July 26, 1999
To:Audit Committee
From:City Auditor
Subject:Payroll Review
Recommendations:
It is recommended that:
- all payroll bank reconciliations be brought up to date and from thereon be completed in a timely manner, that all
reconciling items be promptly investigated and cleared, and that reconciliations be reviewed and approved by
supervisory staff ;
- the upcoming conversions to the new SAP payroll system be adequately planned and properly managed, that all required
testing be performed and documented, and that the necessary signoffs and approvals be obtained before implementation;
and
- payroll managment staff review the current procedures for employees on salary continuance and utilize electronic and
other controls available, to further ensure employees are not paid beyond their termination date.
Background:
As part of the Audit Work Plan, a review of specific payroll areas was completed to ensure the existence of effective
control procedures. The review focused on the following areas:
- the proper and timely completion of payroll bank reconciliations;
- the adequacy of procedures utilized in the conversion of payroll systems; and
- controls over payroll changes, with particular emphasis on terminated employees;
The review included interviews with applicable payroll staff, an examination of relevant documents, an evaluation of
procedures and processes, and the testing of transactions on a sample basis. The results of our review are provided below.
Comments:
Payroll Bank Reconciliations:
The proper and timely completion of payroll bank reconciliations and the prompt investigation and correction of
outstanding items are extremely important control procedures that assist in the detection of errors and other irregularities.
Our review noted that payroll bank reconciliations for the various payroll systems are not up-to-date. Two reconciliations
(for the former City of Etobicoke and the former Metro) have not been completed since August 1998. A number of long
outstanding reconciling items were also identified. Several of these items date back to early 1998 and are for significant
amounts. For example, an unreconciled balance of $6 million has appeared on the payroll reconciliation for the former City
of North York since April 1998. Staff have been unable to determine the cause of this outstanding item. In addition,
reconciling items were noted where manual cheques were cashed but were not recorded in the general ledger. These
transactions occurred in the period January to September 1998.
Payroll Conversions:
Upon amalgamation of the former municipalities, the processing of payroll was performed on seven different systems by
seven separate payroll functions. During 1998, a rationalization of these functions resulted in the number of payroll
systems and functions being reduced to four. Specifically, payroll processing for employees in the former City of York and
Borough of East York were merged with that of the former City of North York. Similarly, the payroll processing for the
former City of Scarborough staff was merged with that of the former Metro. The former cities of Etobicoke and Toronto
retained their respective payroll systems.
Based on our review of these conversions and discussions with staff, it would appear that the conversions completed to
date have not been particularly well planned or managed. Any conversion testing that was performed was done on an
informal basis and was not documented. Evidence of formal review and approval of the conversions was not available. We
were therefore unable to review the testing performed and determine the accuracy and completeness of the conversions.
In order to minimize the risk of errors and avoid other problems, it is important that system conversions be adequately
planned and that appropriate testing be performed and documented. This is especially important in the conversion of
payroll systems, since the accurate and complete payment of employees is at risk and should not in any way be
compromised.
Payroll Changes:
As a result of downsizing, a number of staff terminated their employment with the City. We performed testing to ensure
that exit payments made to terminated employees were accurate and in compliance with the corporate policy. No errors
were identified from the sample testing completed.
Some staff that exited the Corporation negotiated, as part of their termination package, to continue to receive their salary
up to a pre determined date. To ensure that no overpayments occur, the former cities of Toronto and North York have
electronic controls in their systems that automatically discontinue any payments after the prescribed date. The former
Metro system also has this functionality, however, it is not being utilized. Instead, payroll staff monitor those individuals
on salary continuance manually every pay period. While only 12 individuals are still on salary continuance in the Metro
system, it would be appropriate to utilize the electronic control that exists in the payroll system to better ensure that no
overpayments are made.
The former Etobicoke payroll function also manually controls staff on salary continuance. Payroll staff advised that since
there are only a few individuals on salary continuance, the risk of overpayment is minimal. Nonetheless, the current
procedure is subject to human error and as such the procedures should be reviewed to determine if any compensating
controls can be implemented.
Conclusions:
The rationalization of payroll functions combined with the secondment of several payroll staff to the SAP project
implementation team has placed significant pressure on payroll operations and has increased the risk of errors occurring. It
is therefore important that supervisory review, in the current environment, be more diligent, that electronic controls
available be fully utilized, and that key control procedures such as the completion of bank reconciliations be performed on
a regular basis. It is also important that the future conversions to the SAP payroll system be adequately planned and
properly managed to minimize the risk of error and ensure the conversions occur without significant problems.
Contact Name and Telephone Number:
Tony Veneziano, Senior Audit Manager, 392-8353.
Jeffrey Griffiths
City Auditor
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