This is the third in a series of articles on red flags and this week's article focuses on payroll. Red flags may represent subtle or somewhat more obvious vignettes that "something is wrong with this picture" that can be sometimes overlooked by executive management or supervisors. Accordingly, an essential aspect of internal controls is to train appropriate staff to increase their awareness of and to be monitoring for various red flags that are relevant to various control areas.
Red flags associated with payroll include:
- Turnover of staff that have various roles related to payroll-related processes on campuses or in organizational units
- Indication that select principals or departmental supervisors have delegated their approval responsibilities for payroll reports
- Lack of select principal’s or supervisor’s detailed review and approval of payroll records
- Lack of or very minimum overtime wages are paid to employees compared to comparable size enrollment districts
- Individuals are classified as both employees and as contractors during the same active employment period(s)
- Hourly or nonexempt employees are paid a flat wage amount for select activities outside of their standard work day instead of wages based upon actual hours worked
- A weighted-average overtime calculation was not used for hourly or nonexempt employees that earned overtime wages while working multiple activities with different pay rates
- Payroll charges do not agree with funding source(s) associated with time and effort records
- Payroll charges are based upon budgeted funding sources instead of actual time and effort
- Lack of information about funding source(s) for new employees at time of hire
- Central administration does not know how many employees are on the payroll
- A position control system is not installed, or is installed but is not functioning in a mid- to large-size enrollment district
- Unexpected patterns are observed where increases in overtime do not align with increases in activities or services (or where suspension or discontinuation of select activities or services occurred)
- Unexpected patterns in overtime charges that do not align with patterns for activities and services
- Lack of payroll reconciliations based upon various counts and measures derived from records outside of the payroll system
- Lack of automated linkages between the employee leave system and the payroll system
- Lack of automated linkages between hourly time clock system and the payroll system
- Lack of evidence of any payroll adjustments for the fiscal year (it’s normal for some payroll adjustments to occur in nearly all school districts during a fiscal year due to variances between budgeted and actual time and effort, or due to pending adjustments to time clock punches or time and effort records when payroll is processed)
- Lack of year over year changes in stipend records for select campuses or departments
- Payroll charges are not supported by the district’s standards for payroll-related documentation
- Employees are entering time clock punches for other employees
Any indications or observed red flags should be promptly evaluated and consideration be made for prompt follow-up or investigation. In most instances, red flags are signs that relevant manuals for practices, procedures, processes and key controls should be reviewed and modified, as needed, and staff should receive additional relevant training to improve their skills and expertise. Red flags should be covered during after-action reviews to evaluate strengths and opportunities for improvement. Invariably most red flags are more recognizable as 20/20 hindsight.
It’s important to note that red flags do not stand on their own as an indication that fraud has occurred. When should a school official refer a matter to law enforcement? In all instances, this should be done only after consultation with the district's attorney-on-retainer, which was covered in a prior article titled Internal Control Tip of Week - When Do You Refer a Matter.