Payroll Review

The Audit Committee recommends the adoption of the following report (July 8, 1999) from the City Auditor:

Recommendations:

It is recommended that:

(1)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 ;

(2)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

(3)payroll management 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.

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The Audit Committee also submits the following report (July 8, 1999) from the Chief Financial Officer & Treasurer:

Purpose:

To respond to the City Auditor's report related to the Payroll Review.

Funding Sources, Financial Implications and Impact Statement:

None.

Recommendation:

That this report be received for information.

Discussion:

Payroll Bank Reconciliation

Payroll Bank Reconciliations will be completed on a monthly basis with all reconciling items reviewed and addressed within one month. All bank reconciliations are to be reviewed by the Supervisor, Funds and approved by the Manager, Financial Reporting.

The large unreconciled balance was due to a payroll error that required payroll staff review. Frequent staff changes resulted in this review taking longer than is normally necessary to identify all the adjustments that were required. This amount has now been reconciled and properly recorded.

Payroll Conversions

During 1998 the number of payroll systems in operation was reduced from seven to four. This was done mainly to retain financial control as management staff were exiting from the Corporation. In some of these payroll system conversions, technical resources were limited, therefore some of the conversion was handled manually.

The implementation of the SAP HR/Payroll system is being properly planned and managed. All required testing is being performed and properly documented and necessary sign-offs and approvals will be obtained prior to implementation.

Payroll Changes

The implementation of SAP is being phased in over the period August 1999 to February 2000. The former Metro payroll system which now processes payroll for both former Metro and Scarborough employees is scheduled for conversion to SAP in November 1999. This implementation date is beyond the Y2K office's requirement of September 1999. Therefore, this system, CYBORG, is also being remediated to ensure it is year 2000 compliant.

Since both the remediation of CYBORG as well as implementation to SAP are being performed in the latter part of 1999, any programming changes to the system have been frozen. Although the manual tracking of both terminated employees on salary continuance is not our preferred way of monitoring, it is only an interim measure. Controls, although manual, have been put in place to ensure employees are not paid incorrectly.

Conclusion:

The rationalization of the payroll systems has enabled us to continue to maintain financial control in the remaining four systems. The SAP implementation and Y2K requirements have caused us to minimize any programming changes to the existing legacy systems. As SAP is implemented, proper automated controls are also being implemented.

Contact Name:

Ivana Zanardo

Director

Pension, Payroll & Employee Benefits

397-4143