Human Resources Cycle

ACC 444 Enterprise Process Analysis

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INTRODUCTION
The most important tasks performed in the HRM/payroll cycle are:
Recruiting and hiring new employees
Training
Job assignment
Compensation (payroll)
Performance evaluation
Discharge of employees (voluntarily or involuntarily)
In most companies these six activities are split between a payroll
system and an HRM system:
The payroll system handles compensation
The HRM system handles the other five tasks

Human Resources Cycle
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INTRODUCTION
In this chapter, well focus primarily on the payroll system
The seven basic activities in the payroll cycle are:
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

Human Resources Cycle
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UPDATE PAYROLL MASTER FILE
The HRM department provides information on new hires,
terminations, changes in pay rates, and changes in discretionary
withholdings.
Appropriate edit checks, such as validity checks on employee
number and reasonableness tests are applied to all change
transactions.
Changes must be entered in a timely manner and reflected in the
next pay period.
Records of terminated employees should not be deleted
immediately as some year-end reports (e.g., W-2s) require data
on compensation for all employees during the year.
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UPDATE TAX RATES AND DEDUCTIONS
The payroll department receives notification of
changes in tax rates and other payroll deductions
from government agencies, insurers, unions, etc.
These changes occur periodically.
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VALIDATE TIME AND ATTENDANCE DATA
Information on time and attendance comes in various forms depending on the
employees pay scheme.
Some employees are paid on an hourly basis and therefore must record their arrival
and departure time on time cards.
Manufacturing companies may use job time tickets to record not only time present
but also time dedicated to each job.
Some employees earn a fixed salary (e.g., managers and professional staff) and usually
dont record their time.
Professionals in accounting, law, and consulting firms must track their time on various
assignments to accurately bill clients.
Sales staff are often paid on a straight commission or base salary plus commission;
some may also receive bonuses for surpassing sales targets.
Increasingly, laborers may be paid partly on productivity.
Some management and employees may receive stock to motivate them to cut costs
and improve service.
The payroll system needs to link to the revenue cycle and other cycles to calculate these payments.
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VALIDATE TIME AND ATTENDANCE DATA
How can information technology help?
Collecting time and attendance data electronically,
e.g.:
a) Badge readers
b) Electronic time clocks
c) Data entered on terminals
d) Touch-tone telephone logs
Using edit checks to verify accuracy and
reasonableness when the data are entered.
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PREPARE PAYROLL
The employees department provides data about hours worked.
A supervisor confirms the data.
Pay rate information is obtained from the payroll master file.
Gross pay is calculated:
a) Hourly Employees: Gross pay = (hours worked x wage rate) +
Overtime + Bonuses
b) Salaried Employees: Gross pay = annual salary x fraction of
year worked
Payroll deductions are summed and subtracted from gross pay to
obtain net pay. There are two types of deductions:
a) Payroll tax withholdings
b) Voluntary deductions


Human Resources Cycle
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PREPARE PAYROLL
The following are printed:
a) Paychecks for employees--often accompanied by an
earnings statement, which lists pay detail, current
and year-to-date.
b) A payroll register which lists each employees gross
pay, deductions, and net pay (current and year-to-
date) in a multi-column format
As payroll transactions are processed, labor costs are
accumulated by general ledger 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 posted to the general ledger.
Other payroll reports and government reports 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 good documentation
Procedures:
When paychecks have been prepared, the payroll register is sent to
accounts payable for review and approval.
A disbursement voucher is prepared to authorize transfer of funds
from checking to the payroll bank account.
a) For control purposes, checks should not be drawn on the companys
regular bank account
b) A separate account (payroll imprest 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 payroll register 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 and recording from distribution of
checks).
Re-deposits unclaimed checks in the companys bank
account.
Sends a list of these paychecks to internal audit for
investigation.
Returns the payroll register to payroll department, where it
is filed with time cards and job time tickets.
Sends the disbursement voucher to accounting clerk to
update general ledger.
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CALCULATE & DISBURSE BENEFITS AND
TAXES
The employer pays the following payroll taxes and employee
benefits that were withheld from the employees paychecks:
federal and state taxes
employees share of Social Security & Medicare tax.
voluntary deductions such as retirement contributions, health
insurance premiums, flexible spending contributions, etc.
In addition, the employer pays:
A matching amount of Social Security
Federal and state unemployment taxes
The employer share of health, disability, and life insurance
premiums, as well as pension contributions
The company must periodically prepare checks or EFT to pay tax
and other liabilities.
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OUTSOURCING OPTIONS
Many entities outsource payroll and HRM to:
Payroll service bureaus (who maintain the payroll master file and
perform payroll processing activities); or
Professional employer organizations (PEOs), who also administer and
design employee benefit plans, in addition to processing payroll
When organizations outsource payroll processing, they send the service
bureau or 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
Outsourcing is especially attractive to small and mid-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
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CONTROL: OBJECTIVES, THREATS,
AND PROCEDURES
Following is a discussion of threats to the HRM/payroll
system, organized around three areas:
Employment practices
Payroll processing
The major threats in the employment practices area
are:
THREAT 1: Hiring Unqualified or Larcenous
Employees
THREAT 2: Violation of Employment Law



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THREATS IN PAYROLL PROCESSING
The major threats in the payroll processing area are:
THREAT 3: Unauthorized Changes to the Payroll Master
File
THREAT 4: Inaccurate Time Data
THREAT 5: Inaccurate Processing of Payroll
THREAT 6: Theft or Fraudulent Distribution of Paychecks
Human Resources Cycle
ACC 444 Enterprise Process Analysis
HRM and Payroll Cycle
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