School districts have implemented direct deposit for a majority of the 600 thousand plus employees statewide. This is a best practice that has resulted in a significant reduction in the number of staff that would otherwise be employed in districts’ payroll departments. As a result, it’s essential to periodically review what payroll payment controls are in place especially because payroll staff in mid- and large-enrollment school districts report that they are less familiar with who is employed in individual campuses and departments compared to their counterparts in smaller-enrollment districts. Controls to reduce the risk of check payment fraud or errors include:
- Update signature authorizations at the bank immediately upon finance and payroll department employees’ separation from the district.
- Update all security access to the district’s payroll and financial systems immediately upon administrative or information technology employees’ separation from the district.
- Distribute copies of check stubs to employees for selected departments on a surprise basis to verify employees’ existence.
- Implement positive pay for the district’s payroll clearing account to prevent someone from attempting to increase the amount on an existing check or creating duplicate checks. It’s also recommended that only the exact amount of the payroll be deposited into the district’s payroll clearing account.
- Match employees’ addresses to monitor for multiple checks going to the same address.
- Verify social security numbers by uploading files containing names and SSNs for overnight verification by the Social Security Administration. Issues involving valid SSNs may be an indicator of fraud or errors.
- Require completed change authorization forms for any changes to employees’ payroll records.
- Segregate duties for maintaining the payroll system, authorizing payroll runs and processing payroll runs. In smaller districts where segregation of duties is challenging, at least have someone outside of payroll (an employee that does not have assigned payroll processing functions) review and authorize the payroll before it is distributed via direct deposit and other methods.
- Reconcile each preliminary payroll run to verify changes to the total amount processed in reference to the prior payroll run.
- Use check stock with security features, including microprint, and anti-copy and scanning watermarks, for any physical payroll checks distributed to employees.
Consider assigning selected tests of controls listed above to someone independent of payroll functions in the district. We'll review timekeeping system-related control issues in another article.