SECOND EDITION Chapter 10-1 Prepared by CobybyHarmon Prepared Coby Harmon University of California, Santa Barbara University of California, Santa Barbara Westmont Westmont CollegeCollege Expenditures Processes and Controls-Payroll and Fixed Assets Chapter 10-2 Study Study Objectives Objectives An introduction to payroll and fixed asset processes Payroll processes Risks and controls in payroll processes IT systems of payroll processes Fixed asset processes Risks and controls in fixed asset processes IT Systems of fixed asset processes Ethical issues related to payroll and fixed assets processes Corporate governance in payroll and fixed assets processes Chapter 10-3 Real Real World World Soon after implementing a new ERP system in 2003, the Prince George’s County, Maryland, school district processed the regular payroll for its 19,000 teachers, administrators, school bus drivers, and other employees Of those 19,000 paychecks, 1,400 were incorrect In some cases, teachers were paid only 50 percent of what they were owed In other cases, teachers were paid more than they were owed, and had to return the overage This is an extremely high number of errors for payroll, and employees get very upset with such errors The school district had just implemented a new $9.5 million integrated accounting software system from Oracle® However, after an investigation, it was determined that the payroll errors were not hardware or software problems, but problems with people and processes The problems were related to the steps that employees used to submit time cards for payroll—in other words, payroll processes The processes in this case that were faulty included a time-consuming policy of assigning timekeepers at each school, who had to personally review each time card before submission Prince George’s County also had payroll employees who were inadequately trained in the use of the new payroll module A similar payroll debacle occurred at the Los Angeles Unified School District when it implemented the payroll function of its ERP system in 2007 In mid-2010, the district was still trying to recover $9 million of the $60 million in overpayments that were made because of glitches in the system and errors made by employees An extensive investigation found several problems that led to these payroll problems (both overpayments and underpayments), one of which was inadequate training for employees who operated the payroll system Chapter 10-4 Introduction Introduction to to Payroll Payroll and and Fixed Fixed Asset Asset Processes Processes Payroll processes Chapter 10-5  Acquiring and maintaining human resources  Capturing and maintaining employee data  Paying employees  Recording cash and payroll liabilities and expenses SO An introduction to payroll and fixed asset processes Introduction Introduction to to Payroll Payroll and and Fixed Fixed Asset Asset Processes Processes Fixed asset processes Chapter 10-6  Purchasing property  Capturing and maintaining relevant data about assets  Paying for and recording the related assets  Recording depreciation and other expenses  Accounting for gains or losses SO An introduction to payroll and fixed asset processes Introduction Introduction to to Payroll Payroll and and Fixed Fixed Asset Asset Processes Processes Various risks Chapter 10-7  Recorded expenditures may not be valid  Transactions may be recorded in the wrong amount  Valid expenditure transactions may have been omitted  Transactions may have been recorded in the wrong employee or vendor account  Transactions may not have been recorded in a timely manner  Transactions may not have been accumulated or transferred to the accounting records correctly SO An introduction to payroll and fixed asset processes Exhibit 10-1 Expenditure Processes within the Overall System Payroll Payroll and and Fixed Fixed Asset Asset Processes Processes Chapter 10-8 SO Payroll and fixed asset processes Introduction Introduction to to Payroll Payroll and and Fixed Fixed Asset Asset Processes Processes Concept Check Which of the following statements about payroll and fixed asset processes is true? a Both have only routine processes b Both have only nonroutine processes c Both have routine and nonroutine processes d Payroll has only routine processes, while fixed asset has only nonroutine processes Chapter 10-9 SO An introduction to payroll and fixed asset processes Payroll Payroll Processes Processes Terminology Chapter 10-10  Human resources department  Organization chart  Time sheet  Payroll register  Payroll disbursements journal SO Payroll processes Risks Risks and and Controls Controls in in Fixed Fixed Assets Assets Processes Processes Common procedures associated with the fixed asset process: Chapter 10-31  Authorization of transactions  Segregation of duties  Adequate records and documents  Security of assets and documents  Independent checks and reconciliation  Cost-benefit considerations SO Risks and controls in fixed asset processes Risks Risks and and Controls Controls in in Fixed Fixed Assets Assets Processes Processes Authorization of Transactions Three Formal Steps: Investment analysis Comparison with the capital budget Review of the proposal and specific approval Exhibit 10-13 Fixed Asset Approval Levels Chapter 10-32 SO Risks Risks and and Controls Controls in in Fixed Fixed Assets Assets Processes Processes Concept Check Which of the following is not a part of “adequate documents and records” for fixed assets? a Fixed asset journal b Fixed asset subsidiary ledger c Purchase order d Fixed asset tags Chapter 10-33 SO Risks and controls in fixed asset processes Risks Risks and and Controls Controls in in Fixed Fixed Assets Assets Processes Processes Concept Check Which of the following questions would be least likely to appear on an internal control questionnaire regarding the initiation and execution of new PP&E purchases? a Are requests for repairs approved by someone higher than the department initiating the request? b Are prenumbered purchase orders used and accounted for? c Are purchase requisitions reviewed for consideration of soliciting competitive bids? d Is access to the assets restricted and monitored? Chapter 10-34 SO Risks and controls in fixed asset processes Risks Risks and and Controls Controls in in Fixed Fixed Assets Assets Processes Processes Concept Check Which of the following reviews would be most likely to indicate that a company’s property, plant, and equipment accounts are not understated? Chapter 10-35 a Review of the company’s repairs and maintenance expense accounts b Review of supporting documentation for recent equipment purchases c Review and recomputation of the company’s depreciation expense accounts d Review of the company’s miscellaneous revenue account SO Risks and controls in fixed asset processes IT IT Systems Systems of of Fixed Fixed Assets Assets Processes Processes The efficiency and effectiveness of accounting for fixed assets can be greatly improved through the use of specialized asset management software Such software simplifies the Chapter 10-36  record keeping regarding location and description of fixed assets,  depreciation and maintenance records,  audit trail, and  linkages to the general ledger SO IT systems of fixed assets processes Real Real World World Sophisticated fixed asset software offers many advantages Tempel Steel, a Chicago-based company with approximately 1900 employees, uses FAS 500 Fixed Asset, a structured query language (SQL) software to account for fixed assets Prior to using this software, Tempel used an older system and spreadsheets The company estimated that the new fixed assets software cuts paperwork in half and reduces the time spent on capital project management by half Pepsi-Cola, Jamaica, a Pepsi bottler with approximately 300 employees, uses the same fixed asset software as Tempel Under its older system, the monthly update of fixed assets took about three days; while it now takes only a few minutes This company also uses bar code technology to conduct inventory of fixed assets This improves the efficiency and effectiveness of the fixed asset inventory process Chapter 10-37 SO IT systems of fixed assets processes IT IT Systems Systems of of Fixed Fixed Assets Assets Processes Processes Concept Check Which of the following is not an advantage of fixed asset software systems when compared with spreadsheets? a Better ability to handle nonfinancial data such as asset location b Easier to apply different depreciation policies to different assets c Manual processes to link to the general ledger d Expanded opportunities for customized reporting Chapter 10-38 SO IT systems of fixed assets processes Ethical Ethical Issues Issues Related Related to to Payroll Payroll and and Fixed Fixed Assets Assets Processes Processes Typical sources of time sheet falsifications: Chapter 10-39  Exaggeration of hours worked  Falsification of overtime or holiday time worked  Falsification of sales in order to increase commission payouts  Overstatement of job-related expenses SO Ethical issues related to payroll and fixed assets processes Ethical Ethical Issues Issues Related Related to to Payroll Payroll and and Fixed Fixed Assets Assets Processes Processes Ghost Employee Clues that a ghost employee may exist: Payroll register identifies paychecks without adequate tax withholdings Personnel files contain duplicate addresses, Social Security numbers, or bank account numbers Payroll expenses are over budget Paychecks not claimed when paymaster distributes them Paychecks contain dual endorsements Chapter 10-40 SO Ethical issues related to payroll and fixed assets processes Ethical Ethical Issues Issues Related Related to to Payroll Payroll and and Fixed Fixed Assets Assets Processes Processes Fixed asset information is more likely to be manipulated by management to unethically enhance the financial statements Often, this occurs when management misclassifies expenses as fixed asset purchases Chapter 10-41 SO Ethical issues related to payroll and fixed assets processes Real Real World World A misclassification practice was performed at WorldCom, Inc., as the company transferred billions of dollars worth of facility-related expenses into asset accounts in 2001 and 2002 These misclassifications led to the restatement of WorldCom’s financial statements and the ultimate downfall of the corporation Another misclassification case involves Krispy Kreme Doughnuts, Inc This company has been criticized for its aggressive practices related to fixed assets reporting When Krispy Kreme buys back its doughnut franchises, it records the amounts paid as intangible assets, even though much of the outlay is for fixed assets It does not depreciate or amortize fixed assets, so the related costs are not reported as expenses on the income statement Krispy Kreme defended its practices, claiming that the assets were not impaired and should not be expensed until used This is an earnings management tactic that allowed the company to show favorable financial results, despite its dwindling profits Following an SEC investigation, Krispy Kreme’s top executives agreed to settle the matter and pay monetary Chapter fines, but they admitted no wrongdoing 10-42 SO Ethical issues related to payroll and fixed assets processes Ethical Ethical Issues Issues Related Related to to Payroll Payroll Concept Check The term “ghost employee” means that a hours worked has been exaggerated by an employee b false sales have been claimed to boost commission earned c overtime hours have been inflated d someone who does not work for the company receives a paycheck Chapter 10-43 SO Ethical issues related to payroll and fixed assets processes Corporate Corporate Governance Governance in in Payroll Payroll and and Fixed Fixed Assets Assets Processes Processes In addition to the need for  strong management oversight,  internal controls, and  ethical practices, corporate managers must recognize their responsibility to be good stewards of the assets underlying the payroll and fixed assets processes Chapter 10-44 SO Corporate governance in payroll and fixed assets processes Copyright Copyright Copyright © 2013 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 10-45 ...Expenditures Processes and Controls- Payroll and Fixed Assets Chapter 10-2 Study Study Objectives Objectives An introduction to payroll and fixed asset processes Payroll processes Risks and controls. .. payroll processes IT systems of payroll processes Fixed asset processes Risks and controls in fixed asset processes IT Systems of fixed asset processes Ethical issues related to payroll and fixed... Payroll Process Map Chapter 10-12 SO Payroll processes Payroll Payroll Processes Processes Exhibit 10-3 Payroll Process Map Chapter 10-13 SO Payroll processes Payroll Payroll Processes Processes