Chapter 14

The Human Resources (HR) Management and Payroll Processes

Accounting Information Systems 7e
Ulric J. Gelinas and Richard Dull

Copyright 2008 Thomson Southwestern, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Learning Objectives
Define and understand the basic functions of the HR management and payroll processes. Describe the relationship between the HR management and payroll processes and their environment. Comprehend the relationship between the HR management and payroll processes and management decision making. Depict the logical and physical elements of the HR management and payroll processes. Describe some of the technology used to implement the HR management and payroll processes. Prepare a control matrix for a typical payroll process, including explanation of how business process control plans can accomplish payroll operations and information control goals.
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Process Definition and Functions

Personnel management started by handling payroll and personnel administration, but evolved by adding functions to handle recruiting, employee relations, and so on. HRM still viewed personnel as something that could be controlled HCM philosophy is based on three major principles:
1. An individuals value to an organization is derived from his/her jobrelated knowledge, skills, attitude, and motivations 2. Human assets include full-time permanent employees, plus part-time employees, temporary employees, and independent contractors. With supply chain management, an organizations human assets could include employees of suppliers, sales channel partners, and customers 3. A persons relationship with an organization, from hiring through termination, must be nurtured and managed to obtain maximum lifetime value

Duties of HR Managers

Duties of HR Managers

Definition of HR Management Process

Primary function of the HRM process is to create information flows that support the following:
1. Repetitive work routines of the HR department 2. Decision needs of those who manage the HR department

The HRM process supports the work routines of the HR department and provides information for management decisions by:
Capturing, recording, and storing data concerning HR activities Generating a variety of HR forms and documents Preparing management reports Preparing governmental reports

The Payroll Process

Many companies often merge payroll and HR The payroll process maintains records of payroll taxes, fringe benefits, attendance/absence, time worked and employee paychecks The payroll process is generally automated because computers are much faster at handling the repetitive computations necessary (payroll is also the most frequently outsourced application in accounting) Current HR software reaches far beyond simply doing payroll and includes:
Benefits admin, applicant tracking/processing, skills inventories and compliance reporting

Much of HRM is NOT captured by GAAP

But accountants must recognize the immense value of human capital and its affect on the long-term financial health of the organization
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Organization Chart of the HR Function

Technology Trends and Developments

HR self service systems
HR Manuals Retirement programs Personal profile Expense reports

Outsourcing
Web-based collaboration Payroll

Enterprise systems may integrate HRM with

Financial Accounting Logistics Sales and Distribution The Workflow Module

Master Data related to HR and PR Function

Payroll function Establishes authorization for payroll event Provides inputs
Pay rates Exemptions Deductions

HR function Determine:
Employee's assigned department Telephone number Supervisor

Historical payroll data periodic reporting

Taxes Insurance Retirement programs.

Locate and manage human capital skills Performance evaluation data

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Payroll Process Context Diagram

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Payroll Process: Level 0 DFD

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Payroll Process Diagram 4

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Accounting Entries Payroll Process

PAY EMPLOYEES A. ESTABLISH VARIOUS PAYROLL LIABILITIES Payroll clearing FIT withholdings payable SIT withholdings payable FICA tax withholdings payable Accrued payroll B. RECORD THE DISBURSEMENT OF CASH Accrued payroll Cash XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

DISTRIBUTE PAYROLL TO VARIOUS ACCOUNTS Work in process (direct labor) Manufacturing overhead (indirect labor) General and administrative expense Selling expense Payroll clearing XXXXX XXXXX XXXXX XXXXX XXXXX 14

Accounting Entries Cont.

ACCRUE EMPLOYER PAYROLL TAXES Manufacturing overhead (tax on factory workers) General and administrative expense Selling expense FICA taxes payable SUT taxes payable FUTA taxes payable RECORD TAX DEPOSITS FIT withholdings payable SIT withholdings payable FICA tax withholdings payable FICA taxes payable SUT taxes payable FUTA taxes payable Cash XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX
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XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

Payroll Process Flowchart

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Payroll Has High Fraud Potential

Types of payroll frauds:
Ghost employees (employees who dont exist but are issued paychecks) Falsified hours (employees who overstate hours worked) Commission schemes (collecting commissions on false sales or using false commission rate) Workers comp schemes (faking injury to receive compensation)
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Payroll System Controls

Segregation of duties between HR (employee record creation), payroll (prepares payroll) and AP/cashier (disburses cash) Direct deposit (eliminates opportunity for check fraud) Review of employee master data for duplicate names and/or social security numbers Comparison of actual payroll to budget
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Reimbursement Fraud
Reimbursement for employee business expenses often clear the payroll system
Claiming personal expenses as business related Altering receipts to increase expenses Submitting false receipts Submitting same expense multiple times

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Payroll Process Control Matrix

Control Goals of the Payroll Business Process Control goals of the operations process
Ensure effectiveness of operations Ensure efficient employment of resources Ensure security of resources

Control goals of the information process

For time data inputs, ensure: For empl/PR master data, ensure:

Recommended control plans

A B C IV IC IA UC UA

Present Controls P-1: Enter time data close to the datas originating source P-2: Computer agreement of batch totals P-3: P-4: P-5: P-6: P-7: Approve attendance time data and job time data Reconcile attendance time data and job time data Distribute labor costs Independent paycheck distribution Approve payroll transfer check P-6 P-7 P-8 P-8 P-8 P-8 P-8 P-4 P-4 P-3 P-4 P-5 P-6 P-4 P-5 P-3 P-4 P-5 P-1 P-1 P-1 P-1 P-2 P-2

P-8: Accumulate payroll data for reconciliation of the payroll clearing account P-9: P-10: Use a payroll clearing account Prepare miscellaneous reports P-10 P-10

P-9

P-9

P-9

P-9

P-9

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Payroll Process Control Matrix

Control Goals of the Payroll Business Process Control goals of the operations process Control goals of the information process
Ensure effectiveness of operations Ensure efficient employme nt of resources Ensure security of resources For time data inputs, ensure: For empl/PR master data, ensure:

Recommended control plans

IV

IC

IA

UC

UA

Missing Controls M-1 Independent reconciliation of payroll bank account M-1

M-2 Use an imprest payroll bank account

M-2

M-2

M-2

M-2

M-2 Computer agreement of batch totals (agree run-to-run totals)

M-3

M-3

M-3

M-3

M-3

M-3

Effectiveness goals include: A Provide employees with timely paychecks B Provide timely filing of tax returns and other reports to government agencies C Comply with requirements of payroll and tax laws and regulations

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Payroll Part of HR Module

It is common for payroll to be part of the HR module in software (SAP example)

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Figure 14.1
The HR module includes options for both HR and payroll, among others The advantages gained by allowing the two processes to share common data include:
Creating a single source for obtaining HR information Providing for faster data access Minimizing data redundancy Ensuring data integrity and consistency Facilitating data maintenance Improving data accuracy
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Implementing the HRM Process

Process Inputs: In general, the HR forms in the figure capture information about three HR-related events: (1) selecting employees (2) evaluating employees, and (3) terminating employees

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Implementing the HRM Process

Selecting employees may be initiated in one of two ways:
1. Departmental managers (outside the HR department) may initiate the process to satisfy their immediate hiring needs 2. Selection process may be started by the system automatically

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Implementing the HRM Process

Evaluating employees comprises a multitude of activities
Departmental managers and supervisors (again, outside the HR function) usually initiate evaluations or other changes affecting employees The manager of personnel appraisal and development (in HR) typically approves the review and implements such changes
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Implementing the HRM Process

Terminating employees closes the employment process loop
Periodically, departmental managers and supervisors (in concert with HR managers) must make difficult decisions about the retention of employees If a termination is necessary, the employee change screen is used to initiate the process of changing an employees status from current employee to terminated employee

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Implementing the HRM Process

Processing Logic and Process Outputs. HR requests initiated outside of the HR department are approved within that department and then routed to HR for approval Some data may be entered within HR The employee/payroll master data, skills inventory data, and labor-force planning data within the enterprise database are updated and various reports are made available Several outputs are produced New hire: An employment letter is sent to the employee Selection notice is sent to the department manager Feedback on job performance: Employee review form Termination: Employees are notified of a dismissal through a dismissal letter Termination notice sent to the operating department manager.

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Implementing the HRM Process

HRM process prepares reports for government and nongovernment entities
Payroll reports: employee federal, state, and local taxes Unions Equal Employment Opportunity (EEO) Occupational Safety and Health Administration (OSHA) Department of Labor

HR reports might include those provided to the following:

There are also numerous communications to employees of HR-related information

Job opening announcements Training information Phone books Benefits literature Policy and procedure manuals, and the like.

Many companies have found that such materials can be disseminated effectively and efficiently through an HR portal, which serves as a central data source for such information.
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HR Management Flowchart

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Key Data Tables in the HR Process

Though the flowchart shows only one data store, multiple database tables are contained:
Employee/payroll master data Labor-force planning data
Staffing requirements Skills required Turnover data

Skills inventory data

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The Payroll Process

Payroll generally falls under the controllers office with the treasurer participating in distributing paychecks
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Payroll Data and Flows

Tax rates data
Contains current tax rates (federal, state, county and city) for employee withholding and employer accruals

Attendance time record

Lists hours employee are at the job site available for work; usually kept on time card

Job time records

Start and stop times for particular jobs for direct labor distribution
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Federal Payroll Tax Reports

941 (report of FICA taxable wages) W-2 (employee wage and tax statement) 1099 (reports non-salary income) Employee Retirement Income Security Act (ERISA) reports (reports on private pension fund assets management)

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