The Payroll System for Inkwell Limited - Coursework Example

A Review of the Payroll System At Inkwell Limited This is a report analysing the Payroll System for Inkwell Limited. AAT Membership Number: Date project started: Date of completion: Report Contents 1. Terms of reference 2. Executive summary 3. Methodology 4. Introduction 5. Review of the accounting system 6. Recommendations 7. Cost benefit analysis 8. Appendices 1. Terms of Reference 1.1. Target of the report This report is being prepared with the sole purpose of investigating and reviewing the payroll system that is currently being used by Inkwell Limited. The targeted respondent for the report shall be the organisation’s management, particularly, the Managing Director or Chief Executive Officer (C.E.O), for the organisation. In this report, I seek to present to the management, recommendations upon which it can use to improve on its current payroll system, after identification of the probable weaknesses and challenges being faced in the implementation of the system. A review of this system is targeted at enhancing how the company handles its employees’ remuneration and other work packages. 1.2. Part of accounting system chosen for review In this report, the chosen system for review is the payroll system, whose investigations are expected to provide a summation of the entire accounting system that is in operation in the organisation. A study of Inkwell’s payroll system shall entail an in-depth examination of the organisational activities such as the tax management, tracking of taxes that have been withheld, analysis of the record of hours employees work, and a record of the paychecks issued to employees (Bragg, 2006.p.125-129). 1.3. Overall aim of the review To assess the payroll system being used by the company with the motive to provide recommendations for its improvement in efficient employee management. The payroll system, being a core accounting system is essential to the management as it streamlines the organisation’s ability to stay on top of its regulatory and legal responsibilities. Therefore, this report shall seek to identify the weaknesses within the organisation’s payroll system, and determine the needs that require improvement. Therefore, the report shall outline the cost-benefits analysis of implementing the payroll system’s improvements in Inkwell Limited (Bragg, 2003.p.85-92). 1.4. Expected benefits from the review It is expected that as a result of this review, it would be possible for the payroll system being used to effectively process payroll reports that can be used to make tax withholding summaries. The covering of this system’s evaluation in this report has been achieved as part of an accounting assessment, which is part of the AAT level 4 accounting. 2. Executive Summary 2.1 Inkwell Limited is a Limited Company with a larger section of its operations majored in the private sector. However, its specialisation in the re-manufacturing or re-cycling of used laser toner and printer cartridges. The company’s sales targets are achieved by distributing its products through a nationwide chain that comprises over 60 high street shops. Subsequently, the sales are made online. Particularly, this investigation shall provide for weaknesses in the area of wages and salaries implementation in the company. This preparation for this project seeks to cover the requirements of the Payroll System for the Association of Accounting Technicians. 2.2 This report seeks to present an analysis of the company’s payroll system as part of the general accounting systems in use by the company, with the aim of providing advice and recommendations for improving the system in its entirety. The investigations shall also pinpoint the weaknesses in the Payroll System. For instance, the security controls in place for securing the payroll accounts office are not sufficient, in as much as, the company has specific codes to control the door leading to the office. Particularly, the security code is known amongst most staff members and in most cases, it is barely used to gain access to the office. 2.3 In general, this report notes that the company’s accounting system is decentralised, implying that even though the systems are internally located, the different accounting system aspects are in different computers. The payroll system in itself is decentralised and centralising it would be beneficial to the company as it enhances improved communication and better control over the payroll data. As such, a recommendation for training of the staff at the payroll department would be appropriate, which would cost the company a sum amount of £4,000.00 for the upgrading of the system to a more centralised one. The cost would also include a full license installation for the upgrade and the training of the staff on how to use the new automated system (Khosrowpour, 1999.p.100-107). 2.4 Noting from the weaknesses that the payroll system in place still has allowance for cash payments to its staffs, the assessment for this system as presented in this report shall be beneficial to the firm as it shall provide for regulations that shall prohibit the use of cash as a payment form to the staff. There are more secure methods available for making payments such as the basic payment that can help in minimising the risk of errors occurring in the payroll system. However, the analysis of this basic payment will be performed later in detail. 3. Methodology 3.1 The methodology applied in this report follows after an analysis of the information that I received from the organisation’s finance department that was basically, a compilation of the financial statements over the past financial year and financial diary of the company’s payroll details for the same financial year. The following procedures were particularly, followed in the investigation procedure: Attainment of personal departmental information. Assessment of the information technology policies and systems. Assessment of the employee database. Analysis of the wages and salaries policies of the company. Determination of the company’s history. 3.2 I wish to acknowledge the participation of the following in the writing of this report; without which, no fruitful analysis shall have been successfully attained. The Finance Director, Inkwell Limited The Accounting Department The General Manager, Inkwell Limited. 4. Introduction 4.1 Inkwell Limited is a limited liability company that was established in Birmingham in the year 2003 by Victoria Dawson and Paul Farnon, but, was later on bought by Anil Gupta in the year 2008. Victoria Dawson was the Managing Director with 40% share interests and Paul Farnon, the Sales Director had 30% of shares. The remainder 30% were bought by Anil Gupta when he joined as the Finance Director in 2008. This company mainly deals with the re-manufacturing or re-cycling of used laser toner and printer cartridges that it then re-distributes to consumers within its areas or operations. Currently, the company has its sales spread across 60 high street shops that are spread in the whole nation. Subsequently, the company has its sales being done online 24/7 where consumers are just required to log into the site and make purchases. Most of the company’s sales are retail sales or cash sales, while, in other instances, the company engages in large sales that require the customers to make purchases from the central warehouse where they are subjected to credit terms that range between 30 to 60 days. Sales prospects are realised in the firm given that all of its directors have a background knowledge in essential fields such as printing manufacturing and sales and distribution (Shelly & Rosenblatt, 2012.p.205-208). 4.2 In a bid to cut on costs that are paid to the external Payroll Accounting consultants and auditors that come to review and assess the company’s accounting systems, the firm has moved all the accounting systems to be done internally. This includes the Payroll System that is also operated internally by the firm’s appointed accountants. This internal operation is evidenced by the engagement that the accounting department has had me into, by going through their payroll system and talking to the employees. The firm’s accounting department is headed by the Finance Director, who then has subordinate Department Managers that operate under him. The accounting system, particularly, the payroll system is centrally placed so that it can be able to serve functions that relate to employees’ affairs from all the departments of the company. This structure allows for the department to be able to capture all records accurately and timely to comply with all the tax obligations from the government. 4.3 The company has a flat structure of a relationship with external parties such as its customers, suppliers, banks, trade organisations and the government since it directly engages with all parties based on open agreements. In all these relationships, the various correspondents report to the company directors in various capacities, and now, to me being involved in the assessment of their payroll system. 4.4 The payroll system of the company resembles that shown in the figure below. In this structure, the structure caters for three main functions; payroll services, management and integration of human resources and the administration of benefits. This form of a system leads to a customized integration in the company’s accounting system. The payroll system in itself is operated by five stand-alone computers, which aids in the integration of the system with other organisation’s systems. Much of the payroll system operations are conducted on the Sage payroll while other related transactions are recorded using Excel. 4.5 Inkwell Limited’s structures, procedures, business transactions and systems affect its payroll system’s operations in several ways. Particularly, this regards to the exchange of information between the payroll system department and other departments. I witnessed that the payroll system department acted as a guidance to the human resources department, in that it determined when to recruit new employees and on what terms of engagement. Information concerning the fiscal state of the company is passed from the inventory department to the payroll system department so as to inform the decision, and calculations made in relation to taxes by the organisation. In its relations with the bank, a reduction in the credit terms on the loans taken or the over drafting of the bank orders may affect the firm’s ability to continue operating as a going concern. 4.6 There are certain legislation that affects the organisation’s relation to its customers, suppliers; thus, affecting its practices and methods. First, considering that the Company Act 2006 defines how financial statements are supposed to be prepared and filed, the same has an effect on the accounting system of the company, particularly, the payroll system. Subsequently, the accounting standards define the organisation’s procedures in that they provide the specific details and parameters that guides the company in the preparation of its accounts (Bragg, 2004.p.95-102). Specifically, the International Financial reporting Standards (IFRS), determines how the company reports its accounts for purposes of taxes. The government’s Data Protection Act (1998), as the legislation, defines how the employees’ records should be stored by the firm, as well as those of customers and suppliers. Finally, the government recently required companies to have their employees update their information to the database. Subsequently, employees were required to be updated on the changes made to the VAT bill; hence, a significant change in the payroll system (Bieg & Toland, 2011.p.141-148). 4.7 Inkwell Limited is expected to annually produce an income statement, a statement of financial position and cash flow forecast as its financial reports. The income statement was used to record the expenses and incomes of the business leading to either profits or loss for the year; thus, showing the company’s profitability to shareholders and investors. The statement of financial position records the reported the liabilities, assets and stockholders’ equity for the year. The cash flow statement was used to report the sources of cash in the firm and the various uses to which the same was put by reporting the operating, investing and financing activities and supplemental information on the company. 4.8 Inkwell Limited uses Sage Pastel in its accounting functions. This encompasses the payroll system, to which it uses the software in analysing payroll records. This software benefits the company than the manual system in that it provides for faster services and eliminates the chances of errors occurring during the accounting computations. Subsequently, this software is automated to produce designed outputs when printed; hence, saving time for doing the same. 5. Review of the accounting system 5.1 The accounting system that has been reviewed in this case of Inkwell Limited is the Payroll System. This system offers an integrated and tailored solution for the company with regarded to the provision of customer services. As such it involved processing of payroll, administration of payroll, benefits administration, time attendance and human resources. Therefore, through the system, the company was relieved of employer costs, the administrative burden and liability through the integration of the solutions. As a result, it provide the company with benefits such as secure transactions and data management; enhanced accuracy and reliability in the processing and reporting of the data; reduction of liability through diligent compliance systems, oversight and support; and flexible and comprehensive solutions for the organisation, integration and simplification of complex business processes (Gelinas & Dull, 2010.p.106-111). 5.2 Referring to the figure in the appendix 1, which shows the information flow in the department, the payroll system is noted as having three main sub-branches that monitor all transactions, before customising the same for integration into other accounting systems operated by the company. Success in this system is often facilitated by the use of five computers that have been put in place and installed with the appropriate software Excel and Sage Pastel. However, in some instances, the determination of the tax obligations is done through the use of electronic tax register. 5.3 Findings (Strengths and weaknesses) 5.3.1 The study of the company’s payroll operations reveals the following strengths. First, there is a buffering or back-up of the payroll data in an independent computer as well as physical file so as to ensure that no loss is incurred. 5.3.2 Additionally, the payroll system is beneficial since it provides the company with the information that is critical in decision-making such as in regards to management of taxes and employees remunerations. 5.3.3 The use of the Sage Payroll is a strength to the system as it automates the calculation of all wages and salaries that are due to employees on a monthly basis. 5.3.4 However, as a strength, the company’s computers are password protected by a master password that is known to the responsible individuals in the organisation. This ensures that the information is contained within particular individuals alone in the company. Weaknesses 5.3.5 First among the weaknesses, despite the company’s payroll system having its computers protected by a password, there are issues since the password seems to have been outdated and might be known to those employees that had left the company. This puts the data about the employees contained in the payroll system at risk since it is vulnerable to access by unauthorised persons. The same password is the one that is used across all departments of the company; hence, the likelihood of data sabotaging by employees from other departments. 5.3.6 There are issues occurring with the difference in shifts that employees take in working in the company. The effect is in the lack of cover for the specific roles performed by a particular accounting department staff. In extreme cases, a wages clerk in the Payroll Department decided to take a holiday without ensuring that no trained personnel was left in the same capacity to manage the payroll system. 5.3.7 The fact that any employee can easily access the accounts department puts the information held by the Payroll system at risk since they are very critical and if changed, may have serious implications on the company’s operations. The information in this system should not be used by anyone for any use except for the payroll duties as detailed by the management and the information technology policy. 5.3.8 There was witnessed a case of bad practice when the wage clerks failed to back up the monthly data; hence, when the system was faced by a technological glitch, the data was lost and proved costly to the company to retrieve as an external expert had to be hired to do so; further putting the company’s data and systems to public exposure (Shelly & Rosenblatt, 2012.p.154-159). This is not good as a backup plan should always be used on a regular basis. 5.3.9 The use of excel and sage software in data input may be prone to typing errors that might affect the output obtained. 5.4 Summary of these weaknesses are as identified in the SWOT analysis. 5.4.1 Particular case in the weakness for highlight in this report is when the wages clerk took holiday without appointing a trained and competent person to stand in for him. In this case, the employees were paid wages based on the previous calculations, which is not appropriate as payroll calculations need to be determined based on the month’s obligations. This practice could easily be regarded by the government’s officials as malpractice and an act of tax evasion. 5.4.2 The above case was repeated when the head of the accounting department was away too, and the junior staff was forced to use the previous blank checks he had signed. This is wrong as the employees could have manipulated this and resulted in huge drawings from the company’s accounts. 5.4.3 Records for petty cash obtained by the employees is done by themselves in certain occasions; thus, questioning the viability of the reimbursements made on the same. They only need to leave a note on the accounts clerk desk regarding the same. I perceive this as not appropriate as it is open to manipulation by the employees even in unwarranted occasions. Recommendations 5.5.1 The password being used by the department of accounting needs to be reset so as to grant access to only authorised persons. Also, the payroll system needs to be equipped with its own unique password. 5.5.2 No employee should be allowed to take a shift without the authorisation of the management so as to reduce delays in operations as witnessed when the wages clerk was away. The company should also employ more than one person for this post. 5.5.3 Upgrading the system to a better and automated software protected with a password would hinder the employees from having access to their information to make petty cash filings on. Subsequently, the office for the payroll system should be inaccessible when not in use so as to restrict access by unauthorised personnel (Bieg & Toland, 2011.p.78-83). 5.5.4 The adoption of an external server should be ensured so as to enable the backing up of the data stored in the system so that it is not lost in case of any system crash. Internal experts should also be the ones used in case of restoration so as to preserve the confidentiality of the company’s information. 5.5.5 Automation of the system would limit the occurrence of errors as are currently being witnessed. 5.6 In conclusion, I would like to point out that despite the company being in the forefront in the adoption and usage of new and improvised accounting systems, it is still faced by certain factors that have a great impact on its operations, particular with regard to the Payroll System. As presented in this report, these factors are expressed in the form of weaknesses that are noted to outweigh the benefits derived from the use of the Payroll system; hence, an indication that a review of the same is necessary. Particularly, the management needs to take into consideration the recommendations as highlighted above, so as to be able to capitalise on its production activities. 5.7 Analysis of Fraud 5.7.1 The Payroll System that is currently being used by Inkwell Limited at the moment may not be considered as strict in ensuring that the company’s operations are not subjected to any form of fraud. 5.7.2 The manner in which petty cash has been handled by the Payroll clerk is susceptible to fraud given that it could be easily misused to fleece money from the company for unmerited petty transactions given that the employees are allowed to make the petty cash filings for themselves. By reason that no one nearly checks the employees when this happens, the petty cash system as determined from the payroll system may be easily targeted for carrying out fraudulent practices. 5.7.3 The sharing of one password by all departments in the company, which in itself has not been reset for a long period could be another source for fraud. This is for the reason that evil-minded personalities in the company may distort data stored in the various systems for the fulfillment of their negative plans. Haters of the company or previously retrenched employees may use the same to attack the firm’s credibility by accessing the confidential or classified information in the various systems. Cost-benefits Analysis 5.8 Costs 5.8.1 The company currently uses the sage accounts that has a total cost amount of £2,500.00 for about four users. Additionally, this is exclusive of payroll system upgrade cost that would cost about £650.00. These, therefore, become the costs associated with the obtainment of the system. 5.8.2 In choosing the communication network, a wireless network would be preferable in that the costs of its installation is determined by the variation in the involvement of the employees with the network. For Inkwell, acquisition of an external server would cost it £605.00 while the installation would be approximately range from £750 - £1105. 5.8.3 For employees that are not acquainted with the software used, training for three days will be organised at an approximated cost of £300 per employee. Subsequently, given that the training will take place during work hours, the company will incur costs to its business due to the time lost for production. 5.8.4 Another cost is that by installing or upgrading the payroll system, there is a possibility in its disrupting the operations of the accounts system given that the installation would only take place on one computer at a time. As the company has expectations for increasing the employees’ base, I would suggest an automated payroll system that, despite being costly, would be faster in operation. Generally, I have estimated that the time of installation in monetary terms would be a cost of £1300 to the company. 5.8.5 Since the Excel software is currently being used to manually produce employees’ registers, I would suggest purchase of an automated one that would also allow printing of tax reports easily, but, at a cost of £70. 5.9 Benefits 5.9.1 The first benefit is that the management would easily access the payroll information regarding its employees as a unit, by using any computer attached to the system; thus, time saving and improves job performance through boosting of communication and morale of employees. 5.9.2 This system would easily present Inkwell with the capability of producing their own payroll reports, as and when, needed. This would benefit the company towards enhancing its planning and forecasting to be accurate and effective. 5.9.3 Obtaining the automated system that can generate invoices and tax reports fast at a cost of £70 would ensure that occurrence of errors is minimised, and speed of operation is increased. 5.9.4 Installing or upgrading to a new automated system would be beneficial to Inkwell Limited in that it would enable the curbing of detected fraud such as associated with the petty cash system. Therefore, the workload to the payroll clerk will be maximally reduced allowing time for focusing on other issues. 5.9.5 Having the external server would be beneficial to the company in the event of a system crash; thus, acting as a point for restoring the system. Therefore, the risk of losing data or ending up with corrupted data will be minimised. This would also allow for the company to comply with any legislation related to data protection. 5.9.6 The payroll system staff would be pleased to have an automated and faster system that would enhance communication amongst them, as well as being reliable (Lambert & Ioma, 2005.p.201-207). This new payroll system would also lead to printing of exact amounts of payments to the sales staff. 5.9.7 Relations with the government and other institutions such as bank and suppliers would be enhanced as the management would have a better control over the system. References List BIEG, B. J., & TOLAND, J. A. (2011). Payroll accounting. Mason, OH, South-Western Cengage Learning. BRAGG, S. M. (2003). Essentials of payroll management and accounting. Hoboken, N.J., J. Wiley & Sons. http://www.books24x7.com/marc.asp?bookid=6699. BRAGG, S. M. (2004). Accounting for Payroll a Comprehensive Guide. Hoboken, John Wiley & Sons. http://www.123library.org/book_details/?id=5931. BRAGG, S. M. (2006). Payroll Best Practices. Hoboken, John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=251680userid=^u. GELINAS, U. J., & DULL, R. B. (2010). Accounting information systems. Australia, South-Western/ Cengage Learning. KHOSROWPOUR, M. (1999). Success and pitfalls of information technology management. Hershey, Pa. [u.a.], Idea Group Publ. LAMBERT, V. M., & IOMA. (2005). Payroll a Guide to Running an Efficient Department. Hoboken, John Wiley & Sons. http://www.123library.org/book_details/?id=5941. SHELLY, G. B., & ROSENBLATT, H. J. (2012). Systems analysis and design. Boston, Course Technology Cengage Learning. Appendix 1 Read More