Reduce fraud with payroll and timekeeping controls

Almost inevitably, a new year brings new goals. We check the status of current goals and jot reminders to work toward others at a later date. As public sector administrators draft that goal list, consider including one to review your organization’s internal payroll and timekeeping controls. While we would like to trust our coworkers, the reality is the public sector is second only to the banking and financial services industry for the likelihood of fraud to take place. Further, more than 50 percent of employees who conduct fraud have more than five years’ tenure with the organization.1 Implementing or updating payroll and timekeeping controls are a low-to-no cost way to reduce your organization’s exposure to fraud.

Reaffirm internal controls with managers

Managers are one of the best resources to mitigate timesheet fraud since they have the closest interaction with employees. While everyone is meeting to discuss rule change implications for your organization, utilize the time to reaffirm the need for timekeeping internal controls and highlight the associated risks if not met.

• Emphasize the importance of closely reviewing timesheets. Timesheet approval is only effective if properly executed.
• Managers should personally deliver the approved timesheets to payroll if paper timesheets are used. Even the helpful employee who offers to drop off the sheets with payroll should be politely declined. Allowing an employee access to the approved timesheets negates the control  in place with the signature approval.
• Require approvers to cross out blank lines or highlight the last entry of timesheets. This prevents an employee from adding additional time after the timesheet is approved.
• Review security measures for password protection if you use an electronic or web-based time entry system. A supervisor who saves passwords on a spreadsheet on the shared-drive (or shares the spreadsheet with their administrative assistant) does not have a secure password.

Updates for administration

In addition to the front-line process improvements managers can implement, public sector organizations should take a high-level look at their system processes or create additional checks to make payroll and timekeeping controls more consistent.

• Routinely prepare exception reports listing overtime that exceeds your policy (i.e. a policy that overtime pay cannot exceed 25 percent of base pay), and verify the appropriate approvals were obtained if you use an electronic timekeeping system.
• Confirm that no employee approves his own timesheet. While this is a minimal risk if you use an electronic time entry system with built-in workflow, it may fall through the cracks if your organization uses paper timesheets. If there is not time to review all employees, look back a few years and consider positions where a manager left and the position was never filled or within departments that were restructured.
• Review the security levels of the system. Who has access to review and approval of time entry? Investigate approvals when employees approve timesheets across different departments and when employees approve only one other timesheet.
• Verify proper segregation of duties in payroll and other related processes. For example, the same employee should not approve payroll and print checks. Having separate employees perform these functions reduces the risk of fraud.
• Assess IT risks related to the payroll process including system access, change and development, backup and monitoring.

Now is also a good time to contact your payroll and timekeeping vendor to confirm you fully utilize the time entry module’s functions. Some of the controls or reports mentioned above may be built into the system’s capabilities. If you track time in a separate system, such as Excel or another spreadsheet application, you may increase controls by changing your processes. For example, instead of using a paper system, employees can directly enter time into an Excel spreadsheet that managers can review, lock and send the spreadsheets directly to payroll. The re-worked process can increase your control over approvals with the additional benefit of reducing data entry redundancy and errors.

A review of your payroll and timekeeping controls requires a small amount of time and likely no cost, yet it can help protect your organization from serious financial and public relations damage. Add it to your new year’s goals list and start it soon. It’s an easy one with which to begin and quickly check off your list — and that always feels great.

For more information on this topic, or to learn how Baker Tilly's state and local government consulting practice can help, contact our team.

1 Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study.