Payroll System and Internal Control - Essay Example

Payroll System and Internal Control Executive Summary In the paper, the conception of payroll system as well as internal control regarding the case of Trolley Dodgers which is based on real issues and cases of contemporary auditing will be elaborately discussed. Various aspects that include the different features of employee’s fraud, internal control weaknesses and problems, suggested control methods relating with this particular case study along with a summative conclusion will also be taken into account in the discussion of this paper. Table of Contents Executive Summary 2 Introduction 4 Characteristics of the Employee Fraud 5 Internal Control Weaknesses in Dodgers’ Payroll System 7 Internal Control Framework 9 Conclusion 12 References 13 Introduction A payroll system is used by an organisation primarily in order to maintain a list of the names, addresses and necessary information among others especially of the employees working within the organisation (Lambert, 2005). The importance of maintaining a payroll system lies in keeping a track upon certain specific data especially of the employees’ which include their salary and incentive structure, pension plans, union membership status and taxes along with the method of calculation regarding the pays of the employees by taking into consideration the available employee data. Payroll systems are mainly implemented by using different software in order to calculate the employees’ net pay from various deductions according to the norms and policies of a particular organisation (Mohammed & et. al., 2007) In relation to payroll system, payroll records are usually used or implemented in order to keep a proper record regarding the hours worked by the employees in an organisation on a monthly basis. Apart from the payroll records, a payroll ledger is also used in relation to payroll system. A payroll ledger is a kind of a table that shows the calculated pays of the employees along with the month in which they earned the pay (Mohammed & et. al., 2007) In relation to payroll system, an internal control can be regarded as “a procedure of control and checking various levels of management in terms of financial and non-financial actions or operations of a particular business within an organisation in order to make sure that the business actions or operations are conducted successfully” (Trenerry, 1999). The internal control of a business within an organisation also focuses towards the procedure of management decision making along with meeting all appropriate legal procedures that eventually leads towards the improvement of any business organisations (Hightower, 2008). The importance of internal control within an organisation lies in a few of the factors that include attaining successful business operations, controlling the business environment, improving the information and communication system, monitoring the business processes and managing or controlling various risks that occur while executing business operations among others (Heintz & Parry, 2007). Characteristics of the Employee Fraud The various features of fraud in relation to the employees of a particular business within an organisation mainly lie on certain factors that include motivation, opportunity and personal characteristics among others. In context of motivation, it is usually referred to certain situational pressures which lead to fraudulent activities by the employees due to the need of money for fulfilling personal necessities (University of California, n.d.). With regard to opportunities, it is referred to making improper use of certain conditions where frauds are carried out through weaknesses in the internal controls, necessity of a well sustainable working environment and different managerial approaches among others (Jones, 2004). Apart from motivation and opportunities, the other factor i.e. personal characteristics refer towards willingness in order to create fraud. Personal truths along with moral values need to be strongly demonstrated in order to point out any such frauds which are performed by the employees of an organisation (Rezaee & Riley, 2009). In this case study relating to Trolley Dodgers, the characteristics of employee fraud that are indicated are mainly related with opportunities and personal qualities among others (Moorthy & et. al., 2009). In addition, the opportunity to perform fraudulent acts lies upon the procedures of internal control within an organisation. In this particular case study, there lies a significant limitation in the internal controls of Trolley Dodgers because the payroll design and system was known only to an employee rather than the management among others (Knapp, 2011). Moreover, the poorly designed and mismanagement record keeping practices that involve cash or other assets are a few of the reasons that raised the opportunities along with the occurrence of fraudulent acts. As a whole, opportunity remains the leading cause of employee’s fraud (Moorthy & et. al., 2009). The other significant characteristic of employee’s fraud that has been observed in this particular case is the employee’s personal qualities. In relation to the personal qualities with the characteristics of employee fraud, it has been recognised that the personal qualities also contribute towards the occurrence of fraud in an organisation (Knapp, 2011). In this case study, the employee of Trolley Dodgers who created the fraudulent act displayed a dishonest personal characteristic by practicing several fraudulent acts that eventually leads towards the occurrence of fraud within Trolley Dodgers (Knapp, 2011). In this connection, it has been recognised that the dishonest personal qualities of the employees ultimately raised a fraud incident within the organisation. The personal characteristics of the employees’ are very much significant in identifying fraud rates within an organisation. The employees with their dishonest personal traits who cause such damages through executing fraudulent acts are personally responsible for various alternative expenditures or costs or any other significant loss among others (Amudo & Inanga, 2009). Internal Control Weaknesses in Dodgers’ Payroll System The several objectives of an internal control lie in the commitment regarding the assets of an organisation that are safeguarded and used only for business motives rather than personal usage, providing relevant and exact business information and meeting different legal procedures performed by the managers and the employees among others (Warren, 2011). Moreover, the objectives also include the control upon the business environment in which the people conduct their activities and perform various responsibilities and determining the various ideas and perceptions in order to recognise several risks towards the accomplishment of an organisation’s success among others (Needles, 2010). The objectives furthermore encompass the preparation of reliable financial reports along with the prevention of false monetary reporting, analysis of the risks along with determining how the risks are controlled and conducting various activities or actions in a proper way to manage or reduce the risks (Needles, 2010). In this connection, the purpose of internal control also includes towards improving particularly the information and communication system that affects towards controlling environment, various risks, activities and performances among others. However, the objectives also focus upon identifying, capturing, processing and communicating towards the people who are engaged within a particular organisation (Pfister, 2009). The other significant objective of internal control lies in monitoring. Fundamentally, it is the assessment of internal control performances which are attained by various ongoing activities such as conducting various assessments, reviews and audits among others. The purpose of monitoring is to determine whether the internal control is properly designed as well as executed while executing business operations within a particular organisation (Moeller, 2010). In relation to Dodgers’ payroll system, the internal weaknesses recognised were in their great and excessive reliance upon its employees especially in the payroll and financial transactions’ departments. In this context, the in-charge of the payroll department of the Trolley Dodgers designed as well as implemented such a payroll system which is only known to him rather than other management officials of Trolley Dodgers. Here, the internal weakness was raised between the management officials and its employee (Knapp, 2011). Moreover, one of the significant weaknesses on behalf of Trolley Dodgers apart from its employees’ lies in their minimum financial structure as compared to others along with minimum players of high calibre that resulted due to financial position of Trolley Dodgers (Knapp, 2011). In relation towards the different objectives on the basis of payroll cycle that has been discussed earlier, it has been identified that the Trolley Dodgers failed to attain certain internal control goals and objectives. Initially, Trolley Dodgers failed to identify its internal control weaknesses such as the facts relating to its financial positions and extreme trust towards the employees (Knapp, 2011). The other objective in which Trolley Dodgers failed was to prepare reliable financial reports along with the prevention of fraudulent monetary reporting and the most significant objective was that it failed to monitor or apply the monitoring process towards its employees’ which implies that the organisation was unable to assess internal control through accomplishing various activities such as conducting assessments reviews and audits among others (Knapp, 2011). In this connection, Trolley Dodgers greatly rely upon its employees without giving much importance in conducting any sort of assessments, reviews and audits among others. It is strongly believed that these mismanagement techniques ultimately raised fraud in monetary terms within Trolley Dodgers (Knapp, 2011). Internal Control Framework The internal control problems relating with the Dodgers’ payroll system eventually lies on its heavy reliance towards the employees’ and non-monitoring evaluation of internal control activities by not conducting any sort of reviews and audits among others (Knapp, 2011). According to the view of the Committee of Sponsoring Organisations’ (COSO), it is observed that the internal control has been designed in order to assist the organisations in order to attain their objectives. Moreover, the COSO board also recognised that the assessment of internal control from management viewpoint is a time-consuming assignment that usually involves a significant amount of annual management and internal audit testing among others (COSO, 2009). In lieu of this, effective monitoring can help to access various assessment procedures but several organisations do not entirely understand this important component of effective monitoring of internal control. This is what exactly has transpired in Trolley Dodgers and eventually let towards the fraudulent acts within their organisation (COSO, 2009). According to COSO’s internal control framework, the various functions of monitoring lies in providing significant benefits towards any organisation that include recognising and correcting internal control problems in a proper way, producing more accurate and relevant information for using in decision making and preparing exact and correct monetary statements among others (COSO, 2009). After acquiring a vast knowledge regarding the studies that are associated with payroll system along with internal control, it is suggested particularly for the Trolley Dodgers to minimise their heavy reliance upon the employees, particularly the sensitive departments such as finance and payroll system among others, which could ultimately result in fraudulent acts and hamper the organisations valuable reputation and assets among others (Moeller, 2010). Moreover, it is also suggested for the Trolley Dodgers to conduct various actions and operations in order to carry out their operational responsibilities, determine the various goals and objectives in order to identify several risks towards the achievement of their expected objectives, creating exact financial reports along with making various analysis of the risks along with determining how the risks are minimised or managed among others (Moeller, 2010). In this connection, the most significant suggestion for the Trolley Dodgers’ lies in the process of monitoring which would be ultimately beneficial for them in identifying as well as correcting various internal control difficulties and weaknesses and also preparing exact and definite financial reports among others (COSO, 2009). Conclusion Establishing and maintaining effective internal controls are significant basics towards the management viewpoint of a particular business organisation. In order to provide reasonable assurance that a particular organisation’s objectives are attained, the system of internal control should be highly prioritised for improving the various weaknesses and other immoral activities among others to a certain extent. In this context, payroll system and internal control are interrelated to each other, as payroll system is related to the employees’ and the internal control of a particular organisation, in order to become successful in the long run, also relies upon the behaviours of the employees’ to a certain extent. It has been identified that strongly laid down rules and regulations in relation to these factors can be extremely valuable and necessary in case of an organisation. The relationship was observed while discussing the case of the Trolley Dodgers where a particular fraudulent act has been recognised from one of the employees of the organisation. Moreover, the various internal weaknesses along with differing objectives of internal control have been elaborately discussed and also related with this particular case study. After finding the various weaknesses of Trolley Dodgers’, certain valuable suggested procedures are also provided in order to reduce the internal control problems that are raised in this case study. Moreover, it is firmly believed that by following the suggested procedures, Trolley Dodgers’ might be able to overcome their internal control related problems along with their weaknesses. References Amudo, A. & Inanga, E. L., 2009. Evaluation of Internal Control Systems: A Case Study from Uganda. International Research Journal of Finance and Economics, vol. 27, pp.125-144 COSO, 2009. Monitoring: An Integral Component of Internal Control. Guidance on Monitoring Internal Control Systems. [Online] Available at: http://www.coso.org/documents/COSO_Guidance_On_Monitoring_Intro_online1.pdf [Accessed January 14, 2012]. Heintz, J. A. & Parry, R. W., 2007. College Accounting: Chapters 1-27. Cengage Learning. Hightower, R., 2008. Internal Controls Policies and Procedures. John Wiley & Sons. Jones, P., 2004. Fraud and Corruption in Public Services: A Guide to Risk and Prevention. Gower Publishing Ltd. Knapp, M. C., 2011. Contemporary Auditing Real Issues and Cases. South-Western Cengage Learning. Lambert, V., 2005. Payroll: A Guide to Running an Efficient Department. John Wiley & Sons. Moeller, R., 2010. IT Audit, Control and Security. John Wiley & Sons. Mohammed, A. S. & et. al., 2007. Achievement. Project Report on Payroll System. [Online] Available at: http://project2.files.wordpress.com/2007/04/project-report.pdf [Accessed January 14, 2012]. Moorthy, M. K. & et. al., 2009. Preventing Employee Theft and Fraud. European Journal of Social Sciences, vol. 12, no. 2, pp.259-268. Needles, B. E., 2010. Principles of Accounting. Cengage Learning. Pfister, J., 2009. Managing Organizational Culture for Effective Internal Control: From Practice to Theory. Springer. Rezaee, Z. & Riley, R., 2009. Financial Statement Fraud: Prevention and Detection. John Wiley and Sons. Trenerry, A., 1999. Principles of Internal Control. UNSW Press. University of California, No Date. Characteristics for Fraud. Understanding Internal Controls. [Online] Available at: http://www.ucop.edu/ctlacct/under-ic.pdf [Accessed January 14, 2012]. Warren, C. S. & et. al., 2011. Financial and Managerial Accounting. Cengage Learning. Read More