October 13, 2020

Is your payroll process a risk to your business?

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Is your payroll process a risk to your business?
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Although payroll processing is a core function for organizations and payroll systems house massive amounts of sensitive employee data, the compulsory (non-revenue-generating) nature of this and similar processes often means that they are viewed as little more than a time-consuming, back-office necessity. As a result, such processes are often neglected when it comes to continuous improvement initiatives.A lack of focus on payroll process leads to inefficiencies (e.g. duplicative work or rework), employee dissatisfaction (e.g. employees are not paid accurately or on time), and impacts to the bottom line (e.g. overpayment). And in some cases, it can lead to serious fraud events when lack of controls allow staff to wrongfully manipulate the payroll system to receive unearned pay.

Is Your Payroll Process Streamlined and Secure?

While it is a well-known best practice to make sure your processes are documented, and roles and responsibilities for team members are clearly defined and communicated, in practice, continuous improvement initiatives in these areas are typically deficient or altogether nonexistent. And a lack of process documentation and ambiguous role definition can significantly hinder standardization, training, and transition of responsibilities.The payroll process is often corrupted by other cross-functional processes that are much further “upstream.” There may be errors in your onboarding and termination processes that present themselves during payroll processing. If you pay seniority bonuses based on years of service, you can set those markers in your payroll system during the onboarding process to avoid missing payouts. As another example, you can standardize start dates for new hires to avoid mid-cycle starts, which can often lead to overpayment that will not likely be recovered.When it comes to payroll changes resulting from a termination or other employee changes (e.g. promotion), you should have a “source of truth” for all actions required as a result of such changes. Managing these changes in an ad hoc way often leads to things slipping through the cracks—for example, a worker transitioning from temporary to full-time is paid twice—which can cause rework, employee dissatisfaction, and unrecovered overpayments.As discussed below, your payroll system will have many tools that help to facilitate this critical process standardization.

Are Payroll-Related Roles Clear and Are Duties Sufficiently Separated?

As mentioned above, processes should be documented and roles and responsibilities supporting these processes need to be clearly defined. This documentation should not simply live in an archive but should be routinely reviewed and updated. Employees should have extensive training based on these defined processes during their onboarding, as well as ongoing refresher training.Separation of duties is paramount in payroll processing. For example, you should have “hard lines” between your payroll specialist who performs the routine biweekly activities, and your HR manager who oversees the payroll process by reviewing change reports. Additionally, someone outside of the payroll team, likely from Finance, should be routinely reviewing net pay activity each cycle. This can prevent fraud activity such as members of the payroll/HR staff colluding to give themselves additional compensation.Periodic user access reviews should be a standard procedure to make sure employees have the appropriate level of access to meet their job requirements. This can help to ensure that terminated employees’ access is promptly cut off, segregation of duties is maintained when an employee moves from one department to another, and dormant administrative accounts are not compromised. A specific review of all employees with administrative access should be part of your standard payroll process.

Have You Optimized Your Technology to Support People and Processes?

It is important to note that a good system alone will not remedy payroll woes. However, a good system can support and enable rigorous processes and well-trained people. First, determine if you are using your current payroll system to its fullest capacity. Ask yourself these questions:

  • Have you migrated all possible processes into the system? or are you still working outside the system in a lot of ways—ways that are more time consuming, more susceptible to data-entry errors, and less likely to enforce proper separation of duties?
  • Are you are utilizing the solutions you are likely paying for in your system? There are often system alerts or hard stops that can be set up to enforce separation of duties.
  • Can certain data entry be automated to avoid manual errors? For example, you may be able to integrate your benefits providers (medical, 401k, HSA, etc.) to avoid manual entry. Most payroll systems have checklists for processes like onboarding and termination, which can help to enforce process standardization.

Migrating processes into the system also means that more data is available, and this data can be used to generate reports that will help oversee processes (change reports, etc.). You can wield this captured data to not only react more quickly, but also to be proactive. Here's more information about creating a holistic approach to improving payroll processes.

Is Your Payroll Process Costing Your Business More Than You Realize?

There may indeed be many hidden costs that you did not realize were lurking under the surface when you consider overpayment, lost time, and exposure to fraud. However, there are simple improvements in the areas of process, people, and technology that will improve the efficiency and security of your payroll processing, and free you to focus on driving your business forward.

We Can Help

For more information about how Elliott Davis can assist you in mitigating these types payroll risks reach our to our Management Consulting Team.The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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