Overview of the In-House Computerized Payroll Process

A payroll system that is just as popular as outsourcing is the in-house computerized system. Payroll software is very inexpensive, as it is now bundled with accounting software that costs just a few hundred dollars. More comprehensive systems, for use with large numbers of employees, are much more expensive, but are a cost-effective solution for large entities.

The basic process flow for an in-house computerized payroll process is shown in Exhibit 1.4. A fully automated process involves the review and verification of hours worked and other changes as entered by the employees, followed by the processing and printing of payroll reports, filing of direct deposit information and payroll taxes, and the distribution of paychecks.

The flowchart assumes a complete automation of all key payroll functions. For example, a computerized timekeeping system is assumed. This system, as described in Chapter 2, requires employees to run a badge through a time clock that can reject the scan if the employee is clocking in at the wrong time or is attempting to work during an unauthorized overtime period. By using such a system, the payroll process is considerably reduced at the front end, with the payroll staff only having to investigate missing badge scans. The process flow also assumes that employees can make their own deduction and address changes through an interface to the payroll software, so that the payroll staff only has to review these changes. Further, the process flow assumes that the timekeeping database used by the time clock computer feeds directly into the in-house payroll software, which eliminates the keypunching of payroll data. If any of these automation elements are not present, then the process flowchart appears as a mix between in-house computerization and a manual system, which is shown later in Exhibit 1.6.

There are several key differences between the automated in-house system shown in Exhibit 1.4 and the outsourced solution in Exhibit 1.2. A key difference is that an in-house system requires the payroll department to file several tax returns, which would otherwise have to be filed by the payroll supplier. These include the quarterly federal tax return, the annual federal unemployment tax return, and annual W-2 forms to employees. There may also be a variety of state reports to file. Further, an in-house system that uses direct deposit requires the payroll staff to create a database of direct deposit information and send it to the company's bank, which uses it to process direct deposits to employees; otherwise, this would have to be handled by a payroll supplier. Third, the in-house payroll database must be backed up and stored, which is normally handled by the payroll supplier. Finally, an in-house system requires the payroll staff to summarize all tax deposits, fill out remittance forms, and file payments with the federal and state governments at regular intervals. Consequently, no matter how much control a company may feel it has by using an in-house computerized system, the payroll staff will have a number of additional tasks to perform.

Controls for the in-house computerized payroll process are noted in the boxes with bold lettering in Exhibit 1.5. Due to the assumed use of a computerized timekeeping system, in the exhibit no controls are required for timekeeping activities, since the computer can spot them. (If a company does not have such a system, then review either the out-sourced or manual control systems in Exhibits 1.3 or 1.7 for the controls covering this area.) In addition to those controls shown earlier for the out-sourced system, new controls are also needed for check stock and signature plates, both of which should be securely locked up at all times. Be sure to note at the very end of the process flowchart the controls for reviewing uncashed checks and performing bank reconciliations. These controls are designed to spot payments made to employees who are no longer with the company and who, therefore, never received the checks (which were probably issued in error). These two controls can be added to the earlier outsourced payroll system, though some suppliers will notify a company of any uncashed checks, depending on the outsourcing arrangement.