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301 North Ninth Street Richmond, VA 232191927 Telephone: (804) 7807628 Fax: (804) 7807099 Email: [email protected]

Memorandum Internal Audit Services

TO: The Honorable Members of the School Board of the City of Richmond, Virginia

Dr. Yvonne Brandon Superintendent

FROM: Debora R. Johns, CGAP Chief Auditor

DATE: June 22, 2009

SUBJECT: Audit Report on the Review of the Payroll Process Audit Assignment No.: A3101090001

As a part of our approved Fiscal Year 2009 audit plan, Internal Audit Services completed the audit work on the payroll process. Our work was performed in accordance with the International Standards for the Professional Practice of Internal Auditing. The audit covered the period of July 1, 2006 through May 31, 2009. The purpose of our audit was, but is not limited to, the following objectives: to determine whether employees are accurately paid in accordance with established policies, rules, and regulations; to determine that the payroll process is comparable to that of the surrounding school districts; to determine if adequate segregation of duties over the payroll process exists; to ensure individuals on the payroll were bona fide employees; and to ensure access to the employees’ personnel and payroll records were adequately restricted and secured.

We commend the payroll function for paying employees on time, for placing payroll forms on Infonet (intranet website) and for providing basic training at the school district’s Leadership Conference. During our audit, we found no fictitious employees on the payroll. Although our audit procedures indicate the items mentioned above were properly handled, there are areas that need improvement such as stronger management is needed of the payroll function, the payroll processing manual needs to be updated, supervisory controls are not in place to ensure all leave taken is recorded and best practices can be implemented to assist with improving the payroll process.

Although we exercised due professional care in the performance of this audit, this should not be construed to mean that unreported noncompliance or irregularities do not exist. The deterrence of fraud is the responsibility of management. Audit procedures alone, even when carried out with professional care, do not guarantee that fraud will be detected. The purpose of the audit report is to furnish management independent objective analyses, recommendations, counsel, and information concerning the activities reviewed. The audit report is a tool to help management identify weaknesses and implement specific improvements.

We would like to acknowledge the cooperation extended to us during the performance of this audit by employees of the Payroll function.

If you have any questions concerning this report, please contact me. My telephone number and email address are shown below.

TABLE OF CONTENTS

Pages

Audit Report in Brief……………………………………………………………………….......15

Background………...………………………………………………………………………….....6

Objectives & Scope and Methodology………….…………………………………………......78

Audit Findings and Conclusions Stronger Management is Needed for Payroll Function……………………………....910 Redistribute the Workload and Eliminate Two Positions ……..…………………...1012 Update Payroll Processing Manual and Incorporate Additional Policies and

Procedures …………………………..……………………………………...1213 Ensure All Support Documentation for Payroll is Maintained

New Hires…………………..…………………………………………..………14 Terminations……………………………………………………………… ..1516

Implement Best Practices to Improve Process…………………………………..….1719 Pay Employees without Direct Deposit with Payroll Cards and Implement Direct

Deposit for All Employees…………………………………………………1920 Develop a Better System for Collecting Accounts Receivables Due From

Employees for Overpayments………………………………………………2122 Automate Garnishment Transactions and Charge a Processing Fee………………..2223 Employee Leave Taken but Not Recorded in System and Payroll Verifications

are Not Submitted Timely…………………………………………………..2324 Ensure Employees Follow Procedure on Recording Compensatory Time to

System………………………………………………………………………2526 Implement Changes for Manual Checks……………………………………...….....2628

Other Matters to Report………………………………………………………………………..29

Acknowledgements………………………................................................................................30

AUDIT REPORT IN BRIEF

Audit Review of Payroll Process

Scope X FinancialRelated Computer/EDP X Operational/Program Results Special Project

Team Members: Debora Johns, CGAP, Chief Auditor, and Yolanda Tennessee, Auditor

Objectives: Ø To determine if Richmond Public Schools (RPS) payroll process is comparable to surrounding

jurisdictions. Ø To determine if the payroll staff is complying with system policies and procedures and

federal/state laws when authorizing payment. Ø To ensure that there is adequate segregation of duties over the payroll process in order to

minimize errors in payroll transactions. Ø To ensure that all new hires were legitimate, properly authorized and accurately recorded. Ø To ensure all current employees on payroll are bona fide. Ø To ensure terminated employees were properly recorded and processed on payroll and no longer

remain. Ø To ensure authority for all pay entitlement is clearly defined and effectively exercised. Ø To ensure that all contract changes are correct on the system. Ø To ensure that all salary deductions are being properly authorized and calculated accurately. Ø To ensure that employment taxes, tax and nontax reporting requirements are in compliance with

federal/state laws. Ø To ensure that the payroll checks and payroll documentation are properly secured and access

restricted to the appropriate personnel. Ø To determine if employees receive training on system usage as appropriate by the department.

Audit Findings:

Ø Due to the high risk involved with payroll, stronger management is needed for the payroll

function. With the limited resources that exist for the organization, it is imperative that

managers ensure that all funds are accounted for and managed in the most efficient way

possible.

Ø In 199596 the payroll section had 9 employees. Since that time the process has improved

and a lot of changes have been made which decreased the workload. As of FY 2009, there

are 9 employees assigned to work with the payroll process. The current staffing level does

not reflect the decreased workload.

2 AUDIT REPORT IN BRIEF

(Continued)

Ø The Payroll Processing Manual has not been updated since fiscal year 199596. The manual

lacks policies and procedures on key aspects of the payroll function.

Ø All support documentation for payroll transactions is not maintained in the file for new hires

and terminated employees.

Ø We reviewed the book “Best Practices for Payroll” by Steven Bragg, and we’ve identified the

best practices that may assist with improving the payroll process.

Ø As of May 29, 2009 we have approximately 1,173 employees (23%) who do not have direct

deposit.

Ø The Supervisor of Payroll does not have an adequate system for collecting accounts

receivables due from salary overpayments. One of the largest overpayments in the amount of

$10,050 was set up with a payment agreement of $50 per pay period or 201 payments.

Ø For garnishments, payroll manually calculates an employee’s disposable income, determines

the appropriate deductible amount in light of any other garnishment orders applicable to the

same employee, enters deduction codes in the payroll system, pays the garnishing entity and

monitors when the garnishment will be completed. Payroll does not charge the employee a

processing fee for the garnishment. We have processed approximately 331 garnishments

within the audit period. The department is missing the opportunity of collecting revenue of at

least $3,310 ($10 for each garnishment summons received).

Ø There is a lack of supervisory control when it comes to ensuring that all leave taken by

employees is being recorded in the system. There is also a problem with the departments not

submitting their payroll in a timely manner. We have a lot of departments that repeatedly

appear on the semimonthly notice sent out by Payroll.

Ø Compensatory time earned and taken is not always being submitted to Payroll and logged on

the system as stated in Administrative Procedure #7.04 Overtime and Compensatory Time.

Ø The Supervisor of Payroll fails to ensure that the policy on manual checks is being followed.

The number of manual checks has increased over the years from 192 in FY 2007 to 626 in

FY 2009. Also, the manual check bank account is not reconciled.


(Continued)

Audit Recommendations:

Based on our findings, we made the following recommendations:

Ø The Director of Finance should ensure that the Supervisor of Payroll is properly trained

and is creating additional management reports to better assist with the identification of

errors and questionable trends that may occur with each payroll.

Ø The Director of Finance should develop performance measures for the payroll process to

evaluate the staff’s performance on a 6 month basis.

Ø The Director of Finance should redistribute the work to allow for more work to be

completed by the employees eliminating a lot of the down time. The redistribution of

work will show that based on the amount of work coming in payroll two positions may be

eliminated. The elimination of 2 positions would generate a cost savings between

$48,942.71 and $78,412.46.

Ø The Supervisor of Payroll needs to update the payroll processing manual to reflect

current operations and to include policies and procedures on key aspects of payroll.

Ø The Supervisor of Payroll must ensure that each staff member has a copy of the payroll

processing manual and review the duties of the staff involved to ensure the tasks are

being performed properly. Ongoing training for the payroll staff should be provided to

help ensure that proper payroll procedures are followed and payroll documents are

adequately maintained.

Ø The Supervisor of Payroll needs to develop written guidelines on what documentation

should be maintained in the payroll files to ensure consistency and include this

information in the Payroll Processing Manual.

Ø The Director of Finance and Supervisor of Payroll should consider the identified best

practices and determine whether these payroll practices will help to improve the payroll

process.


(Continued)

Ø The Supervisor of Payroll needs to develop a plan of action and implement payroll cards

for all employees who normally receive a paycheck. These employees’ wages will be

available on the payroll card for usage each payday.

Ø The Superintendent should submit to the School Board for approval the consideration of

implementing a direct deposit policy which states all employees should have direct

deposit. The benefits of the policy would include saving time and money by eliminating

the manual process, reducing costs associated with printing checks, reducing

irregularities and human errors and having the funds deposited to be timely and readily

available.

Ø The Supervisor of Payroll needs to work together with the Coordinator of Administrative

Services to take a more aggressive approach in collecting the amount currently due for

overpayments. The Supervisor of Payroll should contact the School Board Attorney to

obtain legal assistance to collect the overpayments.

Ø The Supervisor of Payroll needs to develop a plan of action to automate garnishment

transactions. This will eliminate a lot of the manual time utilized for handling the

garnishments and also will provide a means for tracking and properly monitoring the

garnishment information.

Ø The Superintendent should submit to the School Board for approval the consideration of

implementing charging a $10 processing fee for all garnishment summons received.

Ø The Supervisor of Payroll and Department of Human Resources needs to develop

procedures on the monitoring of employee absences and distribute these procedures to the

department and school managers.

Ø All departments should review recorded absences for their employees to ensure accuracy.

Ø The Supervisor of Payroll and the Director of Human Resources needs to reinforce to all

current employees during training, the policy on compensatory time to ensure that all

time accrued is recorded on the system and the procedures are followed as written in the

Department of Human Resources Administrative Procedures #7.04.

Ø The Supervisor of Payroll should utilize the established procedure for

supplemental/manual checks. Manual checks should only be written in extreme


(Continued)

emergency situations otherwise an employee who has not been paid can be processed on

a supplemental payroll. By enforcing the procedure that is already in place this should

cut down on the number of manual checks being processed.

Ø The Supervisor of Payroll needs to ensure that all manual checks are entered into the

financial system and should begin the process of entering all previously written checks.

We recommend that the manual check bank account is reconciled and that it is done on a

monthly basis. The payroll staff must provide the complete and accurate information to

the General Ledger section.

Management Response:

The Director of Finance and Supervisor of Payroll generally agreed with the audit findings

and recommendations with the exception of one. The Director of Finance and Supervisor of

Payroll has taken steps to correct many of the issues identified in the report and to enhance

the payroll process.

This space left intentionally blank.

Review of Payroll Process 6

Background

Richmond Public Schools (RPS) is a serviceoriented organization with over 82% of all

resources going toward salaries and benefits. Payroll represents the largest expense incurred by

Richmond Public Schools. For FY 2009, RPS budgeted $159,414,195.00 for salaries and wages

and $60,421,873.00 for employee benefits.

Salaries & Benefits

Other Expenditures

During FY 2009, Richmond Public Schools paid approximately 5,035 employees through

general and special revenue funds. Employees are paid on a semimonthly basis. Contracted

employees receive a gross pay equal 1/20 th or 1/24 th of their contracted salary in twenty or

twentyfour checks depending on their contract length and position. Temporary hourly

employees, such as substitutes, receive a gross pay equal the number of hours worked in a given

pay period.

The payroll processing system is a combination of efforts from the Human Resources

Department and Payroll function within the Finance Department. The Human Resources

Department is responsible for the maintenance of personnel records, the set up of employees in

the system, pay rates, job assignments, etc. The Payroll staff is responsible for processing the

data entered for newly hired or terminated employees and changing existing employee data that

may affect pay. Other duties include processing payroll, running reports, sorting checks,

distributing checks to the individual departments and paying overtime and other payments when

warranted. In the payroll function there are 9 FTEs, including 2 temporary employees.


Objectives

The audit focuses on the financial related and operational issues of the payroll process. The

objectives of this audit were:

Ø To determine if RPS payroll process is comparable to surrounding jurisdictions. Ø To determine if the payroll staff is complying with system policies and procedures

and federal/state laws when authorizing payment to contracted and hourly employees. Ø To ensure that there is adequate segregation of duties over the payroll process in order

to minimize errors in payroll transactions and to minimize business risks. Ø To ensure that all new hires for the company were legitimate, properly authorized and

accurately and completely recorded in a timely manner. Ø To ensure that all current employees already on the payroll are bona fide. Ø To ensure that terminated employees were properly recorded and processed on the

payroll system and to ensure that they no longer remain. Ø To ensure that authority for all pay entitlement is clearly defined and effectively

exercised and determine if contract changes are correctly computed, verified and loaded to the payroll system.

Ø To ensure that all employee salary deductions are being properly authorized, accurately calculated and completely processed in a timely manner.

Ø To ensure that employment taxes, tax and nontax reporting requirements are in compliance with applicable federal/state laws.

Ø To ensure that the payroll checks and payroll documentation are properly secured and access restricted to the appropriate personnel and that all pertinent information concerning contracted and hourly employees are being properly kept up to date and maintained to determine if documentation is properly distributed for all payroll transactions in a timely manner.

Ø To determine if employees received training on system usage as appropriate by the department.

Ø To make recommendations as deemed appropriate.

Scope and Methodology

The audit period was July 1, 2006 through May 31, 2009. The audit was to consist of, but not

limited to the following:

Ø Examine the financial controls in place for the payroll process to identify whether or not they exist and if so to determine if they are strong or weak.

Ø Provide an internal control narrative. Ø Conduct a transaction walkthrough. Ø Understand whether our payroll process is consistent with that of other surrounding

districts.


Ø Evaluate the adequacy of internal controls and conduct various audit tests to provide reasonable assurance of detecting any risk of fraud or illegal acts.

Our review was conducted, in accordance with the International Standards for the Professional

Practice of Internal Auditing. Those standards require that we plan and perform the audit to

afford a reasonable basis for our judgments and conclusions regarding the organization, program,

activity or functions under audit. An audit includes assessments of applicable internal controls

and compliance with requirements of laws and regulations when necessary to satisfy the audit

objectives. We believe that our audit provides a reasonable basis for our conclusions. Our work

focused on specific areas that have potential for abuse and misuse of public resources and may

be summarized as follows:

Ø Interviewed several employees involved with the payroll process.

Ø Reviewed School Board Policies.

Ø Reviewed best practices to determine if there are other ways to improve payroll process.

Ø Conducted surveys of surrounding districts to determine if their payroll process is

comparable to our payroll process.

Ø Conducted surveys to gain understanding and knowledge of payroll policies and

procedures.

Ø Performed audit procedures to determine whether the staff handling the payroll process

complied with policies and procedures.

Ø Reviewed documents related to handling and processing the payroll.

Ø Ran queries to obtain financial data associated with payroll.

Ø Reviewed and analyzed supporting documentation for financial transactions.

Ø Evaluated the internal controls established by management. We focused on specific areas

that have potential for abuse and misuse of public resources.

Ø Performed other work considered necessary in the circumstances.


Audit Findings and Conclusions

Stronger Management is Needed for Payroll Function

Due to the high risk involved with payroll, stronger management is needed for the payroll

function. With the limited resources that exist for the organization, it is imperative that

managers ensure that all funds are accounted for and managed in the most efficient way

possible. The Supervisor of Payroll does not employ strategic skills in analyzing the payroll

process.

The Supervisor of Payroll has a processing knowledge regarding payroll. In addition, the

request from executive management to pay employees outside of the normal pay cycle is

taken as high priority and is processed contrary to what is documented in policies and

procedures. A stepbystep plan of action of the necessary steps to reach the function’s

objectives is not present. There are a number of reports that the Supervisor should create to

find discrepancies in payroll. Payroll data should be analyzed prior to a payroll run and also

after the payroll run is complete. Additional training, cross training and the necessary

resources are not provided to the staff to accomplish their assigned duties. Controls are not

in place to evaluate the staff’s performance and no adjustment is made to processes that may

need improvement. The staff level should be reviewed to determine the appropriateness in

the number of employees assigned to handle the payroll process.

Due to the lack of knowledge and understanding, the staff cannot accomplish their job as

well as it should be. Employees are not consistent in the processing of transactions. There

can be a lack of staff focus and sense of direction, which in turn leads to much

dissatisfaction. There is a lot of idle time among the payroll staff. The risk of potential

payroll errors is high. There are missed opportunities for cost savings.


Recommendations

1) The Director of Finance should ensure that the Supervisor of Payroll is properly

trained and that additional management reports are created to better assist with the

identification of errors and questionable trends that may occur with each payroll.

2) The Director of Finance should develop performance measures for the payroll process

to evaluate the staff’s performance on a 6 month basis.

Management Response

Concur: The Director of Finance will ensure that the Supervisor of Payroll is properly

trained and that additional management reports are created to better assist with the

analysis of payroll errors or trends that may occur with each payroll. The Director of

Finance currently uses workload indicators and departmental Balanced Score Card to

measure staff performance. Beginning with fiscal year 2009, we are also using The

Council of the Great City Schools Key Performance Indicators to measure the staff’s

performance.

Target Date: September 2009 and ongoing

Redistribute the Workload and Eliminate Two Positions

We did a comparative analysis survey of Richmond Public Schools’ payroll process to that of

the other surrounding districts. This was done to determine if RPS payroll guidelines were

similar to those of other school districts. We found one district, Norfolk Public Schools

(NPS) that was comparable to ours for the benefit of showing the number of employees.

NPS processed approximately 187,475 checks in 2008 and had a total of 7 employees.

According to our Supervisor of Payroll, we processed approximately 127,923 in 2008 and we

currently have 9 employees. Over the years the payroll process has improved however the

staffing has not changed much. We did a comparison of the payroll section from FY 1996 to

that of FY 2009:


Number of Payroll Employees Fiscal Year 19951996

Number of Payroll Employees Fiscal Year 20082009

Supervisor of Payroll Supervisor of Payroll Accountant for Payroll Operations Assistant Supervisor of Payroll Operations

Lead Accountant for Payroll Accounting & Reporting

Lead Accountant for Payroll Accounting & Reporting

Senior Account Technician for Operations (4) Accountant for Operations (3) Senior Account Technician for Benefits

Accounting Account Technician

Data Entry Technician (1/2 Worked between Payroll and Accounts Payable)

Temporary Employees (2)

Temporary Employees (There were 2, but only worked part time so we counted as 1)

Total Number of Employees = 9 1/2 Total Number of Employees = 9

The following items have been incorporated to improve the process such as, automating

timekeeping which was manually done before, absence reporting is now done through the

phone and on the web, and the payroll checks are sealed instead of being stuffed in

envelopes. The data entry technician position association with Payroll was eliminated and

the current staffing level does not reflect the decreased workload.

During our audit we observed that the payroll employees have a lot of down time due to the

small amount of work coming into the department. The work is distributed by social security

numbers which allows for one employee to have more work than others and allows for a lot

of down time. Most of the busy work is done days before payroll is processed and the day

after the payroll run. Four of the employees are assigned to keying the paperwork received

from the school and/or departments. One employee is responsible for calculating all

deductions, inputting the information associated with deductions and creating the necessary

reports. This task is not performed until after the payroll has been processed. The temporary

employees are responsible for keying all hours associated with maintenance which is being

used for more than just overtime, but also for hours not reported in the time period accrued.

They also key VHSL, stipends, departmental invoices, and perform all of the filing of the

payroll files.


The payroll function only processes payroll. The accountants’ work is based on social

security numbers instead of the actual amount of work coming into the department. Unless

there is a change in position, or an employee leaves or goes out of pay, there is no actual

work associated with most employees. There is a lack of supervision for payroll to be

properly managed. There is not enough work coming into the department to justify having a

total of 9 employees.

Recommendation

3) The Director of Finance should redistribute the work to allow for more work to be

completed by the employees eliminating a lot of the down time. We believe the

redistribution of work will show that based on the amount of work coming into

payroll two positions may be eliminated. The elimination of 2 positions would

generate a cost savings between $48,942.71 and $78,412.46.

Management Response

We do not concur with the recommendation to eliminate two positions. In 1996 there

were eight full time payroll employees and three part time data entry positions. We have

since eliminated one full time position and one part time data entry position. The city

plans to add staff for the implementation of the new ERP system and we cannot afford to

eliminate staff. We will reevaluate our staffing levels during the budget process. The

Supervisor of Payroll redistributed work in the last year to the Sr. Account Technician,

Accountants and Benefits Accountant to help facilitate crosstraining within the section.

Social Security Numbers are currently redistributed annually among the staff to ensure

equal distribution of workloads to staff. We will distribute work by location instead of by

social security number as recommended in the MGT study.

Target Date: September 2009

Update Payroll Processing Manual & Include Additional Policies and Procedures

The Supervisor of Payroll has a 199596 payroll processing manual which documents the

instructions on how to process payroll. There are policies and procedures in the payroll

processing manual on time sheet processing; transportation time entry; proforma payroll


processing; early retirement payments; direct deposit transmittal and fund transfer; check

distribution; supplemental and manual checks; employee contract assignment; check voiding;

deduction and the priorities; garnishments; VRS and overpayments.

Some of the procedures need to be updated with current information. However, there is no

guidance or detailed explanation on what forms should be used, from whom or when the

forms should be received for such things as new hires and terminations nor who should

approve certain transactions. There is no information on how to account for sick, vacation

and bereavement leave, compensatory time, pay rate changes, etc. Also, there are no

procedures to show what type of documentation should be maintained by payroll in

employees’ files. Management does not have documented standards as to how business is to

be conducted, reducing the ability to hold individuals accountable. Also, there is a Financial

Procedures Manual that should also be updated to reflect the new policies and procedures to

assist managers with the proper guidelines for handling payroll items.

The Supervisor of Payroll has not reviewed the manual to determine if it should be updated

and/or whether additional procedures should be added. Payroll staff does know how to

perform certain tasks however consistency does not exist among the staff. This is a

significant weakness resulting in inefficient operations and increases the risk of errors and/or

irregularities.

Recommendations

4) The Supervisor of Payroll needs to update the payroll processing manual to reflect

current operations and to include policies and procedures on key aspects of payroll.

5) The Supervisor of Payroll must ensure that each staff member has a copy of the

payroll processing manual and review the duties of the staff involved to ensure the

tasks are being performed properly. The Supervisor of Payroll should have each staff

member sign a form acknowledging they received and read the manual. The signed

document will be placed in their employee file.


6) The Supervisor of Payroll should provide ongoing training for the payroll staff to help

ensure that proper payroll procedures are followed and payroll documents are

adequately maintained.

Management Response

Concur: The Supervisor of Payroll will ensure that each staff member has a copy of the

payroll processing manual, will review the duties of the staff involved to ensure the tasks

are being performed properly and will also make sure the manual reflects the current

policies. The Supervisor of Payroll will ensure that staff receives proper training.


Ensure All Support Documentation for Payroll is Maintained

We reviewed the payroll files for new hires and terminated employees to document if all

necessary information is available for transactions processed. Payroll sometimes processes

what has been entered prior to receiving the actual documents from Human Resources. We

identified the following:

New Hires

We reviewed a sample of new hires to ensure they were properly set up and the files in the

employees’ folder are adequate. The following criteria were tested based on the review of an

employee’s file with this documentation included:

• A notice of appointment form is present in the employee’s file.

• The notice of appointment form has a receipt date stamped on it.

• Paperwork is submitted by the Human Resources Department to the Finance

Department timely.

• All documents (social security card, photo identification card, W4 form, etc) are in the

employee file.

• Notice of appointment is approved by the Director of Human Resources or other

management.


• Employee is set up on the AS400.

• The contract amount on the AS400 matches the amount on the notice of appointment

form.

We reviewed 30 employee files and noted the following deficiencies:

• One employee did not have a payroll file therefore, we were only able to review 29

employee files (Payroll)

• 4/29 (14%) files did not have a notice of appointment form to support the new hire

(Payroll)

• 28/29 (97%) notice of appointment forms were not approved by management, but by

the coordinator who created the form or by the principal (HRD)

• 10/29 (34%) forms did not have a receipt date stamped on them (Payroll)

• 8/29 (28%) of employees’ paperwork were not submitted timely (HRD)

• 8/29 (28%) employees’ files did not have a copy of the employee’s social security

card or photo identification card (Payroll)

• 6/29 (21%) employees’ amount listed on the notice of appointment did not match

what is listed on the system but did not result in overpayment of employees (HRD)

Terminations

We reviewed a sample of terminated employees to ensure they were properly processed and removed

from the system. The following criteria were tested based on review of an employee’s file with this

documentation included:

• A notice of personnel change form is present in the employee’s file.

• The notice of personnel change form has a receipt date stamped on it.

• Paperwork is submitted by the Human Resource Department to the Finance

Department timely.

• The final salary/payout amount is properly calculated.

• The notice of personnel change form is approved by the Director of Human

Resources.


• The termination date on the AS400 should be the same date listed on the notice of

personnel change form in the employee’s file.

• Employee’s final salary/payout is received in a timely manner.

• Employees should not receive subsequent payments after their

termination/resignation date other than final salary/payout amount.

We reviewed 49 employee files and noted the following deficiencies:

• In reviewing assignment screens overall it was noticed that payroll does not always

go in and adjust the contract amount screen so that all balances are zero once a person

is terminated (Payroll)

• 6/49 (12%) did not have a personnel change form in the file to support the

termination. Although the file was not in the payroll folder, I was able to find some

of the forms on the OnBase system (Payroll)

• 19/49 (39%) change of personnel forms were not approved by management, but by

the coordinator who created the form (HRD)

• 16/49 (33%) of the forms did not have a receipt date stamped on the forms (Payroll)

• 15/49 (31%) of employees’ paperwork was not submitted timely (HRD)

• 18/49 (37%) employees’ termination date online was not the same date as listed in the

personnel file but did not result in overpayment of employees (HRD)

• 11/49 (22%) employees did not receive their final salary/payout in a timely manner

(Payroll)

Recommendation

7) The Supervisor of Payroll should work with the Department of Human Resources to

develop written guidelines and a checklist on what documentation should be

maintained to ensure consistency throughout the files and include this information in

the Payroll Processing Manual.


Management Response

Concur: Payroll Supervisor will work with Human Resources to develop written

guidelines on what documentation should be maintained to ensure consistency throughout

the files and include this information in the Payroll Processing Manual.


Implement Best Practices to Improve the Payroll Process

We commend the Payroll section on implementing the following best practices to improve

the payroll process:

Ø Installing a webbased timekeeping system

Ø Posting forms on Infonet Ø Using automated sealers for paychecks

Ø Issuing activity calendars to all timekeepers Ø Creating a yearend processing checklist

Ø Creating a backup system for payroll records Ø Isolating access to the payroll check printing capability

Ø Initiating direct deposit prenotifications

We identified additional best practices that could also assist with improving the payroll

process:

Ø Issue Electronic W2 Forms to Employees: The furnisher may provide payee

statements electronically instead of on paper if the requirements specified in the

instructions are satisfied.

Ø Stop Delivering Checks to Employees at the Office: A simple way to eliminate the

delivery of checks by hand and convince employees to switch to direct deposit is to

mail checks to their home on payday. By doing so, the payroll staff is removed

completely from the check delivery business.

Ø Install Automated Time Sheet Reminders Prior to Payroll: The payroll staff may spend

a considerable amount of time reminding employees to complete their time sheets, so

they can be paid on time. An email can be created prior to each payroll run to remind


timekeepers about when payroll is due. It will reduce the amount of followup contacts

that the payroll staff must make.

Ø Implement Self Service: An upload of a variety of employeecentric documents, such as

the employee manual, company phone directory, payroll forms and new releases can be

done. In addition to these basic functions, the site can also allow employees to access

their pay statements and W2 forms, view their earnings history, check their remaining

vacation time, see performance reviews and verify their benefit elections.

Ø Create Necessary Standard Error Checking Reports: Reports should be created and

errors should be identified so that a formal system for addressing the issues can be

developed and the appropriate controls can be implemented to reduce the incidence. It

is also useful to track error types on a trend line, to see which errors keep recurring.

Ø Review Payroll Trends after Each Pay Run: An added benefit is that the payroll

manager can notify management of any reasons for unusual payrelated variances on a

proactive basis, rather than waiting for someone to ask questions at a later date.

Ø Verify All Amounts Owed by Employees at Termination: The best way to ensure that

employees pay for any owed amounts at the point of termination is to maintain a

checklist of potential repayment items.

Ø Verify that Year End Paid Leave Balances are Properly Accrued and Carried Forward

Properly: As soon as possible after yearend, the payroll staff should verify on a spot

check basis that employee vacation balances have been rolled forward into the next

year correctly. This review cannot wait, because employees are likely to spot errors

very early in the year.

The process has never been reviewed or compared to other districts to identify areas for

improvement. The implementation of best practices allows for the organization to have more

efficient operations in Payroll. The costs incurred with printing the W2 forms is $17,000 for

the audit period and the cost associated with the delivery of checks is minimal.


Recommendation

8) The Director of Finance and Supervisor of Payroll should consider the identified best

practices and determine whether these payroll practices will help to improve the

payroll process.

Management Response

Concur: Director of Finance and Supervisor of Payroll will review best practices in this

report and evaluate them for implementation along with the ICTS department.

Target Date: February 2010

Pay Employees without Direct Deposit with Payroll Cards and Implement a Direct

Deposit Policy for All Employees

The Code of Virginia 40.129 states, “Payment of wages or salaries shall be (i) in lawful

money of the United States, (ii) by check payable at face value upon demand in lawful

money of the Unite States, (iii) by electronic automatic fund transfer in lawful money of the

United States into an account in the name of the employee at a financial institution,

designated by the employee, or (iv) by credit to a prepaid debit card or card account from

which the employee is able to withdraw or transfer funds with full disclosure by the

employer of any applicable fees and affirmative consent thereto by the employee.

Failure of the employee to designate a financial institution or consent to payment by credit to

a prepaid debit card or card account under clause (iii) or clause (iv) shall require payment of

wages and salaries to be made in accordance with clause (i) or clause (ii) of this subsection.

However, payment may be under clause (iv) to an employee who has not affirmatively

consented thereto if (a) payment cannot be made under clause (iii) because the employee has

failed to designate a financial institution and (b) the employee is employed at any facility

where the operation of amusement devices is authorized pursuant to a certificate of

inspection and any regulations promulgated thereunder.”


During our audit, we noted that approximately 77% (3,862) of RPS employees utilize direct

deposit for their earnings. As of May 29, 2009 we have approximately 1,173 employees

(23%) who do not have direct deposit. Direct deposit and the benefits of having it is not

being aggressively marketed to employees. The costs incurred associated to printing checks

for the audit period was $15,641.05.

Recommendations

9) The Supervisor of Payroll should develop a plan of action and implement payroll

cards for all employees who normally receive a paycheck. These employees’ wages

will be available on the payroll card for usage each payday. The benefits of

employees using payroll cards is that it reduces or eliminates check cashing fees, it

reduces the need to carry a lot of cash, it offers the ability to make purchases using

credit card networks, it offers 24 hour access to funds via ATM’s with no need to

wait in lines, it makes money transfers more available, and provides a pseudo bank

account (funds do not need to be withdrawn entirely as with using a check casher).

10) The Superintendent should submit to the School Board for approval the consideration

of implementing a policy to include that all employees should have direct deposit.

The benefits of the policy would include saving time and money by eliminating the

manual process, reducing costs associated with printing checks and reducing

irregularities and human errors and having the funds deposited would be timely and

readily available.

Management Response

Concur: The Supervisor of Payroll will work with ICTS department to determine

feasibility payroll cards to replace paper checks.

Target Date: May 2010


Develop a Better System for Collecting Accounts Receivables for Overpayments

Each payroll accountant is responsible for keeping track of the collections of overpayments

for employees assigned to them. The Lead Accountant keeps track of all the high dollar

overpayments and maintains this information in an Excel spreadsheet. There is a section in

the AS400 where the temporary docks for all of these overpayments are maintained. One of

the large overpayments in the amount of $10,050 was set up with a payment agreement of

$50 per pay period or 201 payments. It will take the employee 8.375 years to repay the

overpayment. This employee was overpaid due to hours being reported as worked although

the employee was on educational leave. If an employee leaves the system no attempt is made

to collect on the money due from overpayments. The information continues to remain in the

system in case the person returns to work for the school system again in which the dock will

pick up from where it left off.

About 42% (8 of 19) of the overpayments is the result of the employees being set up by

Human Resources with the wrong salary amount or hourly rate. The remaining

overpayments is due to employees being paid for work not done, continuing to be paid after

resignations, a pay adjustment paid out incorrectly or the employee just wasn’t due to be paid

the money. The total amount that was due from the employees that are currently being

tracked was $50,356.96 of which $14,433.31 has been collected. As of May 31, 2009 the

total amount that is still due for overpayments is $35, 923.65.

There are 4 employees who were overpaid in 2007 and Payroll has not been able to collect

from them. The amount associated with these 4 employees is $1,710.64. Based on some of

the repayment agreements in place, the school system could end up with a large loss in

revenue in the event that some of the employees terminate their employment with RPS.

Recommendation

11) The Supervisor of Payroll and Coordinator of Administrative Services should take a

more aggressive approach in collecting the amount currently due for overpayments.


The Supervisor of Payroll should contact the School Board Attorney to obtain legal

assistance to collect the overpayments.

Management Response

Concur: We recommend that HRD be responsible for securing repayment agreement and

developing accompanying policy to include a time limit for repayment. Payroll will

aggressively collect overpayment and referred any uncollected amounts to the School

Board Attorney.


Automate Garnishment Transactions and Charge a Processing Fee

According to the Virginia Department of Labor and Industry, “An employer may charge the

employee a processing fee, not to exceed $10 for each garnishment summons and $20 for

each tax lien.” For support orders, “Under Virginia law, the employee may be charged $5.00

for each pay period for support orders.” All garnishment orders are received and handled by

Payroll. Payroll manually calculates an employee’s disposable income, determines the

appropriate deductible amount in light of any other garnishment orders applicable to the

same employee, enters deduction codes in the payroll system, pays the garnishing entity and

monitors when the garnishment will be completed. Payroll does not charge the employee a

processing fee for the garnishment.

The payroll section has been operating using the same process that has been put in place from

years ago. The workload for one of the payroll technicians is substantial due to the number

of employees subject to garnishment orders.

Due to the large number of garnishment summons received and processed, it is possible that

some payment instructions can be lost in transition which will result in missing payments that

can open the system up to fines and penalties. The department is missing the opportunity of

collecting revenue of at least $3,310 ($10 for each garnishment summons received).


Recommendations

12) The Supervisor of Payroll needs to develop a plan of action to automate garnishment

transactions. This will eliminate a lot of the manual time utilized for handling the

garnishments and also will provide a means for tracking and properly monitoring the

garnishment information.

13) The Superintendent should submit to the School Board for approval the consideration

of implementing charging a $10 processing fee for all garnishment summons

received.

Management Response

Concur: Payroll Supervisor has submitted a work request to ICTS to have garnishment

calculations automated.

Target Date: June 2010

Employee Leave Taken but Not Recorded in System and Payroll Verifications are Not Submitted Timely

We reviewed the leave time for contract employees to identify if all leave time is reported

and to see if all additional hours worked is accurate. However, department managers are

required to submit absences in accordance with the payroll schedule. There is a lack of

supervisory controls when it comes to ensuring that all leave taken by employees is being

recorded in the system. We reviewed the leave of all administrative employees to determine

the appropriateness of the leave taken and the ending leave balances. During our review, we

identified 11 employees whose leave time looks questionable due to the small amounts of

time coded for the entire audit period. In one case the employee has only taken 24 hours of

leave time which was actually in 2007. No time has been taken by this employee since that

time.

We also performed observation of floors 12 th through 17 th during holiday times to ensure that

absent employees properly recorded their time on the system. We identified the employees


mostly in one department that had taken off during Thanksgiving, the Winter Break and other

reasons, but no time was charged against the system for this time off.

There is a problem with the departments submitting their payroll in a timely manner. We

have a lot of departments that repeatedly appear on the semimonthly notice sent out by the

Payroll section. There is nothing done by the Supervisor of Payroll to address the issues of

the departments that consider to be late with the submission of their payroll. The department

discussed above on not recording leave did not submit payroll for 3 months and nothing was

done to address this problem.

The supervisors are not ensuring that all employees are keying all absences to the system.

There are no supervisory controls in place to address this issue. Lack of control procedures

promoted the abuse of absence reporting. The School Board’s liability for accrued sick and

vacation leave is overstated.

Recommendations

14) The Supervisor of Payroll and Human Resources needs to develop procedures on the

monitoring of employee absences and distribute these procedures to the department

and school managers.

15) All departments should review recorded absences for their employees to ensure

accuracy.

Management Response

Concur: The Supervisor of Payroll will work with Human Resources in developing

procedures on the monitoring of employee absences and distribute these procedures to the

department and school managers.



Ensure Employees Follow Procedure on Recording Compensatory Time

A survey was performed of several timekeepers to gather information of their understanding

of the payroll process. Four of the eleven (36%) timekeepers surveyed responded that they

do not submit compensatory time to the payroll section to add onto the system. It is also

evident that compensatory time is not submitted to Payroll to log on system at the time it is

accrued. For example, the Director of Human Resources sent in a letter on December 15,

2008 to have compensatory time recorded on the system for an employee and the letter

indicated that the time had been accrued beginning April 26, 2008 through November 26,

2008. This employee was due to go on maternity leave and the 61.50 hours submitted in the

letter made it possible for no leave time to be charged against the sick leave balance or

vacation leave balance accrued by this employee.

Administrative Procedure #7.04 Overtime and Compensatory Time states, “Compensatory

time earned shall be recorded in a memorandum to payroll that is forwarded along with the

Time and Attendance worksheets. Compensatory time used shall be recorded on Time and

Attendance worksheets. In all cases, any hours worked in excess of 40 hours per week shall

be expressly approved in advance by the supervisor.”

The previous policy did not require compensatory time to be submitted and recorded on the

payroll system. Therefore, the staff has continued to operate based on outdated information,

and the Supervisor of Payroll has failed to update the manual to reflect administrative

policies. According to our conversation with employees, they are taking earned

compensatory time not actually recorded on the system.

Recommendations

16) The Director of Human Resources should include in Administrative Procedure #7.04

Overtime and Compensatory Time, that compensatory time should be submitted in a

memorandum to Payroll when the compensatory time is earned.

17) The Supervisor of Payroll and the Director of Human Resources needs to reinforce to

all current employees during training, the policy on compensatory time to ensure that


all time accrued is recorded on the system and the procedures are followed as written

in the Department of Human Resources Administrative Procedures 7.04.

Management Response

Concur: The Supervisor of Payroll will reinforce to all current employees during payroll

training sessions the policy on compensatory time to ensure that all time accrued is

recorded on the system during the time it is accrued and the procedures are followed as

written in the Department of Human Resources Administrative Procedures 7.04.

Target Date: September 2009 and ongoing

Implement Changes for Manual Checks

According to the policy in the Payroll Processing Manual, “For employees not paid or paid

incorrectly, your first response should be an adjustment on the next paycheck. If this doesn’t

satisfy the employee, a supplemental or manual check may be written. Supplemental/manual

checks will only be written under dire need circumstances. Human Resources will usually

request a supplemental/manual check for an employee who was set up late. To pay an

employee on the supplemental payroll the “Request for Supplemental Check” form must be

submitted by HRD to the Payroll Office by 10:00 am on supplemental calculation day. The

supplemental payroll is run the day after pay day.” All payroll financial information should

be captured and maintained in the AS400. The bank account should be reconciled to the

bank statement on a monthly basis. We identified the following concerns surrounding

manual checks:

Manual/Replacement Checks

The payroll staff issues supplemental manual checks when an employee does not receive

a physical paycheck, if an employee receives partial payment, when a direct deposit is

reversed, if an employee did not get paid for hours worked and if an employee is not set


up in the system. Replacement manual checks are issued for checks that are lost or

damaged. All of the manual checks are recorded in and printed from Quicken.

The original check for the replacement manual checks remains in the system if they are

identical to the original check. The supplemental manual checks are treated as zero net

checks in the system in order to process them against the accounting line. All the manual

checks are processed through a separate account other than the payroll bank account.

Payroll submits an invoice to Accounts Payable to replenish the account. The manual

check bank account is not reconciled.

Reduce Number of Manual Checks Issued

The number of manual checks has increased over the years from 192 in FY 2007 to 626

in FY 2009. Payroll processes manual checks for any employee demanding payment and

also to respond to with executive management requests.

None of the check numbers were entered in the AS400 but the original check numbers

remain in the system to account for the manual checks. The original checks will never

clear the bank and the reconciliation of the payroll bank account will always show these

checks as outstanding.

An invoice is provided to Accounts Payable to replenish the manual check account.

Accounts Payable submits a request to the City of Richmond for money needed to cover all

payments for bills due including the manual check invoices. There were 2 employees that

never cashed their checks for a total of $48,244.02. The money for these checks was

received during the regular payroll request at the time the original checks were processed.

The employees were required to return the original checks and were issued a manual check.

An invoice for these manual checks was submitted to Accounts Payable instead of having a

transfer done from the cash with the city account line since the money was already sitting


there from the original payroll request. The possibility exists that the replacement manual

checks and the original checks could be processed.

Recommendations

18) The Supervisor of Payroll should utilize the established procedure for

supplemental/manual checks. Manual checks should only be written in extreme

emergency situations otherwise an employee who has not been paid can be processed

on a supplemental payroll. By enforcing the procedure that is already in place this

should cut down on the number of manual checks being processed.

19) The Supervisor of Payroll needs to ensure that all manual checks are entered into the

financial system and should begin the process of entering all previously written

checks. The manual check bank account needs to be reconciled and should be done

on a monthly basis. The payroll staff must provide the complete and accurate

information to the General Ledger section.

Management Response

Concur: The Supervisor of Payroll will reiterate the policy in place on

supplemental/manual checks. We agree that manual checks should only be written in

extreme emergency situations. An accounting of manual checks will be submitted to the

Director of Finance and Chief Operating Officer for review on a monthly basis.


29 OTHER MATTERS TO REPORT

Work Hours

We performed a review of leave time recorded for all administrative employees and also

reviewed some of the programs that employ temporary employees and substitutes. During the

review however it was evident that there is potential abuse with the amount of hours being

reported and submitted for some of the employees. One item in particular has been investigated

and the Superintendent is taking corrective action.

Employee Contract Types

We did a comparative analysis survey of Richmond Public Schools’ payroll process to that of the

other surrounding districts. This was done to determine if RPS payroll guidelines were similar to

those of other school districts. We also wanted to identify items that Administration may want to

include or address in our guidelines. As a result of the survey, we did note that all of the other

school districts do not have 9 ½ months contracts for their employees. However, Richmond

Public Schools still have these types of contracts. Further discussion with a VRS representative

disclosed that a lot of the school districts changed the 9 ½ contracts to 10 month contracts due to

the amount of time associated with setting up these types of contracts.


30 ACKNOWLEDGEMENTS

The results of the audit were discussed with the Director of Finance, Supervisor of Payroll and

with the Assistant Supervisor of Payroll. We appreciate the excellent assistance and cooperation

provided us by the personnel of the Department of Finance.


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