 allocates labor costs to products and

COMPAI (HRM & PAYROLL) departments for use in product pricing

WHAT IS HUMAN RESOURCE MANAGEMENT? and mix decisions.
 the controller manages the payroll
The human resources management (HRM)/payroll system
cycle 2. HRM system
 recurring set of business activities and related  usually the responsibility of the director
data processing operations associated with of human resources
effectively managing the employee workforce. OVERVIEW OF HRM PROCESS AND
The more important tasks include the following: INFORMATION NEEDS
1. Recruiting and hiring new employees
 normally done only once for Organizational success
each employee.  depends on skilled and motivated
2. Training employees because their knowledge and
 are done repeatedly as long as skills affect the quality of the goods and
the employee works for the services provided to customers.
company
3. Job assignment Knowledge and skills
 are done repeatedly as long as  principal component of the company’s
the employee works for the product, and labor costs represent the
company major expense incurred in generating
4. Compensation (payroll) revenues.
 are done repeatedly as long as
the employee works for the To more effectively use employees’ knowledge and
company skills, many organizations have invested in knowledge
 The payroll system handles management systems. What are they?
compensation and comes under
the purview of the controller. Knowledge Management System (KMS)
5. Performance evaluation
 is a software that stores and organizes
 are done repeatedly as long as
expertise possessed by individual
the employee works for the
employees so that the knowledge can be
company
shared and used by others.
6. Discharge of employees (voluntarily
or involuntarily The HRM-related activities (information about hiring,
 normally done only once for firing, transfers, training, etc.) and the collection of
each employee. information about the use of employee time occur daily.
In most companies these six activities are split The actual processing of payroll, however, occurs only
between a payroll system and an HRM system. periodically because in most organizations employees
are paid on a weekly, biweekly, or monthly basis rather
The HRM system handles the other five tasks
than every day.
and comes under the purview of the director of
human resources. (except compensation) Thus, payroll is one application that continues to be
processed in batch mode.
 Payroll costs are also allocated to products and
departments for use in product pricing and mix General Issues throughout entire
decisions.
HRM/payroll cycle
In most companies, these six activities are split between THREATS CONTROL
two separate systems. Inaccurate or invalid  Data processing
master data integrity controls
1. Payroll System  Restriction of access
 compensating employees, is the payroll to master data
system's primary function
  Review of all Checks are also issued to government agencies,
changes to master insurance companies and other organizations to meet
data company obligations (taxes, insurance premiums).
Unauthorized disclosure  Access controls
of sensitive information  Encryption Payroll System produces a variety of reports which we
 Tokenization discuss later, for internal and external use.
Loss or destruction of  Backup and disaster
There are five basic activities in the payroll cycle:
data recovery procedures
Hiring unqualified or  Sound hiring
larcenous employees procedures, including 1. Update payroll & master file
verification of job 2. Validate time and attendance data
applicants’ 3. Prepare payroll
credentials, skills, 4. Disburse payroll
references, and 5. Disburse payroll taxes and miscellaneous
employment history deductions
 Criminal background Update payroll and Master Database
investigation checks
of all applicants for Update payroll and Master
finance-related
positions Database
Violations of  Thorough
employment laws documentation of Updating the payroll and master database involves a
hiring, performance systematic process to ensure accuracy and completeness
evaluation, and in employee records and compensation information.
dismissal procedures The Human Resource Management (HRM) department
 Continuing education typically plays a central role in updating the payroll
on changes in activity cycle. Here's how HRM is responsible for this
employment laws process:
1. Data Collection
2. New Hires and Terminations
Payroll Cycle Activities
3. Employee Changes
HRM department provides information about hirings, 4. Time and Attendance Management
terminations, and pay-rate changes. THREATS CONTROL
Unauthorized changes to  Segregation of duties:
Employees provide changes in discretionary deductions payroll master data HRM department
(insurances, etc) updates master data,
but only payroll
Various departments provide data about the actual
department issues
hours worked by employees. paychecks
Government agencies provide tax rates and regulatory  Access controls
instructions. Inaccurate updating of  Data processing
payroll master data integrity controls
Insurance companies and other organizations provide  Regular review of all
instructions for calculating and remitting various changes to master
withholdings. payroll data

checks (which may be electronic) are the payroll Validate time and attendance Data
system’s principal output.
How employee time and attendance data is collected
Employees receive individual paychecks in differs depending on the employee's pay status.
compensation for their services. 1. Time card - A document that records the
employee's arrival and departure times for each
A payroll check is sent to the bank to transfer funds work shift.
from the company’s regular accounts to its payroll 2. Time sheet - A data entry screen (or paper
account. document) used by salaried professionals to
 record how much time was spent performing batch totals, cross-
various tasks for specific clients. footing of the payroll
register, use of a
THREATS CONTROLS payroll clearing
Inaccurate time and  Source data account and a zero-
attendance data automation for data balance check
capture  Supervisory review of
 Biometric payroll register and
authentication other reports
 Segregation of duties  Issuing earnings
(reconciliation of job- statements to
time tickets to time employees
cards)  Review of IRS
 Supervisory review guidelines to ensure
proper classification
Prepare Payroll of workers as either
employees or
First, payroll transaction data is edited, and the independent
validated transactions are then sorted by employee contractors
number.
Next, all payroll deductions are summed, and the total
Disburse Payroll
is subtracted from gross pay to obtain net pay. Payroll Disbursing payroll
deductions fall into two broad categories: payroll tax  the final step in the payroll activity cycle, where
withholdings and voluntary deductions. employees receive their compensation for their
work.
Once net pay is calculated, the year-to-date fields for Payroll disbursement
gross pay, deductions, and net pay in each employees'  ensures that employees receive timely
record in the payroll master file are updated. compensation for their work, including wages,
salaries, bonuses, and other benefits.
Two main reason of maintaining accurate cumulative
 This timely payment is crucial for meeting
earning records.
employees' financial obligations and maintaining
First, because Social Security tax withholdings and
their morale and satisfaction.
other deductions have cutoffs, the company must know
when to cease deductions for individual employees.
Within this activity, most employees are paid either
by:
Second, this information is needed to ensure that the
1. Check
appropriate amounts of taxes and other deductions
2. Direct deposit
are remitted to government agencies, insurance
3. In some industries, such as construction, cash
companies, and various charitable organizations. This
payments may still be made, but does not
information also must be included in the various reports
provide good documentation
filed with those agencies.
THREATS CONTROLS
Theft or fraudulent  Restriction of
Next, the payroll and deduction registers are created.
distribution of physical access to
The payroll register lists each employee's gross pay,
paychecks blank payroll
payroll deductions, and net pay in a multicolumn format. checks and the
check signature
Finally, the system prints employee paychecks (or machine
facsimiles, in the case of direct deposit). These also  Restriction of
typically include an earnings statement, which lists the access to the FFT
amount of gross pay, deductions, and net pay for the system
current period and year-to-date totals for each category.  Pre-numbering and
THREATS CONTROLS periodically
Errors in processing  Data processing accounting for all
payroll integrity controls: payroll checks and
 review of all EFT Other deductions: Apart from taxes, employers also
direct deposit have to handle deductions for various purposes like:
transactions
 Require proper 1. Court-ordered payments
supporting  If an employee has to pay alimony, child
documentation for support, or has bankruptcy payments,
all paychecks
the employer needs to deduct these
 Use of a separate
amounts from the paycheck and send
checking account
for payroll, them to the appropriate recipients as
maintained as an ordered by the court.
imprest fund 2. Insurance premiums
 Segregation of  Employers might deduct money to cover
duties (cashier health, disability, or life insurance
versus accounts premiums for their employees. They
payable; check also might contribute some or all of
distribution from these amounts themselves.
hiring/firing; 3. Retirement plans
independent  Employers might match employees'
reconciliation of the contributions to retirement plans like
payroll checking
401(k)s or pension plans.
account)
4. Flexible benefits plan
 Restriction of
access to payroll  Some companies offer flexible benefit
master database plans where employees can choose
 Verification of different options for medical insurance,
identity of all retirement plans, and charitable
employees contributions. This means more
receiving paychecks customization for employees but also
 Redepositing requires careful management by the
unclaimed employer's HR/payroll system.
paychecks and
investigating cause FLEXIBLE BENEFITS PLANS
 A plan under which each employee receives
CALCULATE AND DISBURSE some minimum cover age in medical insurance
and pension contributions, plus additional
EMPLOYER-PAID BENEFITS, benefit "credits" that can be used to acquire extra
TAXES, AND VOLUNTARY vacation time or additional health insurance.
EMPLOYEE DEDUCTIONS These plans are sometimes called cafeteria- style
benefit plans because they offer a menu of
The final payroll activity is to calculate and remit
options.
payroll taxes and employee benefits to the appropriate
government or other entity (circle 5.0 in Figure 15-4)
Disburse payroll taxes and miscellaneous
deductions
PROCESS: Employers must pay Social Security taxes
THREAT CONTROLS
in addition to the amounts withheld from employee
Failure to make  Configuration of
paychecks. Federal and state laws also require employers required payments system to make
to contribute a specified percentage of each employee's required
gross pay, up to a maximum annual limit, to federal and payments using
state unemployment compensation insurance funds. current
instructions from
Tax-related disbursements: Employers must ensure IRS
that they correctly calculate and pay mandatory taxes Untimely Payments  Same as above
from employees' paychecks to the government. Inaccurate Payments  Processing
Integrity Controls
  Supervisory of benefits that large companies
review of reports typically provide.
 Employee review
of Earnings 3. Freeing up of computer resources
Statement  A payroll service bureau or PEO
eliminates one or more accounting
OUTSOURCING OPTIONS: PAYROLL SERVICE information system (AIS) applications
BUREAUS AND PROFESSIONAL EMPLOYER (payroll and benefits management).
ORGANIZATIONS
In an effort to reduce costs, many organizations As the basis for competitive advantage increasingly
are outsourcing their payroll and HRM functions to hinges on employees' skills and knowledge, the effective
payroll service bureaus and professional employer and efficient management of the payroll and HRM
organizations. functions becomes increasingly important. Outsourcing
may provide a way to reduce costs. However, companies
A payroll service bureau maintains the payroll master need to be sure to carefully monitor service quality to
data for each of its clients and processes payroll for ensure that the outsourced system effectively integrates
them. HRM and payroll data in a manner that supports
effective management of employees.
A professional employer organization (PEO) not only
processes payroll but also provides HRM services such Conclusion and Summary:
as employee benefit design and administration. Because
they provide a narrower range of services, payroll The HRM/payroll cycle information system consists
service bureaus are generally less expensive than PEOS. of two related, but separate, subsystems: HRM and
payroll.
Payroll service bureau
 An organization that maintains the payroll The HRM system records and processes data about the
master file for each of its clients and performs activities of recruiting, hiring, training, assigning,
their payroll processing activities for a fee. evaluating, and discharging employees.

Professional employer organization (PEO) The payroll system records and processes data used to
pay employees for their services.
 An organization that processes payroll and also
provides human resource management services
such as employee benefit design and
administration.
Payroll service bureaus and PEOs are especially
attractive to small and midsized businesses for the
following reasons:

1. Reduced costs.
 Payroll service bureaus and PEOs
benefit from the economies of scale
associated with preparing paychecks for
a large number of companies. They can
charge fees that are typically less than
the cost of doing payroll in-house.

2. Wider range of benefits

 PEOS pool the costs of administering
benefits across all their clients.
Consequently, a PEO enables smaller
companies to offer the same wide range