Our client, a startup company experiencing rapid growth, encountered recurring issues with accuracy in the recording of payroll transactions. The client suspected the problem originated from the company’s outside payroll processor. The payroll processor, which was not one of the significant full-service payroll processors, was selected at the inception of operations when they had a skeleton staff. Since implementing the outside payroll processor, our client has had rapid growth, adding employees, and offering expanded benefits, including stock-based compensation. Furthermore, the client did not maintain written policies and procedures for payroll transactions. There was only one person at the company who had been in charge of and knowledgeable about payroll processing. The client felt that the payroll processor might no longer be the right choice and needed an independent and thorough review and documentation of procedures surrounding payroll processing.
Through initial discussions with the client, the DLC consultant deployed the following approach:
- Conduct interviews with the appropriate client personnel to develop a detailed understanding of current procedures.
- Review the monthly account reconciliations of payroll related accounts to identify unreconciled amounts.
- Conduct interviews with the payroll processor to complement understanding of how payroll is processed.
- Review existing supporting documentation for payroll processing.
The DLC consultant identified the following:
- The client’s personnel involved with the processing and recording of payroll did not have a thorough understanding of the payroll reports that were being generated by the payroll processor, specifically the inter-relationship of the various sections of the report, and the effect of payroll codes on funding amounts. This resulted in funding amounts that were not always accurate and had to be reconciled.
- Lack of proper approvals to makes changes to the company’s payroll by the processor. The individual at the payroll processing company who was in charge of maintaining the client’s processing algorithm made programming changes without obtaining approval from the client or the client’s account representative, which caused errors in amounts that had to be funded.
- Lack of proper controls to approve and communicate new payroll transactions to the payroll processor. Payroll was under the purview of Human Resources, however Human Resources did not always inform Finance of approval of new benefits that affected funding once processed.
- The payroll processor only had one individual responsible for coding of customer accounts, i.e. maintaining customer processing algorithms. As a result, this person was not always available for consultation, which resulted in a poor level of customer support.
- Reconciling items on payroll related general ledger account reconciliations were not always investigated and corrected in a timely manner.
- Lack of proper approval process for any changes made by the payroll processor.
- Detailed policies and procedures created surrounding payroll transactions.
- Client personnel educated on the contents of reports provided by the payroll processor and how various codes affected funding amounts.
- A new approval process was implemented for Human Resources to complete a form and forward it to Finance for approval before communicating new payroll transactions to the payroll processor.
- Old reconciling items were researched, explained, and corrected in the general ledger.
- A nationally recognized firm replaced the client’s payroll processor.