Loading...
HomeMy WebLinkAboutAudit Reports - Public - HR Overtime Use and Compliance Internal Audit Report - FINAL REPORT City of Glendale HR OVERTIME USE AND COMPLIANCE INTERNAL AUDIT REPORT November 29, 2021 Moss Adams LLP 999 Third Avenue, Suite 2800 Seattle, WA 98104 (206) 302-6500 HR Overtime Use and Compliance Internal Audit Report for the City of Glendale Table of Contents Executive Summary 1 A. Objectives 1 B. Conclusions 1 Detailed Report 3 A. Introduction 3 B. Background 3 C. Scope and Methodology 3 Findings and Recommendations 5 Process Improvement Opportunities 9 Appendix: Definitions of Audit Findings Rankings 10 HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 1 EXECUTIVE SUMMARY Moss Adams LLP (Moss Adams) was contracted by the City of Glendale (the City) to determine whether internal controls were in place related to the recording, tracking, approval, and processing of overtime hours; assess whether the City’s processes comply with the Fair Labor Standards Act (FLSA) requirements related to overtime; and evaluate the City’s related policies for adequacy and consistency with best practices. We performed a variety of procedures to test internal controls and assess the overtime management function, including testing samples of timecards, overtime payments, and evaluating the overtime approvals process. This engagement was performed in accordance with Standards for Consulting Services established by the American Institute of Certified Public Accountants. Accordingly, we provide no opinion, attestation, or other form of assurance with respect to our work or the information upon which our work is based. This engagement was also performed consistent with the guidance issued by the Institute of Internal Auditor’s (IIA’s) International Professional Practices Framework (IPPF). This report was developed based on information gained from our interviews and analysis of sample documentation. The procedures we performed do not constitute an examination in accordance with generally accepted auditing standards or attestation standards. Our objectives for this engagement were to:  Determine whether adequate internal controls are in place over the approvals, tracking, and payments of overtime  Test the City’s internal controls and processes over for compliance with overtime standards based on the Fair Labor Standards Act (FLSA)  Assess the City’s current policies and procedures related to overtime in comparison with best practices The procedures and testing performed identified two areas that require improvement. These are highlighted below. Finding 1. Time Reporting – Medium Risk Finding Employees are not currently reporting start time and end time for dates/shifts worked in the ExecuTime system. As a result, supervisors are approving hours worked and overtime based on lump sum totals by day and week with limited information available to assess reasonableness of time reported. Recommendation The City should establish and document policies and procedures around the timecard completion process and clarify what information is required for a time entry to be valid and any pre-approvals required for overtime. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 2 Finding 2. Employees Incurring Time for Multiple Departments – Low Risk Finding A defined process, and supporting City policies and procedures, is not in place for handling situations where an employee works for multiple departments/cost centers and/or when an employee works a special event/function outside of their normal job duties and hours. Recommendation HR should coordinate with Payroll to determine the best solution (system or outside manual process) for handling situations where an employee performs work for more than one department/cost center. Policies and procedures should be developed to clearly define roles and responsibilities, time reporting, and overtime costs handling. Throughout the internal audit, we also identified one process improvement opportunity related to the consistency of employee classifications in the various City systems. This process improvement opportunity should be considered for implementation. See Section IV for details on the process improvement. Although the focus of this internal audit was to identify opportunities for improvement, it is important to note the areas that are operating well. The City should be commended for the following accomplishments:  Timecard Documentation: All overtime entries selected for testing related to a properly approved timecard and all time reported on timecards agreed to the corresponding payroll register.  FLSA Compliance: During our testing related to overtime handling, all transactions tested were processed at the correct conversion rate of 1.5 times the base rate and the related payment for the overtime hours was paid in the correct pay period, as required by FLSA requirements.  Eagerness for Improvements: During our interviews, feedback from City employees indicated an eagerness to implement improvements to the overtime management function, such as developing policies and procedures and improving communication between departments. We would like to thank City staff and management for their time and efforts in assisting with this internal audit. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 3 DETAILED REPORT Moss Adams was contracted by the City to perform an internal audit over the overtime management function, which involved all departments within the City. In particular, the Human Resources Department is responsible for ensuring adequate controls are in place to ensure FLSA compliance and maintaining employee records. This internal audit was performed as part of the Fiscal Year (FY) 2021 Annual Audit Plan developed by the City’s Independent Internal Audit Program (IIAP). Our internal audit was performed between February 2021 and October 2021. The City’s Human Resources Department is responsible for ensuring efficiency and effectiveness of overtime processes as well as ensuring compliance with relevant rules and regulations. Additionally, the Budget and Finance Department is responsible for monitoring payroll activity and working with City departments to obtain the appropriate supporting documentation, processing payroll, and ensuring that overtime payments are properly recorded in the general ledger in MUNIS. Currently, non-exempt employees enter their hours worked into ExecuTime (a time entry system). Rules have been established in ExecuTime that control how and when to allow overtime and are based on employee classifications. Time is approved by an employee’s direct supervisor. Our objectives for this internal audit were related to the City’s processes and controls specifically surrounding human resources overtime use and compliance function. The internal audit focused on the following objectives:  Determine whether adequate internal controls are in place over the approvals, tracking, and payments of overtime  Test the City’s internal controls and processes for compliance with overtime standards based on the Fair Labor Standards Act (FLSA)  Assess the City’s current policies and procedures related to overtime in comparison with best practices In order to obtain an understanding of the specific processes and overall overtime management function, we conducted interviews with City personnel, specifically within the Human Resources Department and Finance Department, who have designated responsibilities related to overtime management and payroll. We reviewed the City’s policies and procedures provided during the internal audit related to overtime. We performed the following detailed testing procedures:  Employee Classifications: To evaluate and test the City’s process for setting up employee classifications in the system during onboarding and ensuring that exempt employees do not incorrectly receiving overtime payments, we performed the following: ○ Obtained a MUNIS system-generated listing of all city employees, their classifications, and approved salary/pay rate as of the time of this audit HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 4 ○ Obtained an ExecuTime system-generated report of all overtime payments made to employees between January 1, 2021 through June 11, 2021 ○ Analyzed the population of overtime payments processed during the period to determine whether any exempt employees were incorrectly included ○ Compared the employee classifications, for the approximately 400 employees that received overtime payments during the period, to assess consistency between systems  Overtime Approvals and Classifications: We selected a sample of 40 employees from the ExecuTime system who had received overtime payments between January 1, 2021 and June 11, 2021, and performed the following: ○ Determined whether each employee’s timesheet was approved ○ Traced the overtime hours reported in ExecuTime to the payroll register ○ Recalculated overtime wages paid ○ Evaluated the calculations used in the overtime payments for compliance with the FLSA ○ Determined whether overtime was paid in the period it was earned and in compliance with FLSA requirements ○ Performed an analysis on the data to assess whether any duplicate payments or double entries were made  Overtime Policies and Procedures: We obtained an understanding of the City’s current policies and procedures related to overtime and assessed whether there were opportunities for misuse. For the sample of 40 employees identified above, we assessed the related employee timecards and payments and performed the following: ○ Assessed whether timecards, and the related hours reporting, followed City’s current policies and procedures ○ Evaluated the full pay period, and related hours reported, and assed whether an employee recorded overtime incorrectly ○ Evaluated the existing overtime policies and procedures for areas that might be prone to employees taking advantage of current overtime procedures  Multi-Department Review: To assess how overtime is handled when an employee works for several departments, including which department gets allocated the cost of overtime, we reviewed existing policies and procedures to determine whether this topic was addressed and evaluated whether ExecuTime allows users to specifically define which time entry should qualify for overtime. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 5 FINDINGS AND RECOMMENDATIONS 1. Finding Employees are not currently reporting start time and end time for dates/shifts worked in the ExecuTime system. As a result, supervisors are approving hours worked and overtime based on lump sum totals by day and week with limited information available to assess reasonableness of time reported. Recommendation The City should establish and document policies and procedures around the timecard completion process and clarify what information is required for a time entry to be valid and any pre-approvals required for overtime. Condition: The ExecuTime system, which is used to track employee timecards and denote supervisor approval of hours worked, is not being utilized as effectively as it could be. In our analysis of 40 timecards that had overtime hours reported and paid, we found that employees are not currently utilizing the fields for denoting start time (time in) and end time (time out) appropriately. Specifically, we found:  Seven instances where employees left the start time and end time blank and only reported a total number of hours worked on each date  Thirty-three instances where employees put their start time as “00:00” and their end time as the total number of hours worked (for example 08:00 for eight hours worked) As a result, supervisors are approving total hours worked and overtime based on lump sum totals by day and week with limited information available to assess the reasonableness of the shifts/time worked. Criteria: Employees are required to record their time worked in ExecuTime, which has fields to record the start time and end time for each shift/date, and the total number of hours worked, which should tie to the difference between the start and end times. While the City does not have a formal policy related to time reporting, the fields in ExecuTime imply that time is to be reported using the start/end times method of reporting to allow for supervisors to adequately review the time reported. Best practices require that timecards are completed in enough detail to allow for reviewers to adequately assess the reasonableness of the time reported prior to payroll being processed. Cause: The City does not have policies and procedures related to time reporting or time review/approvals and the common practice has been to utilize ExecuTime to report total number of hours worked per day rather than denoting an employee’s start and end times, which the system is meant to capture to auto-calculate the total number of hours worked. Effect: The current practice for reporting time worked makes it difficult to assess the reasonableness of hours worked, by employee and by date/shift, and as a result, there is a risk that hours could be manipulated or incorrectly recorded and not be identified during a supervisor’s review process. Excess overtime could be reported and paid. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 6 Recommendation: The City should establish and document policies and procedures around the timecard completion process and clarify what information is required for a time entry to be valid (i.e., start and end times). If the City does not elect to require the use of start and end times in ExecuTime, at a minimum, the use of those fields and means of reporting total hours worked should be clarified to allow for consistency in use. In addition, the responsibilities of the reviewer should be clearly defined in policy and should include accountability for reviewing total hours worked, by date/shift, and total hours worked for the week, for reasonableness and accuracy based on knowledge of the shifts/schedules each employee worked. In addition, the policy should address requirements around overtime, such as any prior approval required and the responsibility of the reviewer. MANAGEMENT RESPONSE Management Agreement We concur with this finding; we will explore the option of having employees enter start and stop times when we move to a new timekeeping system. Owner Human Resources/Risk Management Department Target Completion Date 6/30/22 Action Plan In order to have employees enter start and stop times, we would have to reconfigure the system and define schedules for all employees within ExecuTime. This would require that many different schedules be developed in order to cover all shift possibilities. It would also be extremely cumbersome for staff to maintain and update schedules for employees on an ongoing basis within ExecuTime. The City explored this option when implementing ExecuTime and determined that it did not work for us as an organization. At this point in time, it would not make sense to reconfigure the system. However, due to issues with the upcoming new version of ExecuTime and not having the ability to obtain updates from Tyler for our current version at some point (current estimate is 12/31/2022), we are exploring other timekeeping options. As we do this, we will include a review of options to allow employees to either manually enter start and stop times or have this done through some type of time clock functionality. As part of the City’s review and revision of all policies, we will specify expectations with respect to the timekeeping and supervisory time approval processes. An existing policy will be revised or a new policy will be published prior to June 30, 2022, and will be updated as necessary when a new timekeeping system and/or process is implemented. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 7 2. Finding A defined process, and supporting City policies and procedures, is not in place for handling situations where an employee works for multiple departments/cost centers and/or when an employee works a special event/function outside of their normal job duties and hours. Recommendation HR should coordinate with Payroll to determine the best solution (system or outside manual process) for handling situations where an employee performs work for more than one department/cost center. Policies and procedures should be developed to clearly define roles and responsibilities, time reporting, and overtime costs handling. Condition: While most City employees work for one specific department, and therefore their time/pay is all charged against one department’s budget, there are situations where employees work for more than one department. This is common for Police personnel in situations where their normal hours worked are related to one primary department, but at times, they work a special event or function that relates to another department and cost center. Currently, time reporting in ExecuTime is not set up to allow employees to charge specific time entries to different departments or codes when necessary. As a result, if an employee works a special event or incurs time that relates to a department outside of their regular department, the process of notifying the appropriate supervisors, HR, and Payroll is done manually (e.g., email or verbal). In addition, there is no established policy guiding the nuances related to employees working for multiple departments in a single pay period, and it is unclear how an employee working in a non-regular department would charge related hours worked or how overtime (if incurred) would get allocated. Finally, it is unclear who is responsible (i.e., the employee, supervisor, etc.) for making notifications related to these circumstances and who is responsible (i.e., HR, Payroll, etc.) for ensuring the appropriate expense/budget entries get processed. Criteria: While current City policies do not address these matters, best practices for time reporting suggest that, when possible, time is coded/charged to the correct cost center/department at the time of entry, allowing for review/approval at the appropriate levels, including supervisors in multiple departments when appropriate. Time reporting policies should address how multi-departmental employees or specific assignments are recorded, communicated, and approved, as well as define qualifying overtime criteria and related responsibilities for proper expense recording. Cause: Currently, ExecuTime is not being used in a way that allows employees to code specific time entries to a different department and cost center and it is unclear if this capability exists within the system. Formal City policies and procedures have not been developed to address situations where an employee works for multiple departments, who is responsible for communication and adjustment processing, and which department incurs any resulting overtime costs. Effect: In the absence of a system solution and defined policy, manual processes and coordination between several departments are required, which increases the risk of errors in time reporting, could result in budget overages when overtime occurs and is not covered by the correct department, and may lead to a lack of appropriate approvals when an employee reports time worked for a department outside of their normal department. Responsibilities, between HR and Payroll, for identifying a solution and policy are not clear. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 8 Recommendation: HR should communicate with Payroll to determine the best approach to handle these situations and determine whether system solutions are possible or warranted. Roles and responsibilities should be defined to ensure that communication related to these situations is occurring in a well-controlled and efficient manner. In addition, the City should develop policies and procedures to address the following key areas:  If possible, employees should select the appropriate department and code for each time entry recorded or otherwise denote on their timecards the time entries that relate to other departments outside of their primary department. If this is not possible, the responsibilities for notification at the employee and supervisor level should be defined.  If an employee works in their primary position as well as for another department and category on that same day, they should not group those two categories into one time entry. For example, an employee should not note 14 hours on one line if eight of those hours related to their normal department and the remaining six related to the ticket counter extra work. The reason to separate time entries between departments is so that the six hours in that example is classified as “overtime” in the event that employee exceeds 40 in the whole week. Regardless of when incurred, the hours for the extra department/work should incur the overtime costs. After policies and procedures are developed, training should be provided to all City employees that perform work for multiple departments or work special events/functions. Training should include some of the following key areas:  Define how employees should communicate when a department outside of their primary department is requesting assistance and how approval for the work/hours is obtained and documented.  Describe how employees are to report their time when they work for more than one department (whether a solution in ExecuTime is implemented or a manual communication process is required).  Define roles and responsibilities for handling these situations including roles for the employee, supervisor, HR, and Payroll.  Define requirements for separating time entries (e.g., normal department hours must be on separate timecard lines than other department lines) and which department and cost center incurs any overtime costs, if applicable. MANAGEMENT RESPONSE Management Agreement We concur with this finding. Owner Human Resources/Risk Management Department Target Completion Date February 28, 2022 Action Plan Human Resources will work with Payroll to determine the best approach to handling situations where an employee is recording time on their timesheet when working for another department. We will explore the possibility of changes to ExecuTime or using a process outside of the system if system changes aren’t feasible. Documentation will be developed, and training provided as appropriate. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 9 PROCESS IMPROVEMENT OPPORTUNITIES Moss Adams identified one process improvement opportunity as a result of this internal audit. The table below summarizes this recommendation. CATEGORY PROCESS IMPROVEMENT RECOMMENDATIONS 1 Employee Classification There were three instances found during testing where exempt employees had been reclassified to non-exempt positions and their new classification had not been updated in the MUNIS system. Although these employee classifications had not been updated in MUNIS, they had been correctly updated in ExecuTime, which prevented overtime from being paid incorrectly. The City should implement an employee classification review when employees change positions to ensure that employee classifications are accurate and consistent across platforms. Additionally, this should be added to the current Compensation and Classification policies and procedures. HR Overtime Use and Compliance Internal Audit Report for the City of Glendale | 10 APPENDIX: DEFINITIONS OF AUDIT FINDINGS RANKINGS We utilized the City IIAP’s risk rankings, presented below, and assigned 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 following table. HIGH Critical control deficiencies that expose the City to a high degree of combined risks. Recommendations from high-risk findings should be implemented immediately (preferably within three months) to address areas with the most significant impact related to the City’s overtime procedures. MEDIUM Represents less than critical deficiencies that expose the City to a moderate degree of combined risks. Recommendations arising from medium-risk findings should be implemented in a timely manner (preferably within six 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 deficiencies and the exposure is not likely to expose the City and its assets to significant losses. However, low-risk findings should be addressed in order to improve efficiency and effectiveness of operations. Recommendations arising from low-risk findings should be implemented within 12 months.