WARNING - By their nature, text files cannot include scanned images and tables. The process of converting documents to text only, can cause formatting changes and misinterpretation of the contents can sometimes result. Wherever possible you should refer to the pdf version of this document. Cairngorms National Park Authority Audit Committee Paper 1 Annex 2 24/03/05 Cairngorms National Park Authority Review of Payroll Internal Audit 2004/05 March 2005 Strictly Private and Confidential Contents Section 1 Executive Summary 1 Section 2 Detailed Findings and Recommendations 5 Section 3 Statement of Responsibility 12 Appendices Appendix A Control Assessment 13 Appendix B Personnel Interviewed 15 SECTION 1 - EXECUTIVE SUMMARY 1.1 Introduction This review of payroll for the Cairngorms National Park Authority is part of our programme of coverage over core financial areas and is consistent with the audit plan approved by the Audit Committee. A Control Assessment, contained within Appendix A was completed during systems documentation and used as a basis for detailed testing. We have reported by exception only and where no comment is made, the results of our work indicate that the control objective was being met. 1.2 Background Cairngorms National Park Authority employs 78 members of staff, 76 are paid monthly and 2 are paid on a weekly basis. Payroll is processed at headquarters in Grantown and relates to employees in the headquarters and also 8 employees in Ballater. The payroll officer is responsible for maintaining the payroll system. Payroll is processed through the SAGE Accounting System. The payroll officer is responsible for recording new starts to the system and also removing employees who have left. In addition, she is also responsible for dealing with amendments and processing expense claims. Absence is recorded by line managers and in the payroll systems and records are maintained by the HR manager. Annual leave is also recorded within payroll and HR. Hours paid are based on a standard contract. Contracts range from 10 to 37.5 hours. Overtime paid based on a standard rate for working hours during the week, time and a half for evenings and Saturdays and double time on Sundays. Flexi-time and time off in lieu (TOIL) are also available to all employees. 1.3 Approach The overall scope of the audit was to evaluate the nature of the controls in place to ensure the adequacy and effectiveness of the payroll system. This was done by interviewing relevant staff and reviewing relevant documentation to identify the key controls within the system and the testing of these controls to determine compliance. 1.4 Overall Assessment The following table summarises the areas of our review and our overall assessment of the control environment against process area: Area of Control Overall Assessment Report Ref. New Starts, Leavers and Amendments **** Payroll Processing *** 2.2 Journal Entries **** Overtime **** Payroll Review and Reconciliation ** 2.3 Access to Payroll Masterfile **** Payroll Reports ** 2.4 Absence Recording and Monitoring *** 2.5 Expense Claims *** 2.6; 2.7 Standing Financial Procedures ** 2.1 Key: **** Arrangements accord with good practice and are operating satisfactorily (recommendations are in respect of minor matters). *** Adequate arrangements are in place, but certain matters noted as requiring improvement. ** Arrangements in place offer scope for improvement. * Inadequate level of control and unacceptable level of risk. In total, we identified seven recommendations as follows: Description Priority Number Major issues that we consider need to be brought to the attention of Management and the Audit Committee 1 1 Important issues which should be addressed by management in their areas of responsibility 2 6 Minor issues where management may wish to consider our recommendations 3 0 Key 7 1.5 Overall Conclusion We can conclude that the controls in place for the management of the payroll system are adequate. However a number of weaknesses exist with regard to their effectiveness. We have summarised the weaknesses and issues below and further details of our findings and recommendations can be found within Section 2 of this report. Our key findings are as follows: • No documented Standing Financial Procedures were available. (Ref Recommendation 2.1); • 3 payment runs were not authorised by a senior member of staff. (Ref Recommendation 2.2); • There are no reconciliations between information recorded in HR and information recorded in payroll. (Ref Recommendation 2.3); • No exception, absence, expense or overtime payroll reports are produced. (Ref Recommendation 2.4); • No official absence monitoring is carried out. (Ref Recommendation 2.5); • Relocation expenses can be authorised by line managers. (Ref Recommendation 2.6); • There are no authorised levels or signatory lists for the signoff of expenses. (Ref Recommendation 2.7); 1.6 Acknowledgements We would like to take the opportunity to thank all of the staff involved in assisting us in this audit. The findings and recommendations in this report were discussed with the Accountant at the conclusion of our fieldwork. To assist management in using our reports, we categorise our recommendations according to their level of priority as follows: • Priority One - Major issues that we consider need to be brought to the attention of management and the Audit Committee, • Priority Two - Important issues which should be addressed by the management in their areas of responsibility, • Priority Three - Minor issues where management may wish to consider our recommendations. SECTION 2 - DETAILED FINDINGS AND RECOMMENDATIONS 2.1 Standing Financial Procedures - Payroll Finding Discussions with the Finance Manager identified that there are no Standing Financial Procedures in place for the organisation including those to govern payroll processes. Recommendation Standing Financial Procedures should be completed and circulated to finance staff as soon as possible. Rationale Standardisation of work and segregation of duties cannot be guaranteed. Management Response As discussed prior to the audit, the need to have Financial Regulations in place has already been highlighted by the external auditors and these will be in place prior to the start of the new financial year. There are, however, written procedures in place detailing the steps necessary to complete the normal monthly payroll cycle. These have been drafted by the Accounts Officer and, following the Finance Manager’s appointment last year, have been tested by these two members of staff to ensure they are an accurate record of the process. Responsibility / Deadline Finance Manager to finalise Financial Regulations (March 2005) Priority One 2.2 Payment Run Authorisation Finding From a sample of payment runs selected from April to January, 3 were documented as not having senior management review or authorisation, although BACS transmission forms were authorised by the Finance Manager or Head of Corporate Services. Recommendation All payment runs should be reviewed and signed by Head of Corporate Services. Rationale Incorrect or inappropriate payments may be made to staff. Management Response Agreed that all monthly payment runs should be reviewed and evidenced as such. The period for which the payment runs themselves were not signed coincided with a change of personnel but, as recognised in the finding above, BACS transmission forms were duly authorised. The BACS forms themselves set out a detailed listing of all payments to be made within a payroll, and their prior authorisation to a great extent replicates the authorisation of payment runs. In addition, monthly reviews of all expenditure by the Finance Manager present an additional cross-check of payroll which will highlighted unusual expenditure, albeit after payment has been made. Responsibility / Deadline Head of Corporate Services (Monthly) Priority Two 2.3 HR to Payroll Reconciliations Finding There are no reconciliations between HR records and the Payroll system identifying starters, leavers and any amendments that have taken place. Recommendation A regular reconciliation should be carried out between the HR staff records and the payroll records to ensure all starters are included on both systems, all leavers are removed from both systems and that any amendments recorded in the HR system are recorded accordingly in the payroll system. Rationale The accuracy of payroll processing cannot be guaranteed. Management Response The general principle that improved reconciliation between HR and payroll records is required is agreed. The HR Manager is currently progressing procurement of an HR system for the Authority. Reconciliation procedures will ultimately be designed around that new system and payroll. In the meantime, the HR Manager sends a memo to payroll each month notifying changes required. An independent reconciliation of changes made to payroll to this memo should be undertaken as part of the month-end sign-off process considered under finding 2.2. Responsibility / Deadline Head of Corporate Services (monthly) Priority Two 2.4 Payroll Reports Finding Discussions with the payroll officer identified that other than the payment listing prior to the BACS run. No other payroll reports are produced from SAGE. The payroll officer is also unaware of the types of reports that can be produced. Recommendation Reports should be produced on a monthly basis through SAGE for: • Exceptions (e.g. all pays £100 or more over last pay); • Report on amendments for the month; • Staff Listings; • Levels of overtime; • Amount in expenses claimed each month; • Levels of absence. These should be passed to the accountant or Head of Corporate Services following the payroll run. Rationale Effective monitoring of payroll may not be possible without reports. Management Response Initially, it is proposed that an exception report identifying all pays in excess of 5% above the previous month should be prepared in order to allow identification and investigation of any potential errors. The Finance Manager and Accounts Officer will undertake a review of the Authority’s use of SAGE payroll to identify any further reports required and any associated training requirements in use of SAGE payroll. Responsibility / Deadline Accounts Officer (Monthly from April 05) Finance Manager and Accounts Officer (by end April 05) Priority Two 2.5 Absence Monitoring Finding Discussions with the HR manager identified that there are no formal monitoring procedures in place with regard to absence. Occasional checks are made of the absence certificate file to identify regular absences, but no reports are produced for local or senior management review. Recommendation Formal reports should be produced detailing levels of absence for the organisation and also by department. It is acknowledged that as no HR system is in place at present this may be difficult but this should be implemented as soon as possible to allow for effective monitoring procedures with regard to HR. Rationale General monitoring of absence can indicate problems in effectiveness or prompt investigation into the underlying causes of absence, for example, workload. Management Response It is already planned that half-yearly management reports on absences and other HR related information (e.g. staff turnover, recruitment and retention) will be prepared for Management Team and the Board’s Staffing and Recruitment Committee. It should also be noted in this regard that the Staff Handbook (December 2004) identifies that line managers have a responsibility for monitoring and managing absence levels. Responsibility / Deadline Head of Corporate Services and HR Manager (By August 2005) Priority Two 2.6 Relocation Expenses Finding Our testing identified that expense claims for relocation expenses are signed off by Heads of Group. These are for amounts ranging from £500 to £1,500. Recommendation All expense claims for relocation fees and also all expenses over a value of £1,000 should be authorised by the Chief Executive or Head of Corporate Services. Rationale At present there are no procedures as to the amount that should be claimed for relocation, however it is possible that larger amounts could be claimed than are acceptable without the authorisation of Head of Corporate Services or the Chief Executive. Management Response The rationale above is incorrect, in that there is a policy for reimbursement of relocation expenses, as set out in the Relocation Expenses Form. Limits for delegated authority for expenditure are being worked on for all aspects of expenditure and relocation costs will be included within that overarching regulation. Responsibility / Deadline - Priority Two 2.7 Authorised Signatory List Finding Our testing identified that all expenses were authorised by senior members of staff; however there is no list in place detailing authorised levels of authority and approved signatories. Recommendation An authorised signatory list should be created detailing staff authorised to sign off expense claims and any thresholds for authorisation. Rationale Inappropriate payments may be authorised. Management Response Agreed that this is a worthwhile additional control, although given the scale of the operation and the full coverage shown by the testing of claims, there is some question as to whether this should be a priority three recommendation rather than priority 2 as shown. Authorised signatory list will be developed following finalisation of delegated authority limits referred to in response to 2.6. Responsibility / Deadline Finance Manager / July 2005 Priority Two Section 3 - Statement of Responsibility We take responsibility for this report, which is prepared on the basis of the limitations set out below. Enterprise Risk Services Deloitte & Touche LLP Inverness March 2005 The matters raised in this report are only those which came to our attention during the course of our work and are not necessarily a comprehensive statement of all the weaknesses that exist or all improvements that might be made. Recommendations for improvements should be assessed by you for their full financial and operational impact before they are implemented. This report has been prepared solely for use by Cairngorms National Park Authority and should not be quoted in whole or in part without our prior written consent. No responsibility to any third party is accepted as the report has not been prepared, and is not intended, for any other purpose. Appendix A - Control Assessment (Not possible to reproduce in text format) Appendix B - Personnel Interviewed  Denby Pettitt – Finance Manager  Francesca Scott – HR Manager  Morag James – Payroll Officer  Mandy Mathieson – Finance Assistant