HomeMy WebLinkAbout06/01/2012 - Report: Payroll Audit - City Council - Audit Committee
Performance Audit:
Payroll Policies & Procedures
June 2012
City Internal Auditor’s Office
City of College Station
File#: 11.02
Audit Executive Summary:
Payroll Policies and Procedures
Why We Did This Audit
Over 25,000 paychecks for $40 million are
processed by the City each year to pay over
1,000 fulltime, part-time, and seasonal city
employees. Based on a citywide risk
assessment, an in-depth examination of the
City’s payroll processes was included in the
fiscal year 2012 audit plan.
What We Recommended
Security measures for changing an
employee’s direct deposit information
should be strengthened.
Implementation of an automated
timekeeping system should be considered
in order to increase efficiency, reduce
errors, and approve accountability.
Regardless, the implementation of
automatic trigger points related to sick
leave usage should be considered.
The ability to add employees and change
pay rates should be limited to only certain
employees with a definite business need.
The City should develop a procedure to
ensure that employees no longer actively
employed by the City are timely removed
from the payroll system. A special re-
instatement process should be considered
for returning seasonal workers.
Documentation authorizing pay rate
changes should sufficiently demonstrate
that all employee pay rates are authentic
and have been approved by management.
What We Found
During this audit, we examined the City’s payroll
policies, procedures, and practices to determine
whether or not adequate controls were in place to
prevent fraud, waste, or abuse of city resources.
Although we did not discover any evidence leading us
to believe that there was material fraud, we found
areas where internal controls could be strengthened to
reduce the City’s exposure to monetary risk. We also
found indicators of abuse of the City’s sick leave
policies.
Under current city processes, the opportunity to create
fictitious (i.e. ghost) employees exists. While no ghost
employees were uncovered in our review, the City
does expose itself to this risk because of the
following: (1) there are inadequate controls over the
changing of direct deposit information, (2) the process
to ensure that terminated employees are timely
removed from the payroll system needs improvement,
and (3) the City’s manual process for recording time
provides less accountability than a properly
implemented automated system.
In addition, we found 41 employees that had the
ability to unilaterally alter employees’ paychecks to
virtually unlimited amounts. Furthermore, most of
these employees had no need for this system access.
This finding was considered a major control weakness
that needed to be timely communicated to
management. Therefore, an interim audit report was
issued on February 24, 2012.
Finally, we found that the City’s sick leave policy has
estimated costs of approximately $1.37 million
annually, with City employees using approximately 9
days of sick leave per year. In addition, we found
indicators that some employees may be abusing the
City’s sick leave policy.
Payroll Policies & Procedures
Table of Contents
Introduction ................................................................................................................. 1
Audit Objectives .................................................................................................... 2
Scope and Methodology ........................................................................................ 2
Findings and Analysis .................................................................................................... 4
No Evidence of Ghost Employees Were found but Risk Exists ............................. 4
Audit Tests Did Not Reveal any Ghosts on the Payroll ..................................... 4
Risk of Redirection of Pay into Unauthorized Accounts Exist .......................... 5
There is a Risk that Former Employee Ghosts Can be Created ........................ 7
Payroll Information System Controls Could be Strengthened ............................10
Timekeepers’ System Access to Alter Paychecks is Too Broad .......................11
High-risk Employees Showed No Evidence of Material Fraud .........................13
Department Timesheet Entry Practices Could be Improved ...........................13
Increased Accountability Could Further Curb Sick Leave Abuse ........................14
Sick Leave Policies Generally Align with Best Practices ..................................14
Some Indicators of Sick Leave Abuse Exists ....................................................15
Automated Timekeeping Systems Improve Accountability .............................18
Audit Tests Performed to Verify Compliance with Policy ....................................19
Receiving Inappropriate Pay after Termination was Verified .........................19
Examination of Donated Leave Yielded No Material Findings .........................21
There is Insufficient Documentation to Verify All Pay Rates ..........................21
Recommendations ....................................................................................................... 24
Appendix A: Interim Audit Report ................................................................................. 27
Appendix B: Management’s Responses ......................................................................... 29
Payroll Policies & Procedures 1
Introduction
The City Internal Auditor’s Office conducted this performance audit of
the City’s payroll policies, procedures and practices pursuant to Article
III Section 30 of the College Station City Charter, which outlines the
City Internal Auditor’s primary duties.
A performance audit is an objective, systematic examination of
evidence to assess independently the performance of an organization,
program, activity, or function. The purpose of a performance audit is
to provide information to improve public accountability and facilitate
decision-making. Performance audits encompass a wide variety of
objectives, including those related to assessing program effectiveness
and results; economy and efficiency; internal control; compliance with
legal or other requirements; and objectives related to providing
prospective analyses, guidance, or summary information.
Over 25,000 paychecks for $40 million are processed by the City each
year to pay over 1,000 fulltime, part-time, and seasonal city
employees. The results of a citywide risk assessment conducted in
October 2007 identified payroll as a potential audit topic for the fiscal
year 2010 audit plan. At this time, a payroll audit focusing primarily
on overtime and compensatory time was conducted. On September
22, 2011, the City Council approved the City Internal Auditor’s audit
plan for fiscal year 2012, which included a more comprehensive
examination of the City’s payroll processes.
In December 2011, leave policies and procedures were reviewed and
a preliminary analysis of payroll data from fiscal year 2009 through
2011 was conducted. During the preliminary review, several aspects
of risk within the payroll process were identified. As a result, audit
methodologies were developed to evaluate internal controls, identify
fraud risks, and assess potential abuse of city policy and possible
waste of city resources.
Payroll Policies & Procedures 2
Audit Objectives
This audit evaluated internal controls, identified fraud risks, and
assessed potential abuse of city policy and possible waste of city
resources. This report answers the following questions:
Are internal controls sufficient to reduce the risk of payroll fraud
to an acceptable level? Is there any evidence of ghost employees
on the payroll?
Are payroll and personnel policies, procedures and practices in
alignment with best practices in order to reduce the risk of fraud,
waste, and abuse?
Scope and Methodology
This audit was conducted in accordance with government auditing
standards (except for the completion of an external peer review),1
which are promulgated by the Comptroller General of the United
States. Audit fieldwork was conducted from March 2012 through May
2012. Most audit tests were performed using payroll data from
January 2008 to April 2012, which comprised 110,580 payroll checks
for approximately $176,578,000.
The audit methods included:
Reviewing the work of auditors in other jurisdictions and
researching professional literature to identify best practices
regarding payroll related policies and procedures.
Interviewing staff responsible for performing various payroll
related duties and oversight functions.
Reviewing applicable city policies and procedures and relevant
state and federal laws and regulations.
1 Government auditing standards require audit organizations to undergo an external peer review every three
years. A peer review is planned for 2013.
Payroll Policies & Procedures 3
Examining direct deposit documentation for all active employees
to verify compliance with city policy and to identify any indicators
of possible fraudulent activity.
Performing global analytics on leave accrual and check history
data from January 2008 to April 2012 using specialized auditing
software to test for potential fraud and abuse.
Drawing a statistical sample of 379 paychecks to verify that the
pay rates found on employees’ paychecks corresponded to the
authorized rates found in employees’ personnel files. The sample
size was randomly selected from the total population of paychecks
from January 2010 through April 2012 in order to reach a 95
percent confidence level and a 5 percent confidence interval.
Payroll Policies & Procedures 4
Findings and Analysis
No Evidence of Ghost Employees Were found but Risk Exists
Ghost employees are individuals listed in the payroll register, who are
not providing services, but who are receiving a payroll check.
Generally, there are two types of ghost employees. The first are
completely fictitious employees added onto the payroll, the second
are former employees that remain on the payroll. Although we did not
find evidence of ghost employees on the payroll during our audit
tests, the City is susceptible to this type of fraud. Therefore, some
improvements could be made in the City’s internal controls to further
mitigate the risk of fictitious employees being added to the payroll.
Audit Tests Did Not Reveal any Ghosts on the Payroll
In general, ghost employees are very difficult to discover once they
are in existence—which is why controls to prevent ghost employees
are so important. Nevertheless, there were two types of investigations
that we conducted in an attempt to discover ghost employees on the
payroll. First, we investigated any accounts wherein multiple
employees on the payroll were paying into the same bank account;
and second, we investigated whether any employees were depositing
their paychecks into accounts that were under the name of someone
other than that employee.
There was evidence to explain why multiple employees were
depositing their checks into a single account. We found 17
accounts wherein multiple employees—146 employees in total—were
paying into a single account. Two Prosperity Bank accounts have
been established to collect association dues for 40 firefighters and 73
police officers. Through employees’ personnel files, we were able to
locate personal identification documentation (e.g. a copy of a driver’s
license or passport) for the remaining 33 employees. In addition,
most of these accounts were jointly owned by married couples that
both work for the City.
We were able to clarify why some employees are depositing
their paychecks into accounts that were not in their name.
We found 14 accounts wherein the employee being paid was not the
owner of the bank account the check was being paid into. Through
Payroll Policies & Procedures 5
employees’ personnel files, we were able to locate personal
identification documentation that verified that these individuals had
actually worked for the City. In addition, we found evidence in 9 of
the 14 cases where the employee and the owner of the bank account
were related. For the five employees we could not verify family
relations, we identified if the owner of the bank account is a current
or former employee. Although there was one instance where the
account holder was a former employee, further examination revealed
that no payments have been made to this employee in the last four
years.
Risk of Redirection of Pay into Unauthorized Accounts Exist
When employees change their direct deposit information, they are
asked to submit a payroll direct deposit form along with a voided
check. A completed payroll direct deposit form should include the
employee’s name, bank name(s), account number(s), routing
number(s), social security number, and signature.
Besides the fact that the information on payroll direct deposit forms
are needed by Payroll so that the City can pay the employee, a fully
completed form has the additional benefit of reducing the risk of
being fraudulently used by third parties since the form requires
private information such as a social security number, and voided
checks that usually have the account owner’s name printed on it.
However, in practice, employees have not always been required to
submit a completed direct deposit form with a voided check.
All city employees are setup with direct deposits, which
reduces the risk of fraud. Currently no city employees receive
manual checks. Instead, paycheck amounts are directly deposited into
employees’ personal bank accounts. Requiring all employees to be
setup with direct deposits not only provides a more efficient and
effective method for paying employees, but it also helps prevent
payroll fraud.
In order for a ghost employee scheme to work, three things must
happen: (1) the ghost must be added to the payroll, (2) timekeeping
and wage rate information must be collected, and (3) a paycheck
must be issued to the ghost and the check must be delivered to the
perpetrator or an accomplice. By requiring all employees to be setup
with direct deposit, several common techniques used to have ghost
employee paychecks delivered to the perpetrator are eliminated.
Payroll Policies & Procedures 6
Therefore, to perpetrate a ghost employee scheme at the City, the
potential fraudster would have to develop a method to redirect direct
deposit pay to an unauthorized account.
Changing of employee direct deposit information is an
informal practice. After examining the payroll direct deposit forms
for all active employees, we found that less than 50 percent of them
were fully completed, and about 40 percent of the submitted forms
had not included a voided check. Of particular note, we found two
employees who changed their direct deposit account without
submitting a direct deposit form. Instead, they submitted a piece of
paper with a note to change their direct deposits and a direct deposit
slip. Additionally, we found several employees who changed their
direct deposit by submitting a direct deposit form that only contained
their name, bank info, and last four digits of their social security
number—which is available off of any employee’s ID badge. Finally,
we found payroll direct deposit forms wherein the employees
requested that an additional bank account be added to their paycheck
deposits; but rather than also listing the bank account that the
employees were already depositing into, they simply wrote, “keep the
rest the same.”
Current employee direct deposit change practices create a
security risk. The fact that employees are able to change their
direct deposit information without submitting a fully completed payroll
direct deposit form along with a voided check creates a security risk
wherein the employee’s wages could be stolen by an individual who
submits a fake direct deposit form. For example, an individual could
redirect a portion of an employee’s pay check into the individual’s
own account by submitting an incomplete payroll direct deposit form
that contains only the employee’s name and the individual’s own bank
account information.
Additionally, an employee’s pay stub does not necessarily show all of
the accounts his money is being directed into (see Figure 1 on the
next page), so it is possible that the employee will not notice that
some of his funds have been redirected into another account. And if a
fraudster were to coincide the redirection with an anticipated change
in the victim’s take-home pay (such as a change in insurance,
retirement, or income), the victim might not notice the redirection
since he was already expecting his amount of payment to change.
Potentially, a fraudster could steal a large amount of money from
Payroll Policies & Procedures 7
fellow employees by only taking a small amount each pay period from
many individuals.
Figure 1: Employee Pay Stub Example
The above employee has his money deposited into three accounts;
$18 each into two checking accounts, and the remainder into a
savings account. However, on the pay stub, only the savings account,
one of the two checking accounts, and the total amount deposited is
listed. Notice that 18.00 + 1,353.63 = 1,371.63—which is 18 lower
than the 1,389.63 listed in the “total” section.
There is a Risk that Former Employee Ghosts Can be Created
A former employee ghost is created when an employee remains on
the payroll after he or she has ended employment with the
organization. For example, in many cases a supervisor creates a
former employee ghost by waiting for one of his subordinates to quit,
and then not informing Human Resources (HR) of the subordinate’s
departure. The supervisor then redirects the employee’s paycheck
Payroll Policies & Procedures 8
into his own account. In the City, the process of (1) accounting for
employees’ time and (2) removing employees from the payroll creates
opportunity for some city supervisors to perpetrate a former
employee ghost scheme.
The City has a manual process for accounting for and
recording employees’ time. The exact process for accounting for
and recording employees’ time worked varies amongst city
departments. Although departmental timekeeping processes may
differ, they all involve manual tracking of time on paper timesheets
that are distributed to employees through department timekeepers or
supervisors. Not only is the manual tracking of time through paper
timesheets a cumbersome process, it also increases the likelihood of
errors, fraud, and abuse. We found that some departments provide
better controls and accountability in their timekeeping process than
others. However, the risk of fraud, errors, and abuse is still prevalent
because manual timekeeping through paper timesheets primarily
relies on adequate supervisor oversight to ensure accurate recording
of time. Supervisors not only approve time entries recorded manually,
but they often take custody of these documents that can be altered
without an audit trail.
Improved processes that ensure timely removal of inactive
employees could reduce the City’s risk exposure. Most
municipalities employ a wide variety of part-time, seasonal and
temporary employees to fill various jobs throughout the year, such as
lifeguards at community pools and election-day workers at voting
locations. In these situations, the proper protocol is to remove these
employees from the payroll immediately after their work is complete.
Allowing inactive employees to remain on the payroll creates an
increased risk of ghost employees since these inactive employees can
be used as the first step in creating a ghost employee. Therefore, it is
important that inactive employees be timely removed from the
payroll.
We examined employee paychecks between fiscal years 2009 and
2011 and discovered 195 employees2 on the payroll who, on average,
had 101 days between paychecks (see Table 1 on the next page). All
but six of the employees identified in Table 1 were part-time,
seasonal or temporary employees.
2 The analysis was based on employee identification number. Of the 195 employees, 49 had multiple jobs.
Payroll Policies & Procedures 9
Table 1: Employees on the payroll with 20 or fewer checks (FY09-11)
Department Employees1 Avg. # of
checks
Pay Check
Gaps2
PARD (Recreation) 79 5 52
PARD (Special Facilities) 63 9 32
City Secretary 49 2 305
Other3 4 3 14
1Employees on the payroll from FY09 through FY11 receiving 20 or fewer pay checks
2Average length of days between pay periods
3Includes 1 employee from Police, Parks Operations, Sanitation, and Legal
In addition to the analysis summarized in Table 1, we found 97
employees3 who remained on the payroll for an average of 526 days
after receiving their final paycheck. Furthermore, we found 5
employees who remained on the payroll for 1,760 days after receiving
their final paycheck.
During the course of this audit, city management recognized this
issue and began removing inactive employees from the payroll. We
applaud their proactive approach to this important matter, and
encourage them, once they have completed this first step of removing
currently inactive employees, to continue on to the second step of
creating a process to ensure that future inactive employees will be
regularly and timely removed from the payroll once they become
inactive.
There is a risk that a ghost employee could be created. As
previously mentioned, for a ghost employee scheme to work, three
things must happen:
(1) The ghost must be added to the payroll.
In College Station, when an employee ends employment, the HR
department relies upon the departing employee, or the departing
employee’s department, to inform the City of the departure. In
addition, there appears to be indicators that the process of timely
removing employees from the payroll is not always effective.
Therefore, we conclude that it is possible under the current control
environment for a supervisor to create a former employee ghost by
not informing HR of his subordinate’s departure.
3 This analysis excluded employees with multiple positions.
Payroll Policies & Procedures 10
(2) Timekeeping and wage rate information must be collected.
Manual timekeeping processes and practices allow some department
supervisors custody over the paper timesheets of their employees.
Consequently, these supervisors have the ability to receive or create
the paper timesheets of former employees who have not been timely
removed from the payroll, manually record time (not actually
worked), and then approve the timesheet for processing.
(3) A paycheck must be issued to the ghost, and the check must be
delivered to the perpetrator or an accomplice.
We found incomplete direct deposit change forms that were
processed without identifying criteria. In addition, we found that
these forms could be submitted without the employee being required
to appear in person (e.g. scan, inter-office mail, or email). Therefore,
an employee’s supervisor has the ability to change a former
employee’s direct deposit bank account to the supervisor’s own
account by submitting an incomplete payroll direct deposit form that
contains only the former employee’s name and the supervisor’s own
bank account information.
Payroll Information System Controls Could be Strengthened
Payroll is one of the areas at greatest risk of fraud and theft.
Because of this, organizations need to be very careful about setting
up proper controls in their information systems to minimize risk. Best
practices in payroll information systems require a segregation of
powers and responsibilities. This includes:
1. All changes to the employee master file should be reviewed and
approved by a supervisory-level employee in Human Resources
(HR) prior to being recorded in the system. No one employee
should be able to record modifications to the employee master
file. The modifications should be initiated by one employee and
reviewed and authorized in the system by a separate employee.
2. Employees responsible for modifying the employee master file
should not have access to the payroll system, be involved in the
payroll process, distribute payroll checks or make hiring or
termination decisions.
Payroll Policies & Procedures 11
It is important to note that we issued an interim audit report that
addressed the audit findings found in this section of the report on
February 24, 2012. We felt that the findings relating to payroll system
controls represented a significant risk to the City. Therefore, we
thought it necessary to inform management of these findings prior to
the release of this audit report. Not only did the interim audit report
address many of the issues identified in this section of the report, but
it also provided management with two key recommendations.
Management concurred with these recommendations and started
immediately to address them. As a result, several if not all of the
issues identified in this section may have already been
corrected. A copy of the interim audit report can be found in
Appendix A at the end of this report.
Timekeepers’ System Access to Alter Paychecks is Too Broad
Although the City has sufficiently separated the responsibilities of
employees, the ability—or power— to perform incompatible functions
within the City’s information system exists. As a result, we found 41
employees that have access to alter paycheck amounts to virtually
unlimited amounts.
The City has properly segregated responsibilities.
Responsibilities in the City have been segregated such that changes
to an employee’s pay are initiated at the department level. Employee
action forms are completed by department personnel and require
signature approval by employees’ supervisors and department heads.
These forms are submitted to HR to authorize HR staff to make
changes to the employee’s pay within the City’s information system.
Once HR has processed an employee action form, they notify Payroll
of the change. Payroll staff must then go into the system to approve
the change.
System settings allowed 41 employees to unilaterally change
paychecks to unauthorized amounts. Even though the
responsibilities have been properly divided, many employees still
retain the power to unilaterally change paycheck amounts. As of
February 24, 2012, 41 employees had the power to alter paycheck
amounts—and most of them have no need for this type of system
access. These employees consist of a system administrator in the
Department of Information Technology, 3 Department of Finance
Payroll Policies & Procedures 12
payroll administrators, 9 Human Resources employees, and 28
department timekeepers.
The fact that so many employees can alter paycheck amounts
constitutes a significant control deficiency. Although the limit per
entry in the dollar amount field is $100,000, the system allows
virtually an unlimited amount of line entries. For example, a user
could use code “16” (on-call pay type) and enter $100,000 (instead of
$15) on multiple lines to create a multi-million dollar check.
Security settings should be changed to prevent department
timekeepers from making changes to any employee’s pay. This can
be done by a system administrator simply changing the “User
department dollar amount entry” from “Y” to “N” in the “Time Entry”
screen in the AS400. Doing so will eliminate users changing the dollar
amount in the hours entry screen.
The payroll system uses hundreds of codes, many of which
are used for purposes they were not originally designed.
There are 255 pay type codes in the system and 22 of these codes
can be used by department timekeepers to change paycheck
amounts. In fiscal year 2011, $10.1 million in payroll payments were
made from 9 of these pay codes—which is approximately 24 percent
of total payroll. Table 2 below shows the dollar amount paid to
employees from these 9 codes in fiscal year 2011.
Table 2: FY11 Pay Codes Used with High Risk Exposure
Pay Type Description Amount Employees Number of
Payments
Salary Adjustment $ 9,756,661 272 6,231
Lump Sum Payment 181,365 146 146
On-call Pay 145,816 162 7,115
Workers Compensation Payments 21,252 5 23
PD Field Training (Patrol) 13,935 12 505
PD Field Training (Communications) 7,104 8 264
Taxable Awards 4,159 22 24
Retro Adjustment Pay 2,079 26 27
Tax Adjustment Retro Pay 30 1 2
Total: $ 10,132,401
In addition to this, the pay codes are often used for purposes for
which they were not originally designed. For example, the salary
adjustment code is used for more purposes than just paying salaried
employees their regular salaried pay check. There are instances
Payroll Policies & Procedures 13
where this code was used to make paycheck reversals and retroactive
pay increases. In addition, several exempt employees received
compensation out of this code. Also, several un-identified salary
adjustment amounts were made that did not correspond with the
calculated salary amount of employees. Finally, the code was used to
adjust fire fighter salaries so that they get paid an even amount each
pay period (otherwise they would receive a large check one pay
period and a smaller one the next because of the 24 hour shifts they
work).
High-risk Employees Showed No Evidence of Material Fraud
We examined the detailed paycheck history of fiscal year 2011 of all
41 high-risk employees previously identified as having access to alter
paycheck amounts. Specifically, we paid special attention to any
payroll entries made by these employees from the pay codes
identified in Table 2. Based on our review, we found only one possible
anomaly. In pay period 7 of 2011 her paycheck amount was
increased by $182.58. The paycheck amount was decreased by the
same amount (through a reversal) in pay period 9 of the same year.
We identified this instance as high-risk because (1) the employee
does her own hours, and (2) this type of reversal transactions could
be used in order to provide a pay advance that could be returned
later. Determining whether or not this is the case would be difficult to
confirm. In addition, we concluded that the amount was immaterial.
Department Timesheet Entry Practices Could be Improved
Process controls at the department level could be strengthened. All
timesheets should be reviewed and approved by department
supervisors and delivered directly to department timekeepers by
supervisors. After timesheet data is entered into the system, a
separate employee from the one who performed time entry should
verify the accuracy of entries by reconciling physical timesheets to the
system generated hours proof report. In addition, department
timekeepers’ timesheets should be delivered to Department of
Finance payroll staff by their supervisors to be audited by central
payroll personnel.
In College Station, each timekeeper has received instructions on how
to review and enter work hours into the system. These instructions
are found on the “Time Sheet Auditing and Entry” form. If all
department timekeepers followed the instruction form as well as the
Payroll Policies & Procedures 14
best practices described in the previous paragraph, timesheet entry
practices could be improved citywide. However, based on our review,
the Police Department was the only department that did not seem to
have any control issues in this area.
Increased Accountability Could Further Curb Sick Leave Abuse
All employers who offer sick leave to their employees find themselves
in the difficult position of trying to balance the competing interests of
having a flexible, friendly sick leave policy for employees in genuine
need of sick leave, while also having serious, objective protocols for
curbing sick leave abuse among those who would abuse it.
To help balance these competing interests, best practices have been
developed; they include: sick leave that is accrued over time, periodic
evaluations of sick leave usage, and “trigger points.” A trigger point is
a mandatory action to be taken when an employee reaches the
trigger point. For example, some cities require their employees to
certify each sick day taken after reaching the trigger point of five sick
days taken in a year. Other organizations require employees to review
their sick leave usage with their supervisor after reaching the trigger
point.
Sick Leave Policies Generally Align with Best Practices
In College Station, most employees accrue 96 hours (12 days)4 of sick
leave each year, and there is no limit on the amount that can accrue.
Sick leave may be used for illness, visiting a physician, or caring for
an ill family member. It may also be used as funeral leave. When an
individual ends employment with the City, sick leave is not paid out
(whereas accrued vacation time is paid out). When employees use
sick leave, they record it on their time sheets so that the City can
keep track of how much sick leave has been used. At the discretion of
each department, employees may also be required to provide specific
notification, such as a physician statement for each absence from
work. City policy also states that evidence of sick leave abuse may
constitute grounds for disciplinary action, up to termination.
4 Fire Department employees assigned to shift earn a maximum of 144 hours of sick leave each year.
Payroll Policies & Procedures 15
Although sick leave policies generally align with best
practices, trigger points could help increase accountability.
City sick leave policies align with best practices in having employees
accrue sick leave over time (rather than giving a block of leave at the
beginning of each year). The City has also done well in creating a
policy that allows supervisors to review an employee’s sick leave
usage. However, the City could further align its policies with best
practices by instituting trigger points, including a mandatory (rather
than discretionary) sick leave review trigger point. Mandatory sick
leave review policies help supervisors be more thorough, objective,
and fair; and help employees more responsibly use their sick leave
since they know they will be held accountable.
Some Indicators of Sick Leave Abuse Exists
Although we do not believe that abuse of sick leave is endemic in the
City, we found some indicators of sick leave abuse occurring along
the margins. For example, we found a disproportionate number of
employees exhausting all or most of their sick leave prior to their term
of employment ending. We also identified specific examples where
employees almost certainly abused sick leave policies.
The City averages about nine sick days per employee
annually. Over the past four years, city employees have used on
average over 64,000 hours of sick leave per year—which equates to
almost 9 days per year per employee. Table 3 below describes city
employees’ sick leave usage from 2008 through 2011.
Table 3: City employees’ sick leave usage
Year Employees1 Sick Hours Avg. days2
2008 911 61,914 8.5
2009 925 67,979 9.2
2010 906 65,653 9.1
2011 910 62,351 8.6
Averages: 913 64,474 8.8
1 The number of employees who accrued some form of sick leave in a given year.
2 Average number of days a city employee takes sick leave in a given year.
It is very difficult to compare the City’s level of sick leave usage to
other organizations. This is because other organizations have different
sick leave policies that will skew their numbers either higher or lower.
For example, if another organization did not allow the use of sick
Payroll Policies & Procedures 16
leave for funerals, as the City does, their sick leave numbers would be
lower when compared to College Station. With this caveat in mind, it
is valuable to note that the Bureau of Labor Statistics reports that in
the private sector “workers participating in plans with a fixed number
of paid sick-leave days per year used an average of 4 days of their
paid sick leave annually.”
Sick leave absences cost the City over a million dollars a year
in lost productivity. Sick leave costs have three primary
components at the City—hourly sick leave, salaried sick leave, and
personal sick days.5 Over the past four years, the amount of sick
leave used by employees has resulted in average annual costs of
approximately $1.37 million. Some experts argue that salaried sick
leave should not be figured into sick leave costs because these
employees are not paid for their time but for their results, regardless
of time worked. If we just looked at sick leave used by hourly
employees, the City’s cost of sick leave would average approximately
$1.02 million per year. Figure 2 below provides a description of these
costs.
Figure 2: Cost of sick leave (in millions of dollars)
5 Employees that have 12 months of accrued sick leave may have one workday converted from a sick day to a
personal day, which functions similar to vacation leave (with the exception that employees are not paid for
personal days upon termination).
$-
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
2008 2009 2010 2011 Avg.
Hourly Sick Salaried Sick Personal Day
Payroll Policies & Procedures 17
There are indicators that some employees may be abusing
sick leave policy. As previously mentioned, when employees end
employment with the City, they receive a cash payout for any
vacation time they did not use, but they do not receive any payout for
sick leave that went unused.
It appears from our investigation that some employees may have
abused this policy by over-using sick leave in order to save up more
vacation days. For example, one employee accumulated
approximately 2,430 sick hours (304 days) during his employment
with the City, and by the time he ended, he used all of his sick leave.
Simultaneously, this employee had saved up 467 vacation hours, and
therefore was able to cash out $11,293 of unused vacation time when
he left city employment.
Table 4 below shows employees who ended their employment with
the City in the last 4 years and received a vacation payout. These
employees are broken into groups based on the percentage of the
sick leave they used during their employment.
Table 4: City employees’ sick leave usage
Percent Used Employees % of
Employees Vacation Payout
<0.50 89 22.4% $ 246,600
0.500 - 0.549 16 4.0% 76,400
0.550 - 0.590 23 5.8% 71,600
0.600 - 0.649 15 3.8% 45,900
0.650 - 0.690 12 3.0% 43,500
0.700 - 0.749 11 2.8% 35,600
0.750 - 0.790 19 4.8% 52,000
0.800 - 0.849 22 5.5% 54,800
0.850 - 0.890 24 6.1% 18,500
0.900 - 0.949 36 9.1% 52,500
0.950 - 1.000 130 32.8% 167,500
Totals: 397 100% $ 864,900
Of particular note in the above table is the fact that there are a
disproportionately large number of employees who used more than
95 percent of their sick leave and received a vacation payout. This, of
course, does not mean that there is rampant sick leave abuse
throughout the City, but it does seem to indicate that there are some
city employees abusing sick leave policies.
Payroll Policies & Procedures 18
Automated Timekeeping Systems Improve Accountability
Employers with sick leave abuse problems often note that there is a
spike in sick leave before or after weekends and holidays. By looking
at how large these spikes are, managers can then get a fairly good
idea of how much, or little, sick leave abuse is occurring in the City
generally. We intended to develop a comprehensive analysis of
citywide sick leave usage by the day to look for indicators of this type
of abuse. However, we encountered the following challenges in the
data hindering our ability to perform the type of analysis necessary to
make reliable conclusions:
1. We found some inconsistencies in how departments recorded sick
leave usage. For example, we found examples of when sick leave
was not recorded on the specific day it was taken. Although the
majority of sick leave appears to be recorded on the specific day it
occurs, the exceptions we found made us question the reliability
that sick leave was recorded accurately all the time.
2. City employees manually record their time worked on paper
timesheets on a biweekly basis. This manual process is more
susceptible to mistake of fact—that is, without even knowing it,
the employee may enter incorrect information on the timesheet.
Supervisory review is the primary method used by the City to
prevent mistakes from occurring. However, this review is still
susceptible to human error—especially when supervisors typically
review and approve timesheets of several employees at the end of
the bi-weekly period.
3. Because city employees provide many different kinds of services
to citizens, there is a large variety of schedules among employees.
For example some employees work 24, 12, 11, or 9 hour shifts;
while others work flex schedules, shift work, weekends, or
holidays.
An automated timekeeping system would help mitigate the above
stated problems. It would reduce inconsistency and increase reliability
of the times employees worked because the information is
automatically time stamped each day. It would reduce the chance of
human error because many of the areas where error could occur
would become automated. Also, such a system would be able to
efficiently and effectively perform sophisticated analytics because it
could automatically take into account the variation among employee
Payroll Policies & Procedures 19
work schedules. Finally, automated timekeeping systems create an
audit trail of each change a system user makes to the system;
thereby enhancing accountability.
Audit Tests Performed to Verify Compliance with Policy
Several audit procedures were developed to test compliance with city
payroll policies. First, we analyzed whether any employees were
receiving inappropriate pay after their term of employment ended.
Second, we examined whether sufficient controls were in place to
ensure that employees were not abusing the City’s donated leave
policy for catastrophic illness. Although we found a few exceptions
when performing our audit tests, we determined that these
exceptions were immaterial and did not constitute a significant risk to
the City.
Finally, we compared the pay rates found in the payroll system to the
pay rates recorded in the employees’ personnel files to ensure that
employees were receiving their authorized pay rate. When performing
this audit work, we were unable to verify approximately 13 percent of
the pay rates because of insufficient documentation.
Receiving Inappropriate Pay after Termination was Verified
According to city policy, employees should not receive a vacation
payout if their term of employment was less than six months. Also, no
employee should receive pay after their term of employment has
ended, and salaried employees should not receive a compensatory
time payout upon leaving the City.
We found a few exceptions of employees being paid after their
termination dates. However, the total amount was under $1,000 and
possible explanations for these occurrences are feasible. We also
found two employees who received a compensatory time payout
during a classification change of salary to hourly—due to the fact that
the City previously allowed salary employees to accrue compensatory
time. Although we believe that these employees should not have
received this extra compensation, the risk of this happening in the
future is minimal because current city policy does not allow salaried
workers to earn compensatory time.
Payroll Policies & Procedures 20
No employees who worked less than six months were found
to receive a vacation payout. According to city policy, employees
who end employment with the City may receive a payout on any
vacation leave they have saved. However, employees who have
worked for the City less than six months are ineligible for vacation
payouts. We examined all pay checks from January 2008 to April
2012 to determine if an employee who worked for the City for less
than six months received a vacation payout. We found no exceptions
in the period reviewed which leads us to conclude that the City has
sufficient safeguards to prevent the violation of this policy.
An immaterial amount of pay was received by a few
employees after termination. We investigated whether any
employees continued to be paid after their termination date.6
Specifically, 17 days after their termination date, since employees
may still receive their last pay check up to 17 days after they end
employment.
We discovered only four employees who received pay more than 17
days after they ended employment; and their combined pay after
termination only totaled $831. We were able to determine that one of
these four employees was an employee that ended employment then
re-entered the City’s workforce, which may explain the discrepancy in
paycheck and termination dates. Because of the small amount of
money at risk here, we decided it would not be the best use of our
time to investigate the specifics of why the other three employees
received pay checks after their termination. We believe it could be for
a number of reasons, such as a second job, incorrect dates entered,
or re-employment.
Two salaried employees received a compensatory time
payout. The Fair Labor Standards Act requires employers to pay
time-and-a-half to hourly employees who work more than 40 hours a
week. Compensatory time is an alternative to time-and-a-half that is
available to public sector employers. With compensatory time,
employers may choose to compensate an employee with paid time-off
rather than paying the employee time-and-a-half. Because only hourly
employees should be receiving compensatory time, as part of this
payroll audit, it was necessary for us to make sure than no salaried
employees have received compensatory time payouts.
6 Our scope of review was employees who received a paycheck between January 2008 and April 2012.
Payroll Policies & Procedures 21
In our investigation, we found two employees that, while classified as
salaried employees, received compensatory time. Because these
employees were reclassified as hourly employees, the City decided to
give them a payout on the compensatory time they had earned while
salaried employees. Together, these employees received a payout of
$10,980. Unless these employees were always mistakenly
misclassified as exempt workers, the extra compensation these
employees received was above what the City was legally obligated to
provide. However, it should be noted that these payouts occurred in
2009, and the City has recently changed its policies so that salaried
employees cannot receive compensatory time.
Examination of Donated Leave Yielded No Material Findings
City policy permits employees to donate sick leave to qualifying
regular fulltime and regular part‐time employees. The purpose of
allowing employees to donate leave is to assist employees and their
families when a catastrophic event forces the employee to exhaust all
leave time, lose compensation from the City, and the situation
presents a hardship to the employee and the employee's family. An
eligible catastrophic event is considered to be more severe than a
“serious medical condition” as defined by the Family Medical Leave
Act (FMLA). However, before an employee can use donated leave,
they must have exhausted all of their personal leave first. Therefore,
we developed audit procedures to determine if any employees
received donated leave prior to all other types of leave being
exhausted. In the last three fiscal years, our analysis revealed that 28
employees were found to have received donated leave, of which all
had in fact exhausted their own personal leave (sick and vacation)
prior to the usage of donated time. This leads us to conclude that the
City has sufficient safeguards to prevent the violation of this aspect of
the policy.
There is Insufficient Documentation to Verify All Pay Rates
Typically, authorization of employees’ pay rates are documented
through employee actions forms (EAF). These forms are completed by
department personnel and require signature approval by employees’
supervisors and department heads. EAFs are submitted to Human
Resources (HR) to authorize HR staff to make changes to employees’
pay (e.g. new hire, promotion, etc.). However, we found that EAFs
are not always used when submitting end-of-year pay raises or other
rate changes that affect several employees at one time—and the
Payroll Policies & Procedures 22
method of documentation used to support these changes was
insufficient for us to verify authentication of pay rates.
Documentation used to support end-of-year pay raises was
insufficient for us to verify pay rates. Pay rate changes were
documented electronically through excel spreadsheets for the last
fiscal year’s end-of-year pay raises. Because this method of
documentation can be easily altered, we found it inadequate for our
purposes of verifying pay rates. Some departments provided HR with
hard copies of their changes with some documentation of approval.
However, we were only able to verify that this occurred in a few
instances. Furthermore, documentation of the approval of these
spreadsheets was contained in emails, but HR personnel did not keep
a record of these emails. Regardless if HR had documentation of
these emails on file, the process of keeping records of pay rate
changes through excel spreadsheets was insufficient for verifying the
accuracy of pay rates in the City’s payroll system.
We were unable to verify approximately 13 percent of the
pay rates in our sample. We drew a statistical sample of 379
paychecks from January 2010 through April 2012 to verify that the
pay rates found on employees’ paychecks corresponded to the
authorized rates found in employees’ personnel files. Our results are
summarized in Table 5 below.
Table 5: Pay Rate Verification Results
Description Number Percent
Sufficient documentation to verify pay rate:
Verified through EAF 284 74.9%
Verified through non-EAF document 19 5.0%
Verified but EAF incomplete1 26 6.9%
Total Verified: 329 86.8%
Insufficient documentation to verify
Check date after 10.10.11 38 10.0%
Check date prior to 10.10.11 11 2.9%
Entire employee file missing 1 0.3%
Total Unverified: 50 13.2%
1This includes 1 EAF without an effective date, 1 EAF missing 2 signatures, and the remaining
EAFs missing 1 signature.
Of particular note, are pay rates on paychecks that we were not able
to verify that fell before or after October 10, 2011. This date is
significant because this is when end-of-year pay raises were
Payroll Policies & Procedures 23
processed, which explains why we couldn’t find sufficient
documentation for at least 38 of the exceptions identified in Table 5.
The sample size of 379 paychecks was randomly selected in order to
reach a 95 percent confidence level and a 5 percent confidence
interval. One advantage of statistical sampling is the ability to draw
inferences to the entire population. For example, we are 95 percent
confident that there is insufficient documentation in employees’
personnel files to verify the pay rates on between 8 and 18 percent of
paychecks between January 2010 and April 2012. There were 58,314
paychecks issued during this period for approximately $95 million in
payroll payments. Therefore, we can infer that between 4,665 and
10,497 paychecks from January 2010 to April 2012 would have pay
rates that could not be verified because of insufficient
documentation.7
7 58,314 multiplied by 8% yields a lower limit of 4,665, and an upper limit of 10,487 when multiplied by 18%.
Payroll Policies & Procedures 24
Recommendations
In addition to the two recommendations issued in the interim audit
report on February 24, 2012, the City’s payroll process needs a few
slight improvements encompassed in the following audit
recommendations. Implementing these recommendations would
strengthen internal controls to further prevent any payroll related
fraud, waste, or abuse.
1. Security measures for changing an employee’s direct deposit
information should be increased. Pay redirection fraud and
former employee ghost fraud can both be mitigated using the same
control. This is because, ultimately, both frauds require the
redirection of an employee (or former employee’s) pay check. We
recommend that management select one of the following options:
A. Require that employees attach a copy of current, legal
identification (such as a driver’s license) to their direct deposit
form when requesting a change to their direct deposits. This
would reduce the risk of fraudulent redirection of an employee’s
pay check since access to an individual’s current, legal
identification is usually quite limited. However, it should be noted
that some supervisors may have copies of their employees’
driver’s licenses on file, so this security measure would not prove
a particularly high hurdle for those supervisors. Ultimately, the
unfortunate fact is that security risks can never be completely
eliminated, they can only be reduced.
B. A second option is to require that employees physically appear at
the payroll office to submit their direct deposit form, and require
the employee to show photo ID when submitting it. This is the
most secure method for preventing pay check redirection. But
unfortunately it could also prove to be somewhat inconvenient for
those employees who do not work in the same building as the
payroll office. Nevertheless, since most employees change their
direct deposit information infrequently, this increased burden may
be worth the enhanced security.
2. The City should consider the implementation of an automated
timekeeping system. The advantages of an automated
timekeeping system are that it eliminates the use of paper timesheets
Payroll Policies & Procedures 25
and the cumbersome, time consuming, manual process; while also
reducing many of the risks associated with human error and fraud. An
automated timekeeping system also provides more detailed records
than a manual system and increases accountability. Finally, many
automated timekeeping systems come with user-friendly analytics
that will help supervisors and managers become stronger leaders with
less time and training required. Specific to this report, an automated
timekeeping system will greatly reduce the risks and inefficiencies
associated with the following issues: (1) ghost employees, (2)
process controls for department time keepers, (3) sick leave usage
and management, and (4) timesheets and time keeping.
3. The City should develop a procedure to ensure that inactive
employees are timely removed from the payroll system. Since
the City has already begun removing current, inactive employees from
the payroll, we recommend that the City now create an official policy
and process that ensures future inactive employees will be timely
removed from the payroll once they become inactive. Furthermore,
some department personnel explained that the justification for not
timely removing inactive seasonal workers was due to the time-
consuming pre-employment processes. Therefore, the City should
also consider developing a special re-instatement process for
returning seasonal employees instead of simply not removing these
employees from the payroll.
4. Official documentation should be filed for every pay rate
change. Documentation authorizing pay rate changes should
sufficiently demonstrate that all employee pay rates are authentic and
have been approved by management.
Before any employee’s pay rate change is entered into payroll, an
official, department approved, document should be filed with Human
Resources. The official document can be in either paper or electronic
form; but, no matter the format, it should be a document that is not
easily manipulated after receiving departmental approval. For
example, an electronic spreadsheet is insufficient because the entered
rates are easily changed. This official document should be kept on file
(either in hard copy or electronically) with Human Resources until, at
the very least, the employee receives another pay rate change. By
following this protocol, the City can reduce the risk of unauthorized
changes in pay rates and also verify pay rates after they are in place.
Payroll Policies & Procedures 26
5. Management should consider instituting trigger points.
Because there was evidence of sick leave abuse among some City
employees, the City should implement trigger points in its sick leave
policy. The trigger point should mandate that once any employee has
used a predetermined level of sick leave in a year, a specific action
must occur. In most organizations this action is either a mandatory
review of sick leave usage by the employee’s supervisor, or the
requirement that the employee’s illnesses for the rest of the year be
verified by his physician. By instituting trigger points, supervisors will
be able to better manage sick leave usage, and employees will more
responsibly use their sick leave since they know they will be held
accountable.
Payroll Policies & Procedures 27
Appendix A: Interim Audit Report
Payroll Policies & Procedures 28
Payroll Policies & Procedures 29
Appendix B: Management’s Responses
Payroll Policies & Procedures 30
Payroll Policies & Procedures 31
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Payroll Policies & Procedures 34