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HomeMy WebLinkAboutAudit Reports - Public - Glendale Human Resources - Citywide Annual Payroll/Timesheets Audit - 8/11/2021 Glendale Human Resources Citywide Annual Payroll/Timesheets Audit August 11, 2021 Independent Internal Audit Program 1 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Table of Contents Executive Summary 2 A. Introduction 4 B. Background 4 C. Objective 4 D. Key Outcomes 4 E. Audit Results and Recommendations 4 F. Process Improvement Opportunities 10 G. Audit Scope and Methodology 10 H. Data Reliability 11 2 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Executive Summary As part of our FY 2020-21 Audit Plan approved by the City Council, City of Glendale's Independent Internal Audit Program (IIAP) conducted a continuous monitoring audit of the City's Payroll and Timesheet records. The audit is performed annually to provide assurance that the City’s largest expense component is accurate. Audit Objective: The objective of this audit was to analyze payroll and timekeeping records to provide reasonable assurance that the City has instituted adequate controls to prevent payroll and timesheet errors and fraud and to ensure that all payroll and timekeeping records were accurate and complete. Audit Conclusions: Overall, IIAP noted that payroll and timekeeping records are accurate and include adequate supporting documentation. However, there were some opportunities noted where improvement could occur. Findings: 1. IIAP extracted a list of employees who were hired in FY20 (between July 1, 2019 and June 30, 2020) from the employee master file provided by HR. A total of 266 employees were hired during this period. IIAP then extracted the personnel action report from the Tyler MUNIS system to determine if all hiring actions were supported by a Personnel Action (PA). A. 19 (7%) of the 266 new hires’ records were not supported by a PA. B. 185 (70%) of the PAs were approved after employees had started employment with the City, rendering the internal control on processing PAs ineffective. 2. From the employee master file, IIAP extracted a list of 305 employees who were separated from the City's employment during FY20. IIAP performed an analysis of the date of separation and their last check date to determine whether the timeline between separation and the last check was within the required threshold and appeared reasonable. A. Five (2%) of the 305 employees were issued their last check more than 200 days after separation. One had a last check date that was paid 431 days after separation. B. 28 (9%) had a last check date that was earlier than the date of separation. C. 71 (23%) had their last check paid after the required 7 days expiry. 3. IIAP reviewed FY20 payroll records for all City employees to analyze overtime pay. 3 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit A. IIAP analyzed 34,010 overtime (OT) records. There were 188,856 OT hours worked across the City for a total of $5,612,374 in OT payments, representing approximately 4% of the City's total payroll for FY20. This is about 1% more than best practice standards, which indicates on average 3% is ideal for an organization to spend in OT. B. The highest OT worked by one employee was from the Police Department. He earned $55,861 (1%) of total overtime, which was $21,049 more in OT than the second highest OT employee. He worked 1,447 hours of OT, which translates to 56 hours of OT or 136 total hours each pay period. IIAP noted that the City has not set a threshold for the maximum number of hours one should work in OT. Severity: 1. High 2. High 3. High 4 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit A. Introduction As part of our FY 2020-21 Audit Plan approved by the City Council, City of Glendale's Independent Internal Audit Program (IIAP) conducted a continuous monitoring audit of the City's Payroll and Timesheet records. The audit is performed annually to provide assurance that the City’s largest expense component is accurate. B. Background The payroll and timesheets review is one of the continuous monitoring reviews that IIAP conducts annually to provide reasonable assurance to the accuracy, completeness, and effectiveness of internal controls related to processing City transactions. FY20 payroll expenditures for the City equaled $129 million, representing about 42% of the City's total spend. This review was performed on all payroll and timekeeping data for FY20. The significant financial and budgetary resources expended by the City on payroll makes it a high risk for potential fraud, abuse, inaccuracy, and inefficiency. This is simply because payroll processes involve a lot of documentation, decisions, reviews, and collaboration between Departments, Human Resources, and Budget & Finance. We used an analytical review approach where we identified certain critical procedures to test based on predetermined criteria and a risk analysis process. C. Objective The objective of this audit was to analyze payroll and timekeeping records to provide reasonable assurance that the City has instituted adequate controls to prevent payroll and timesheet errors and fraud and to ensure that all payroll and timekeeping records were accurate and complete. D. Key Outcomes Overall, IIAP noted that payroll and timekeeping records are accurate and include adequate supporting documentation. However, there were some opportunities noted where improvement could occur. Details of these are included in the audit results section. E. Audit Results and Recommendations Findings: Condition for Finding # 1 1. IIAP extracted a list of employees who were hired in FY20 (between July 1, 2019 and June 30, 2020) from the employee master file provided by HR. A total of 266 employees were hired during this period. IIAP then extracted the personnel action 5 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit report from the Tyler MUNIS system to determine if all hiring actions were supported by a Personnel Action (PA). A. 19 (7%) of the 266 new hires’ records were not supported by a PA. B. 185 (70%) of the PAs were approved after employees had started employment with the City, rendering the internal control on processing PAs ineffective. Criteria All changes to employee information should include adequate supporting documentation. Personnel Action (PA) input should be timely with respect to the effective date of the change. Cause Testing indicated that PA records were not consistently reconciled to the employee master file. One of the results is the need to retroactively approve PAs after the change in status has occurred. Effect Employee information could be inaccurate and/or inadequately supported, possibly requiring additional efforts to research and correct any errors. Recommendations A. HR should regularly review and reconcile changes in the employee master file against PA records in Tyler MUNIS (MUNIS) to ensure that both records reflect the same information and any discrepancies are proactively and promptly identified, investigated, and resolved. B. All Personnel Actions should be fully approved before any action to effect a change in the employee master file takes place. Management’s Response to Finding # 1 HR believes we have mitigating controls already in place and functioning as intended. Recommendation A All of the 19 new hire records identified were related to temporary employees and were supported by a PA. When a current temporary employee changes status and becomes a regular status employee, HR treats them as a “transfer” rather than terminating them and then re-hiring them. All of these employees were changed to regular status through a transfer PA. In MUNIS, we put the transfer date as their hire date into a regular status position. We leave their temporary hire date as the original hire date. HR does not recommend any changes to our process. 6 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Through the PA approval process, HR has multiple checks of the information being entered to ensure accuracy. If there is an error, we correct it prior to posting the PA, which permanently changes the employee’s master record. Recommendation B HR disagrees with the assertion that internal controls on processing PAs are ineffective. Our process for approval of a new hire is outside of MUNIS. Department Directors approve the requisition in NEOGOV which authorizes HR to begin a recruitment. Once the candidate has been identified, the HR Business Partner (HRBP) determines the salary in conjunction with the hiring department and the final salary offer is approved by HR management. The executed offer letter is then used to enter the new hire in MUNIS. The executed offer letter is uploaded and attached to the PA in MUNIS for back-up documentation. Once the PA is entered by HR, the approval going forward is simply HR making sure the information entered is correct. In addition, depending on the timing of receiving the offer letter, the new hire completing their onboarding paperwork, and the pay period, the PA many times is not approved until after the start date of the new hire but is still approved within that initial pay period. Again, this does not make our process ineffective. The HR approval process for the PA is only to ensure the information is entered correctly. The approval to recruit and hire a new person has already been given in NEOGOV by the department director and the salary has been approved by HR management. Condition for Finding # 2 2. From the employee master file, IIAP extracted a list of 305 employees who were separated from the City's employment during FY20. IIAP performed an analysis of the date of separation and their last check date to determine whether the timeline between separation and the last check was within the required threshold and appeared reasonable. A. Five (2%) of the 305 employees were issued their last check more than 200 days after separation. One had a last check date that was paid 431 days after separation. B. 28 (9%) had a last check date that was earlier than the date of separation. C. 71 (23%) had their last check paid after the required 7 days expiry. Criteria The City should issue final paychecks timely to associates who terminate employment, and in some cases are legally required to do so. 7 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Cause Testing indicated that issuance of final paychecks to separated employees is not consistent. One of the main reasons appears to be the failure of City departments to consistently enter the termination PA into the system timely. Effect Incorrect and/or untimely payment of final wages upon employment separation could lead to penalties for violation of labor laws and/or litigation against the City. Recommendation Develop a process that will increase efficiency in processing employee separations. Management’s Response to Finding # 2 HR agrees that with refresher training to departments, the processing and monitoring of employee separations could be streamlined to improve timeliness. Observation A The 5 employees referenced here received their final check appropriately when they left the organization; however, the last check date noted during testing was due to additional refunds or adjustments that were owed to them and paid at the later date. Observation B The 28 that had a last check date earlier than the date of separation is primarily due to those employees being temporary. Departments can use their temporary employees as needed and many times they are either not scheduling them any hours, the temporary contract has ended, or the temporary employee has resigned. The departments are responsible for entering a PA to actually terminate the employee from the system, but many times it is not done immediately. The departments sometimes leave the temporary position open in case they may need them within the next several months. When they determine they are not bringing them back, then they do the PA. This occurs most often in PFRSE and PD. For instance, the PD uses temporary workers to staff special events. They are on-call and work only when needed. HR does audit this and sends reminders to departments to complete termination PAs. Of the 28 instances noted, there were three employees who separated due to health reasons. Per our policy, employees on medical leave may continue in their position for twelve months. These employees ran 8 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit out of leave time and were therefore not being paid for a period of time before they were actually separated. Observation C Final checks issued within seven days of separation are only required if the City terminates an employee. The law states that if an employee is involuntarily terminated, the final paycheck is due within 7 business days or by the next regular payday, whichever comes first. In the data tested, there are only 15 instances where an employee was involuntarily terminated. All but 3 of the 15 were issued their final paycheck within 7 business days. Two of the remaining 3 employees were awaiting the end of their administrative leave before checks could be issued, and the last one was only employed by the City for three days (requiring hiring paperwork to be entered into the system before termination processing could be completed). For any "End Temporary Employment" terminations, these would have occurred due to the temporary contract ending or because the temporary employee resigned. HR codes these as End Temporary Employment; none of these would require a 7-day check. Generally, any gap between the termination date and the last pay date is due to the department either not entering the PA timely, or not sending it to HR timely for entry and subsequent approval workflow (HR is the final approver). It is each department's responsibility to ensure that any PA is completed as close to the effective date as possible. Again, refresher training for City departments will help reinforce processing requirements and timeliness. HR will provide refresher training on separation processing by September 30, 2021. Condition for Finding # 3 3. IIAP reviewed FY20 payroll records for all City employees to analyze overtime pay. A. IIAP analyzed 34,010 overtime (OT) records. There were 188,856 OT hours worked across the City for a total of $5,612,374 in OT payments, representing approximately 4% of the City's total payroll for FY20. This is about 1% more than best practice standards, which indicates on average 3% is ideal for an organization to spend in OT. B. The highest OT worked by one employee was from the Police Department. He earned $55,861 (1%) of total overtime, which was $21,049 more in OT than the second highest OT employee. He worked 1,447 hours of OT, which translates to 56 hours of OT or 136 total hours each pay period. IIAP noted that the City has not set a threshold for the maximum number of hours one should work in OT. 9 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Criteria Overtime hours worked and corresponding OT pay should be monitored for budget impact and possible effect on employee morale and productivity. Cause Due to the nature of working in Public Safety, including the need for their presence at public events, the Police and Fire Departments have the vast majority of OT hours/pay across the City. Staffing shortages, especially in Police, contribute to the reliance on OT. However, the City has not established a threshold for OT work. Effect Not only can significant OT amounts affect departmental budgets, but excessive OT could lead to lower employee morale and productivity. Historically, some employees consistently volunteer for OT, while others never partake unless absolutely necessary. Today it is becoming more difficult to find volunteers for OT and instead departments are forced to assign rotating OT among its employees to cover staffing shortages. Recommendations A. City Management, in conjunction with the HR department, should introduce OT thresholds to ensure employees do not work excessively and ensure OT spend is well controlled. B. HR should implement OT analytics to monitor OT usage, increase efficiencies in OT management, and reduce excessive OT usage across City departments. Management’s Response to Finding # 3 HR agrees that data analytics for overtime hours/pay would be useful. However, HR does not control the amount of OT needed across the City as that is managed at the individual departmental level based on their needs. Recommendation A City Council approves the City’s overall budget, which includes overtime. Departments are responsible for controlling their overtime usage within budget constraints. Control and oversight of overtime for a large organization such as ours should be monitored by each department in conjunction with the budget department. Employees log their time on a timesheet and supervisors are responsible for approving their time along with approving any overtime worked. 10 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit The role of HR in the overtime process is to ensure that our policy is up to date in terms of the Fair Labor Standards Act (FLSA), which regulates how overtime must be paid for non-exempt employees and to work in partnership with Payroll to ensure that MUNIS is set up correctly to comply with FLSA regulations. HR also provides training to department supervisors as needed to help them understand FLSA regulations. We believe it would be unreasonable to impose thresholds on overtime usage, particularly for Police and Fire. Their schedules and staffing are determined by the Chiefs and often require high levels of overtime usage depending on workload or special events. Recommendation B HR will work with Budget & Finance to determine how best to run an OT usage report, how often that report should be run, and how it should be distributed to departments. One distribution possibility might be when Budget & Finance meets with departments on a quarterly basis to review their budget and discuss any anomalies. The OT report could also be distributed and discussed at that time. Development of the report will be completed by August 30, 2021. F. Process Improvement Opportunities Once City Management has determined thresholds and monitoring requirements around overtime hours/pay, departments can utilize the analytics that HR and Budget & Finance are developing. Refresher training on terminations will also help ensure timeliness of final paycheck issuance and compliance with policy. G. Audit Scope and Methodology The scope of this audit included analysis of all payroll and timekeeping records for the period July 1, 2019 to June 30, 2020. We conducted this performance audit in accordance with the Government Accountability Office (GAO)'s generally accepted government auditing standards as well as the Institute of Internal Auditors (IIA)'s international professional practices framework. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on the audit objective. The objective of this audit was to perform an analysis of payroll and timekeeping records to provide reasonable assurance that the City has instituted adequate controls to prevent payroll and timesheet errors and fraud and to ensure that all payroll and timekeeping records were accurate and complete. IIAP determined that internal controls over the following areas were relevant to our objectives: • Efficiency and effectiveness in processing payroll and related transactions; • Adequacy of internal controls in processing payroll and related transactions. 11 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit To accomplish the audit objective, IIAP performed the following activities: • interviewed staff that are responsible for City payroll; • identified and reviewed applicable policies, rules, and regulations; • performed analytics on data extracted from Executime (the City's timekeeping software) and Tyler MUNIS, the City's Integrated system used for payroll processing; and, • made inquiries regarding HR activities related to payroll changes including new hire process, pay increases, and separation. We analyzed all payroll and overtime data for the FY20 fiscal year. H. Data Reliability All data was pulled directly from MUNIS by IIAP or was supplied by the HR Business Analyst directly from MUNIS per IIAP request. 12 Independent Internal Audit Program Citywide Annual Payroll/Timesheets Audit Appendices Appendix 1 Definitions of Audit Findings Rankings We assigned the risk rankings based on our professional judgment. A qualitative assessment of high, medium or low helps to prioritize implementation of corrective action as shown in the table below. High Critical control weaknesses that exposes the City to a high degree of combined risks. Recommendations from High risk findings should be implemented immediately (preferably within 3 months), to address areas with most significant impact or highest likelihood of loss, misappropriation or damage related to the City assets. Medium Represents less than critical weaknesses that exposes the City to a moderate degree of combined risks. Recommendations arising from moderate risk findings should be implemented in a timely manner (preferably within 6 months), to address moderate risks and strengthen or enhance efficiency in internal controls on areas with moderate impact and likelihood of exposure. Low Represents low risk or control weaknesses and the exposure is not likely to expose the City and its assets to significant losses. However, they should be addressed in order to improve efficiency and effectiveness of operations. Recommendations arising from low risk findings should be implemented within 12 months.