CHAPTER 15

THE HUMAN RESOURCES MANAGEMENT AND PAYROLL CYCLE

The human resources management (HRM)/ payroll cycle is a recurring set of business
activities and related data processing operations associated with effectively managing the
employee workforce. The more important tasks include the following: recruiting and hiring new
employees, training, job assignment, compensation (payroll), performance evaluation, and
discharge of employees due to voluntary or involuntary termination.

The HRM-related activities and the collection of information about the use of employee time
occur daily. The actual processing of payroll occurs only periodically because in most
organizations employees are paid on a weekly, biweekly, or monthly basis rather than every
day. The HRM/payroll master database provide descriptive information. To more effectively
use employees’ knowledge and skills, many organizations have invested in knowledge
management systems. Knowledge management systems not only serve as a directory
identifying the areas of expertise possessed by individual employees, but also capture and store
that knowledge so that it can be shared and used by others. These systems can significantly
improve productivity. The payroll system has five major sources of inputs. The HRM
department provides information about hiring, terminations, and pay-rate changes due to raises
and promotions. The checks are the payroll system’s principal output. Employees receive
individual pay checks in compensation for their services. A payroll check is sent to the bank to
transfer funds from the company’s regular accounts to its payroll account. The payroll system
produces a variety of reports for internal and external use.

There are three types of data processing integrity controls that can mitigate the threat of payroll
errors.

 Batch totals. If the original and subsequent hash totals of employees numbers agree, it
means that all payroll records have been processed. It also means that data input was
accurate, and no bogus time cards were entered during processing.

 Cross footing the payroll register. The total of the net pay column should equal the total of
gross pay less total deductions. If it does not, an error occurred in processing that needs to
be promptly investigated and corrected.
 A payroll clearing account. This is a general ledger account that is used in a two-step
process to check the accuracy and completeness of recording payroll costs and their
subsequent allocation to appropriate cost centers.

Discussion Question

15.1 Should CPA firms continue to use time sheets for their employees? Why, or why not?

Answer :

The importance of timesheets for employees is something every company should consider. This
time tracking method establishes proper synchronization between the number of employees and
productivity levels.Software for this process empowers supervisors to arrange scheduling
without errors commonly associated with manual processes. Supervisors can track performance
and make effective departmental decisions.The flexible use of timesheets does more than
calculate payroll. Now, this method of tracking employee time is also useful for management
accounting. Managers can record start and end times for tasks, and identify problematic ones
that may delay completing projects. A detailed breakdown of each task is also useful for
different projects.A major use for timesheets is in a project management environment.
Increasingly, employers see benefits of timesheets for costing and estimation of projects.
Additionally, managers can compare planned costs versus actual costs for different projects and
programs.This information helps with current projects and planning future ones.

15.2 An important step in the payroll cycle is to validate each employee’s time and attedance
data. How an employee’s time and attendance data is collected differs depending on her pay
status. Explain how IT can reduce the risk of intentional inaccuracies in time and attendance
data. (For example, some manufacturing companies now use biometric authentication
techniques, such as hand scans, to verify the identity of the employee who is clocking in and out
of work.)

Answer :

IT can also reduce the risk of intentional inaccuracies in time and attendance data.
1. Access control to the payroll system: The company can use biometric authentication
techniques, such as hand scans, to verify the identity of the employee who is clocking in and out
of work. The objective is to prevent an employee from leaving work early but having a friend
falsely record that person as being at work. On the other hand, the data entry is conducted by an
authorized payroll clerk after collecting time cards from different departments.

2. Segregation of duties is also important. Employee’s time card data should be reconciled to the
job-time ticket data by someone not involved in data entry. The total time spent recorded on the
job-time tickets may be less than the attendance time indicated on an employee’stime card
because of idle time occasionally. (iii) Requiring departmental supervisors to review and approve
time cards and job-time tickets provides a detective control on the accuracy of time and
attendance data. Supervisory review is particularly important for employees who works at home
or customers’ placeto make sure they are not operating a personal business using company-
provided assets.

15.3 You are responsible for implementing a new employee performance measurement system
that will provide factory supervisors with detailed information about each of their employees on
a weekly basis. In conversation with some of these supervisors, you are surprised to learn they
do not believe these reports will be useful. They explain that they can already obtain all the
information they need to manage their employees simply by observing the shop floor. Comment
on that opinion. How could formal reports supplement and enhance what the supervisors learn
by direct observation?

Answer :

Formal reports on employee performance are not intended to replace direct observation, but to
supplement it. Direct observation is important, but a manager cannot observe all employees all
the time. It is also difficult to accurately summarize detailed observations across time.

Well-designed reports provide quantitative summary measures of aspects of employee

15.4 Sales staff are often paid in a different manner compared to other employees. Explain how
the payment of sales staff can differ from the other staff, such as secretarial staff.

Answer :

Sales staffs are often paid either on a straight commission basis or a combination of a salary
plus commissions. This is done to achieve or exceed sales target. The HRM/payroll system will
need input from the sales and other cycles to properly calculate commissions and bonuses for
such employees. It is important that an incentive and bonus system sets realistic, attainable
goals that are congruent with corporate objectives (examples: increase profit, increase market
share, increase reputation etc). It is also important that managers monitor incentive and bonus
goals and ensure that the attainment of such goals does not lead to undesirable behavior. Using
electronic direct deposit for payroll helps employers save time and avoid duplicate paychecks.
The manager is required to sign on a list of payroll (employee name, bank account and amount)
instead of signing on a number of individual paychecks one by one. It also reduces
administrative work for distributing the paychecks to employee and save postage for mailing
the check to employee.

15.5 Describe the benefits and threats of incentive and bonus programs. Explain the benefits,
both to companies and employees, of using electronic direct deposit for payroll.

Answer :

There are many benefits to offering direct deposit, whether it’s in response to a major business
disruption or at any point during your business operations:

 Your business can reduce the time spent on certain payroll-related tasks.

 Your business can save money by not writing, printing, and mailing checks

 Your business can pay employees on time.

 Your business can be more environmentally responsible

 Your business can be more secure.

REQUIRED

a. Identify and describe at least three weaknesses in Arlington Industries’ payroll process.

 The payroll processing system at Arlington Industries violates the principle of segregation
of duties. The same individual verifies time cards, inputs payroll information into the
master file, prints the checks, machine-signs the checks, distributes the checks, and
prepares the payroll journal entry.

 There is no authorization of employees' time cards by a supervisor or other objective party

 Time cards are not stored securely when completed on Fridays.

 There is no authorization of overtime.

 The payroll checks are not prenumbered nor are they properly stored. As a result, there is
no audit trail to verify check usage.

 Supervisors for the second and third shifts distribute paychecks.

b. Identify and describe at least two different areas in Arlington’s payroll processing system
where controls are satisfactory. (CMA Examination, adapted)

 The personnel department determines the wage rate and initiates the setup of payroll
records, which is a good example of segregation of duties.

 A backup of the master file is made after each weekly processing of the payroll.

 A local accounting firm provides Arlington Industries with updates on tax rates.

 Time cards are reviewed for accuracy.

CASE 15-1 Research Report: HRM/Payroll Opportunities for CPAs

Payroll has traditionally been an accounting function, and some CPAs have provided payroll
processing services to their clients. Today, CPAs are finding additional new lucrative
opportunities to provide not only payroll processing but also various HR services. Write a brief
report that compares the provision of payroll and HR services by CPAs with that of national
payroll providers. Perform the following research to collect the data for your report :
1. Read the articles “Be an HR Resource for Your Clients,” by Michael Hayes, and “Hired Help:
Finding the Right Consultant,” by Joanne Sammer, both of which were published in the
November 2006 issue of the Journal of Accountancy.

2. Contact a local CPA firm that provides payroll and HR services, and find out what types of
services they perform and what types of clients they serve.

Reports will of course vary from student to student; however, the following presents some
points that should appear in a student’s report:

1. CPA’s naturally have the necessary skills to provide payroll and human resource (HR)
services.

2. Although national payroll providers also provide the same services, CPA’s are in a better
position to provide those services and recommend benefit consultants due to their detailed
knowledge of their client’s business, operations, and internal needs.

3. Even if a CPA does not offer payroll/HR services, they are in good position to help their
client’s choose the consultant for the work that is required.

4. Some of the payroll/HR services a CPA can offer are as follows:

a. Payroll administration

b. Benefits administration

c. Retirement plan administration

d. Human resource consulting

e. Regulatory compliance

f. Outsourcing

g. Management recruiting

h. CFO outsourcing/consulting

i. Labor relations

j. Acquisition/divestiture HR related consulting