorized transaction).

CONTROL OBJECTIVES THREATS

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Following is a discussion of threats to theHRM/payroll system, organized aroundthree areas: Employment practices Payroll processing General control issues

THREATS IN EMPLOYMENT

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THREATS IN EMPLOYMENTPRACTICES

Objective: Effectively hire, retain, and dismiss

employees.

The major threats in the employmentpractices area are: THREAT 1: Hiring unqualified or larcenous

employees THREAT 2: Violation of employment law

You can click on any of the threats below to getmore information on: The types of problems posed by each threat The controls that can mitigate the threats.

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You can click on any of the threats below to get

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GENERAL THREATS

Two general objectives pertain to activitiesin every cycle: Accurate data should be available when

needed. Activities should be performed efficiently andeffectively.

The general threats are: THREAT 7: Loss, alteration, or unauthorized

disclosure of data THREAT 8: Poor performance

You can click on any of the threats below to getmore information on: The types of problems posed by each threat. The controls that can mitigate the threats.

KEY DECISIONS AND

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KEY DECISIONS ANDINFORMATION NEEDS

The payroll system should be integratedwith cost data and HR information somanagement can make decisions with

respect to the following types of issues: Future work force staffing needs Employee performance

Employee morale Payroll processing efficiency and

effectiveness

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SUMMARY

Youve learned about the basic businessactivities and data processing operations thatare performed in the HRM/payroll cycle,

including recruiting, hiring, training, assigning,compensating, evaluating, and dischargingemployees.

Youve also learned about key procedures in

payroll processing. Youve learned how IT can improve the

efficiency and effectiveness of these processes.

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SUMMARY

Youve learned about decisions that needto be made in the HRM/payroll cycle andwhat information is required to make these

decisions. Youve also learned about the major

threats that present themselves in the

HRM/payroll cycle and the controls thatcan be instigated to mitigate those threats.

romney ch13

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