For every organization, be it private, public or those of the government, employees are needed to meet the various goals and objectives of the company. These individuals are employed based on a cost to the organization that is reflected in the form of salaries, wages and the relevant benefits attached to them.

The primary purpose of a payroll department is to take care of paying the employees and remittance of correlated benefits, taxes, and deductions. For this department to function in an effective, efficient and adequate manner as stated by the management, internal controls are a necessity.

Objectives of an Internal Control System

For establishing an effective internal control system, there are some objectives which need to be fulfilled. These objectives can be covered in three broad areas – Operations, Reporting and Compliance. The following ten points are the basic objectives covered within the three broad areas of an internal control system:-

1) To control operations by establishing authority at various levels, provide adequate approval for the required transactions and establish an adequate reporting system. Also, enable those carrying out the required approvals to be advised of the results from those approvals.

2)  Safeguard the assets of the organization from any damage or loss due to a result of inefficiency, waste, error, fraud or theft.

3) To provide the necessary information that is reliable and timely and that supports the control structures so that management responsibilities can be identified at the individual level.

4) Ensure that all transactions are valid and being recorded on a real-time basis. These valid transactions should be recorded accurately in the relevant records, and also appropriate controls need to be set to identify those transactions that are not recorded.

5)  To protect and detect against invalid or fraudulent transactions being entered.

6) Ensure authorization of valid transactions only and all records should be protected from unauthorized transactions.

7) Value transactions in a correct manner and to protect the records from errors of incorrect calculations and recording.

8) Classify entries accurately in accordance with accounts chart or other categorizing requirements.

9) Record transactions in a timely manner so that it minimizes any error caused as a result of any delay between the transaction and its recording.

10) Include all transactions in the relevant subsidiary ledgers and correctly post them to the relevant ledger accounts.

Best Payroll Practices for Internal Control

For ensuring the objectives of an internal control system is fulfilled, there are some best payroll practices that need to be complied with. Each of these best practices is important in establishing and maintaining an effective payroll control system.

1. Proper Segregation of Duties

In general, there are four categories of tasks that come under payroll – hiring and placing personnel, recording and maintenance of accurate timesheets, setting up payroll and employee payments, and payroll taxes.

As a best practice, all the above responsibilities should be segregated by individuals or departments responsible. Additionally, a member of the management should be designated to keep a periodic review of the company records related to payroll. This would, in turn, ensure proper maintenance of payroll records and limit the chances of fraud.

2. Accountability, authorization, approval and limited accessibility

Adhere to the basic accountability principles and policies while authorizing and reviewing the payroll entries. The highest level of data confidentiality needs to be maintained and this can be done by limiting the payroll and personnel access only to authorized individuals.

A periodic review and update should be done to the authorized signatures. Any changes in timekeeping of the records should obtain pre-approval. The attendance records should be thoroughly reviewed for compliance and accuracy to the policy.

The general ledgers should be reconciled monthly for the accuracy of transactions recorded.

3. Security of assets and the need for a separate bank account

Protection of employee resources is imperative and should be done in a proactive manner. The payroll checks and necessary statements should be secured in a safe location and access to those records should be given only to that designated personnel that needs that information in order to carry out their duties.

Unclaimed checks should be notified to the payees and returned back to the payroll department. All sensitive and private information should be secured.

A separate bank account should be dedicated to the payroll processes only. This account should only have funds that are enough to complete the payroll process. Creating a separate bank account ensures that the business money of the company is separated and properly distinguished from the payroll money in case of any fraudulent activity.

4. Audit review and reconciliation

The payroll department should have either internal or external auditors to conduct a periodic assessment of the payroll function. This should be done to ensure that the payroll payments are being correctly calculated, employees that are being paid are an active member and are still working for the company, and the time records are being accumulated accurately.

The payroll costs on average represent some of the largest cost components of your department’s budget. Monthly reconciliation activities ensure that the right people are being paid at the correct rates.

5. A dedicated HR department

Having a dedicated human resources department to authorize the employee payroll processes protects the business from any kinds of fraud. The HR department eliminates and reduces the chances of terminated or fictitious employees continuing to be on the companies payroll.

The human resources department should maintain an updated employee records at all times. These records should reflect the accurate rate of pay each employee receives and any additional benefits that are being provided to the concerned individual.

Final thoughts

An organization without proper internal control payroll practices in place runs the risk of compensation being issued to terminated or nonexistent employees. We hope these best payroll practices above help in establishing an accurate payroll control system.

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