One of the more complex internal audits conducted for health care clients is a payroll process internal audit. Given the potential for fraud, U.S. Department of Labor (DOL) hospital and health care requirements, and the operational and financial burdens of an inefficient process, a well-designed, effective internal audit of this area could provide significant value.
The objective of the audit is to determine whether the design and effectiveness of controls are operating as needed to meet organizational policies and industry guidelines. This process typically is more complex when multiple systems and entities are not interfaced.
Here are some themes that will surface in walkthrough and internal control questionnaire discussions in these key areas:
- It’s the most significant expense for health care organizations.
- It’s typically understaffed, and segregation-of-duty issues are prevalent.
- The potential for fraud is moderate to high.
- Due to nurse staffing issues, there typically are many pay codes necessary, leading to complex calculations.
- Manual processes usually are prevalent, leading to potential errors.
- Policies and procedures usually are outdated.
Payroll process internal audits typically will include assessments of:
- Authorization process for changes to the payroll/human resources system resulting from hiring, terminating and changing rates of pay/job classifications
- Timekeeping practices and approval process
- Payroll and benefit calculations and processing
- Manual payroll corrections and adjustments
- Safeguarding of assets, security and record retention
- Payroll disbursement process, including check distribution and electronic funds transfer
- Logical access for payroll system users
- Payroll tax filings and other reports
Data analytics also could be used to:
- Search for employees with post office box addresses
- Search for potential duplicate employees
- Analyze non regular payroll hours, including overtime, shift differentials, on call and paid time off
- Search for employees receiving checks for a significant time after termination
Typical findings include:
- Payroll and human resources duties not segregated
- Duties not segregated between timekeeping and record-keeping responsibilities
- Duties not segregated between payroll and accounting functions
- Pay rates that exceed established salary ranges
- No appropriate independent review over payroll functions
- Payroll procedures not formally documented and approved by management
- No periodic review of human resources and payroll user access
- No payroll department job descriptions
- Inaccurate manual calculations of employee hours
- Non compliance with DOL regulations
This is an exceptional area for BKD to help provide value for our health care clients. We encourage dialogue with management to determine whether this is an appropriate service for their organization.
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