The trouble is that the accounting staff tends to forget to update the controls accompanying these systems, resulting in burdensome controls from an old system being imposed on the new system, which may require entirely different controls.
 
A manual system usually has no computerized time clock to monitor employee hours worked, so there are controls to verify regular hours worked and to approve overtime. Another control is needed to secure blank payroll check stock, while still other controls are required to review uncashed checks, reconcile the payroll bank account, and verify that tax deposits are made in the correct amounts and on the proper dates.
 
When a company switches to an outsourcing solution, many of these controls are no longer needed, particularly at the back end of the process. For example, the payroll supplier handles all check stock, issues checks from its own bank account, and deposits taxes on behalf of the company. Unfortunately, the accounting manager may forget to eliminate the controls, resulting in locked storage of old check stock that should have been shredded, maintenance of a payroll bank account that should be closed, and an old tax deposit procedure that should be deleted from the accounting manual.
 
When a company becomes large enough to switch back to in-house computerized payroll processing, the control situation changes once again. In a high-volume environment, it is more likely that a company can afford a computerized time clock, so the approval of hours worked and overtime hours requires a different control to ensure that each employee is set up in the time clock’s database with the correct pre-approved work period. Also, a control is typically needed to follow up on missing scans into the time clock. If the old timecard-based controls are not deleted at this time, a company finds itself with too many controls -- supervisors are still required to approve time records that have already been thoroughly monitored by the computerized time clock!

In addition, a high-volume payroll process will probably use a signature plate to stamp an authorizing signature on each check. If so, there must be stringent controls over the use and storage of the plate. Further, with so many payroll checks being issued, it becomes much easier to pay employees who have long since left the company. A new control addressing this problem is to issue lists of employee names and addresses to supervisors for periodic review. This control would have been unnecessary in an environment with few employees, since the accounting staff would have personally known everyone in the company.
 
It is evident that the ongoing evolution of the payroll function within a company requires continual revisions to the accompanying controls. Otherwise, an accounting manager can find himself in the odd situation of having both too few and too many controls -- not enough controls over new payroll functions added via the latest system upgrade, and too many controls over functions that have been dropped or made inconsequential.
 
STEVEN M. BRAGG, CPA, CMA, CIA, CPM, CPIM, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine. He is also the author of Essentials of Payroll: Management and Accounting (Wiley, March 2003). He resides in Englewood, Colorado.