AUDIT OF PAY AND BENEFITS

Reports 2009


EXECUTIVE SUMMARY

In accordance with the Audit Branch Annual Risk Based Plan for fiscal year (FY) 2008/09, an audit of Pay and pay related benefits (Benefits) were undertaken. The objective of this audit was to provide assurance on the design, efficiency and effectiveness of internal controls and the accuracy and completeness of financial information.

The department of Natural Resources Canada (NRCan) spent $345.4 million in FY 2007/08 for salaries and pay related benefits. This amount represents 50% of the department’s operating expenses. Monitoring and reporting of pay transactions is necessary as it constitutes the largest expense on the financial statements. The scope of the audit included all pay and benefits transactions in FY 2007/08 within the national capital region (NCR).

The Shared Services Office (SSO) Human Resources (HR) Compensation Unit is responsible for delivering compensation and benefit services to all NRCan employees. The Unit ensures that employees receive timely compensation and benefits in accordance with relevant collective agreements, regulations and Treasury Board Secretariat (TBS) requirements.

Overall Assessment

The audit concluded that salaries and benefits transactions paid to employees in FY 2007/08, were accurate and the overall pay processes are compliant with TB and NRCan regulations and policies. In addition, the majority of errors identified in the audit sample had been subsequently corrected within the fiscal year. The positive results are attributed to the good practices that have been established and implemented by the HR Compensation Unit such as the peer review system and 100% audit of pay files to ensure the accuracy for pay and benefits transactions. 

The audit identified some opportunities for improving the pay process, management oversight, and efficiency and performance management. These findings and recommendations would serve to improve a function that is, in general, performing well. They do not detract from the overall positive assurance regarding the accuracy and compliance of NRCan pay and benefits.

The audit identified areas that would assist in maximizing the efficiency and performance of the payroll process and minimizing payroll related risk. The use of performance indicators could assist HR in determining how resources can more effectively be allocated to achieve greater efficiencies in the payroll process. Increased management oversight by operational managers, through the monitoring of pay related trends would assist in achieving operational efficiencies related to employee workload, productivity and staffing.

Audit Findings

Pg

Recommendations

Management Response

Timing

Accuracy and Completeness of Pay and Benefits
The audit was able to provide assurance that pay transactions are accurate and complete.

4% of pay and benefit transactions reviewed in FY 2007/08, were processed incorrectly, however 75% were subsequently corrected within the FY.

4 1. Continue to ensure all supporting documentation submitted and completed by employees and management is correct prior to issuing pay, and continue monitoring PeopleSoft data to ensure it reflects updated information. ( SSO / HR Compensation Unit) 1.  Agree with the recommendation as well as continuing 100% of auditing of pay files, pay cards and PeopleSoft data. 1. Ongoing
Pay and Benefits Process
Pay processes are generally compliant with regulations and policies.

Policy non compliance was identified with the Comptrollership Policy on Pay Administration, specifically FAA Sec. 33.

No documentation available for employees that have transferred to other departments.  

5 2. Ensure compliance with the policies and guidelines regarding FAA Sec. 33 and FAA Sec. 34 including the Comptrollership Policy on Pay Administration - Appendix B. ( FMB/ SSO Finance)

3. Ensure compliance to existing policies and guidelines related to document retention, including the minimum documents to be kept when an employee transfers out. ( SSO / HR Compensation Unit) 

2.  a) A review will be undertaken by SSO HR C&B and SSO Finance with staffing experts to ensure that a coordinated process for verification of section 34 of the FAA approval by an authorized individual is in place.

2. b) FMB, SSO Finance and HR C&B will review key HR control points to assess the adequacy of the Section 34 account verification. At the conclusion of this review, and in consideration of process changes that may be implemented, the risk level of those transactions will be assessed, and an appropriate quality assurance approach determined by FMB and SSO.

2. c) FMB will update the departmental Account Verification and Statistical Sampling policy to incorporate the quality assurance process for pay transactions.

3. We will consult with a Central Agency to seek clarification with regards to this issue.

2. a) June 1st, 2009

2. b) October 30, 2009

2. c) December 31, 2009

3. May 2009

Management Oversight of Pay and Benefits
While managers have access to payroll reports, they require increased accessibility to tools to assist them in fulfilling their monitoring requirements of pay information to assure the proper oversight of employee pay. 

 

8 4. Ensure managers use the existing tools to manage and monitor employee compensation and the timely establishment of employee data in GFS.  ( FMB/ SSO Finance) 4. a) GFS reports on salary forecasts, actuals and variances are currently available and distributed by emails at the request of Sector personnel who can choose which reports they wish to receive.

4. b) An email will be sent by FMB to all RC managers to remind them of the availability of these reports to help them monitor their pay transactions. The email will also provide instructions on how to subscribe to the reports they require.

4. c) Since the current email notification is not solving all the problems of missing PRI's, a solution using the mandatory "On boarding Tool" currently being developed by SSO -IT can provide necessary information to SSO Finance to ensure information is complete.

4. a) Ongoing

4. b) February 27, 2009

4. c) Fall 2009

Efficiency of Payroll Process
Performance indicators are not utilized for maximizing the efficiency of the payroll process and for minimizing payroll related risk.

The type of transaction, which drives the frequency of pay and the workload for each pay advisor, is not being considered when work is distributed to staff.

Timely processing of pay actions is not occurring for all transactions.

9 5. The HR Unit should utilize performance indicators and pay related information to distribute the workload to staff and improve the efficiency of the payroll process.  Together with ensuring the use of the automated smart tool in the Regional Pay System (RPS), the timeliness of processing transactions will improve and efficiencies can be achieved in the performance of the payroll process. (SSO / HR Compensation Unit) 5. SSO - HR C&B management is currently using performance indicators to distribute workload in a mix of senior and junior advisors as well as advisors in training. Pay advisors are strongly encouraged on a continuous basis to use automated smart tools. 5. Ongoing

INTRODUCTION

In accordance with the Deputy Minister approved annual risk based Audit Plan for fiscal year (FY) 2008/09, an audit of Pay and pay related benefits (Benefits) was undertaken.

The department of Natural Resources Canada (NRCan) spent $345.4 million in FY 2007/08 for salaries and benefits. This amount represents 50% of the department’s operating expenses.

The Shared Services Office (SSO) Human Resources (HR) Compensation Unit is responsible for delivering compensation and benefit services to all NRCan employees. The Unit ensures that employees receive timely compensation and benefits in accordance with relevant collective agreements, regulations and Treasury Board Secretariat (TBS) requirements.

Compensation advisors process a variety of pay and benefits transactions, varying in complexity and that require compliance with different regulations.  The Regional Pay System (RPS) is the primary tool utilized by the compensation advisors in performing this function.   

Audit Purpose and Objectives

The purpose of this audit was to provide assurance on the design, efficiency and effectiveness of internal controls and the accuracy and completeness of financial information for pay and benefits. The objectives included determining the extent to which:

  • the design of the management control framework for pay and benefits in place is adequate and there are effective internal controls;
  • the integrity of data related to pay and benefits is appropriate; and
  • the efficiency and performance of the payroll process is maximized and payroll related risks are minimized by management.

Scope and Timing

The audit reviewed pay and benefit transactions processed and reported in FY 2007/08, with the exception of the following:

  • transactions related to pay accruals and reversals;
  • regional pay transactions

Regional transactions were excluded. The majority of pay transactions (72%) occur within the NCR. Employee pay files are kept within the same location as the employee’s place of employment.  Given this information, and considering the audit time and cost involved for on-site regional visits, it was concluded that reviewing the transactions within the NCR would be representative of pay and benefit transactions processed and reported by the department. 

A trend analysis of pay transactions from FY 2005/06 to FY 2007/08 in the NCR was reviewed and included in this audit as part of an assessment of the management of the pay process.

The audit began in July 2008 and the conduct phase was completed in October 2008.

Criteria

The audit was conducted using audit criteria derived from TBS and NRCan policies as well as PWGSC tools related to pay and benefits.  The criteria used were that the management control framework was adequate and effective, integrity of the data was accurate, complete and eligible, and that pay information was utilized to maximize the efficiency and performance of the process and minimize payroll related risks.

Specific policies referenced were: TBS Collective Agreements, TBS Comptrollership Policy on Pay Administration, TBS Account Verification Policy, NRCan Directives, and the FAA—specifically Sections 33 and 34 which govern the payment of expenditures. Section 33 relates to ensuring that payments are subject to authorized requisitions and that they are lawful and within the appropriate financial level; and Section 34 covers the need to certify that services were received (i.e. the payment is valid) and that the recipient is eligible for payment (i.e. payment is not made to a fictitious employee).

Methodology

Individual interviews were held with staff responsible for processing and approving payments in RPS, receiving and recording pay and benefits data from PWGSC to NRCan’s Departmental Financial System (GFS) and preparing and recording pay and benefits accounts in the financial statements.

Interviews were also held with staff responsible for establishing new employees in GFS, as well as transferring existing employees to other departments.

A random sampling method was used, at a 95% confidence level, expected error rate of 5% and a precision of (+/- 3%). The audit team examined a random sample of 203 pay transactions in FY 2007/08. Further to our examination, a follow-up review was completed on all errors found in order to identify when and if corrections were processed.

A judgemental and direct sampling of potentially high-risk transactions was also used to review trends and recurring non-standard financial transactions from FY 2005/06 to FY 2007/08.

FINDINGS AND RECOMMENDATIONS

Accuracy and Completeness of Pay and Benefits

Summary Finding

The audit was able to provide assurance that pay and benefits transactions are accurate and complete.

Level of Accuracy and Completeness

According to the random statistical sampling conducted for the transactions for FY 2007/08, overall, the payments made through the Regional Pay System (RPS) were accurate and complete and paid in accordance with the relevant collective agreements, guidelines, regulations and policies.

The sampling design provided 95% confidence that the error rate in the total population is 5% (+/-3%).The audit identified that 4% of pay and benefit transactions reviewed in FY 2007/08, were processed incorrectly resulting in a payment error of $8K (3%) in the total sample valued at $314K.  The errors identified were a result of a lack of supporting documentation in the file, coding errors, inability to reconcile payments and process non-compliance such as allowing acting pay to continue past its termination date. 

The audit noted that these errors that had been subsequently corrected within the FY and found that 75% of the errors had been identified and corrected by HR staff. The net results of the sample data, excluding the errors that had been corrected, extrapolate to 94 uncorrected transactions in the total population of 157,385 transactions with a payment error valued at $19K in the total population valued at $254M. This is not significant.

Other process non-compliance errors were identified, increasing the error rate; however they did not have an impact on the dollar value paid. The majority of these errors were found in acting and overtime pay where transaction pay type had been incorrectly coded or the PeopleSoft system did not reflect the same information as GFS.  In addition, HR often receives incomplete or inaccurate supporting documentation from managers. HR staff often make the corrections themselves or return the incomplete documentation to have management complete it.  This not only creates delays in processing transactions but also compromises the manager’s approval because what they originally approved was not what was processed. 

The overall positive results are attributed to the HR Compensation Unit’s establishment of an effective process to minimize errors that includes the verification of all transactions entered by the pay advisors prior to issuance in RPS, and the segregation of duties between the pay advisors who input the pay actions and the pay verifiers who perform the verification of those transactions.  HR is in the process of completing an audit of all employee pay files.  The equivalent to one full time staff has been dedicated to this function and will require approximately 2 years to review all files in the NCR.  Any errors that are identified through this process will be reviewed and corrected in the appropriate files and systems. 

The HR Compensation Unit, along with PWGSC, is working towards the use of a more automated system to improve the efficiency of the current pay process.  Some of the initiatives include an electronic pay card and pay interface system.

Accuracy of Departmental Financial Statements

The HR Compensation Unit has in place a process to review the accuracy of pay transactions prior to the issuance of pay by PWGSC.  Once PWGSC has issued payments, there is an automatic upload of the information to GFS.  The Financial Management Branch (FMB) uses the data within GFS, as well as information collected from the HR Compensation Unit to record the department’s liabilities and expenses related to salaries and benefits in the financial statements.  Although, there is no post verification of the accuracy of the data contained in GFS, the audit identified in the random sample that 1% of transactions recorded in GFS had a payment error that had not been corrected within the FY.  The dollar value impact of these errors on the financial statements is not significant.

Recommendations
  1. Continue to ensure all supporting documentation submitted and completed by employees and management is correct prior to issuing pay and continue monitoring PeopleSoft data to ensure it reflects updated information. (SSO / HR Compensation Unit)
Management Response

1. Agree with the recommendation as well as continuing 100% of auditing of pay files, pay cards and PeopleSoft data.

Pay and Benefits Process

Summary Finding

Pay processes are generally compliant with regulations and policies with the exception of the Comptrollership Policy on Pay Administration. The audit did identify specific areas of concern warranting attention.

Non-compliance to Policy Regarding Roles and Responsibilities

When an employee is hired or submits a pay action that requires a written approval, the appropriate forms are completed and FAA Sec. 34 is completed by a delegated authority such as the RC Manager.  When the documents are received by the HR Compensation Unit, the pay advisor reviews the supporting documentation to ensure it is complete. Pay advisors do not however, review the authenticity of the FAA Sec. 34 approver against a specimen signature database of managers, who have delegated signing authority.  It is the responsibility of the financial officers exercising FAA Sec. 33 to ensure that FAA Sec. 34 is being processed properly as described below.

The TBS Comptrollership Policy on Pay Administration clearly outlines the responsibilities for FAA Sec. 33.  It states the following:

  • “Financial officers with payment authority under section 33 of the FAA must ensure that an adequate process is in place to verify accounts under section 34 of the FAA, and that the process is being properly and conscientiously followed.
  • …the Senior Financial Officer (SFO) must ensure that proper mechanisms are in place to allow the person with authority under section 33 of the FAA to verify the legality of the payment and the availability of funds.
  • SFO should establish procedures and, probably, an audit program to ensure that authority under section 33 of the FAA is exercised in accordance with departmental standards and control objectives.”

At the present time, FAA Sec. 33 is being processed in batch format (bulk approval) without any type of verification that FAA Sec. 34 was completed or signed by the appropriate delegated authority. In addition, there is no indication that a post-verification process exists for pay and benefit transactions to ensure that FAA Sec. 33 was exercised appropriately. Without proper approvals and verification, errors can go undetected. There is currently a reliance on the transaction review and audit performed by HR staff at the time of the pay action, as well as that performed by PWGSC. This is not sufficient because PWGSC’s review will not detect the common errors that are occurring and HR’s review takes place before the transaction is processed.  There is no other review being completed by the department.

Retention of Documentation

Each department maintains the pay and benefit files for their respective employees.  When an employee transfers out of one department to another, his/hers pay file is also transferred so that the employer – employee relationship can be maintained.  Of the 292 transactions selected as part of the random and directed samples, 19 transactions (7%) could not be reviewed because NRCan does not retain copies of employee pay files or supporting documents for employees that have been transferred out to another department.  A department may request the new department to provide this information in order for them to perform their review. However, it is at the discretion of the new department whether or not to release the file back to the first department. This is a general weakness in the government wide process, and as a result, it is difficult for the department to perform any post-verification of these transactions and fulfill the requirements for maintaining documentation for payments. 

Recommendation

2. Ensure compliance with the policies and guidelines regarding FAA Sec. 33 and FAA Sec. 34 including the Comptrollership Policy on Pay Administration -Appendix B. (FMB/ SSO Finance) such as:

  • Ensure FAA Sec. 34 signature is matched to the existing delegated signing authority database.
  • Ensure that proper mechanisms are in place to allow the person with authority under FAA Sec. 33 to verify the legality of the payment.
  • A verification process using risk-based analysis of FAA Sec. 33 approved transactions with a follow-up on anomalies, in particular for non recurring transactions would ensure that FAA Sec. 33 is exercised in accordance with TBS and Departmental standards and policies.
Management Responses

2.   a) A review will be undertaken by SSO HR C&B and SSO Finance with staffing experts to ensure that a coordinated process for verification of section 34 of the FAA approval by an authorized individual is in place. 

2.   b) FMB, SSO Finance and HR C&B will review key HR control points to assess the adequacy of the Section 34 account verification.  At the conclusion of this review, and in consideration of process changes that may be implemented, the risk level of those transactions will be assessed, and an appropriate quality assurance approach  determined by FMB and SSO

Further more, departmental personnel recently participated in a project led by the Office of the Comptroller General which resulted in a draft control framework for HR/Finance interactions. This framework will be used as a guide for the review of the pay process control points as they relate to the Comptrollership Policy on Pay Administration.

2.   c) FMB will update the departmental Account Verification and Statistical Sampling policy to incorporate the quality assurance process for pay transactions.

Recommendation

3. Ensure compliance to existing policies and guidelines related to document retention, including the minimum documents to be kept when an employee transfers out. (SSO / HR Compensation Unit)

Management Response

3.  We will consult with a Central Agency to seek clarification with regards to the policies and guidelines related to document retention.

Management Oversight of Pay and Benefits

Summary Finding

While managers have access to payroll reports, they require increased accessibility to tools to assist them in fulfilling their monitoring requirements of pay information to assure the proper oversight of employee pay.

Management Oversight Responsibilities

Managers have the responsibility of managing and monitoring their operating budgets which includes information related to people management.  Although various pay related reports are available in GFS, managers require increased awareness and accessibility to the tools to assist them in fulfilling their monitoring requirements of pay information. The regular review of reports and reconciliations of employee pay by managers aids in identifying payroll errors and assists managers with decisions concerning their budgets and the management of people within their group.

The directed sample of pay transactions examined from FY 2005/06 to FY 2007/08, identified overtime pay, acting pay and vacation/leave pay as areas where trends and anomalies had occurred.  These trends and anomalies consisted of employees having received a high percentage of overtime, acting or vacation/leave pay in multiple years. Examples were found where:

  • Employees had received more than 50% of their regular salary in overtime pay
  • Employees had received more than $10,000 in overtime over the 3 year period
  • Employees had received acting pay for long periods of time, in multiple years
  • Employees had received vacation/leave pay “cash outs” in multiple years (up to 600hrs per year) and had only taken a few days of vacation/ leave

Careful monitoring of these trends and anomalies can assist managers in achieving operational objectives and ensuring compliance with policies on acting or overtime work as well as aid with decision making related to employee workload, productivity and staffing.  Managers can better decide whether or not it is more appropriate and cost effective to staff a new position than approve continual overtime and acting positions. It will also alert managers to unusual patterns and inefficiencies that may be occurring and allow them to take corrective action.

The audit also examined a sample of transactions coded to invalid pay.  It was concluded that invalid pays occur when employees are established in GFS without their personal record identifiers (PRI) for the matching of pay transactions when data is received from PWGSCGFS will convert the PRI associated with the data received from PWGSC to an invalid PRI until the appropriate PRI is set up within GFS for that employee.  The invalid pay reviewed in the audit sample identified employees whose PRI had not been input in GFS for 1 to 5 bi-weekly pay periods. If the PRI field was mandatory in GFS when an employee is established in the system, the creation of invalid PRI could be avoided.  

Recommendation

4. Ensure managers use the existing tools to manage and monitor employee compensation and the timely establishment of employee data in GFS(FMB/ SSO Finance)

Management Responses

4.   a) GFS reports on salary forecasts, actuals and variances are currently available and distributed by emails at the request of Sector personnel who can choose which reports they wish to receive.

4.   b) An email will be sent by FMB to all RC managers to remind them of the availability of these reports to help them monitor their pay transactions. The email will also provide instructions on how to subscribe to the reports they require. 

4.   c) Emails are automatically produced when a PRI is not in GFS. This email is sent to Sector personnel responsible for maintaining the PRI information in GFS.  The emails are re-sent daily until the PRI has been entered.  Since this is not solving all the problems of missing PRI’s, a solution using the mandatory “On boarding Tool” currently being developed by SSO -IT can provide necessary information to SSO Finance. As part of the “arrival form” for new employees, an email would automatically be sent to the Cashier’s Office containing any PRI and financial coding details included in the Personnel Action Request (PAR). The Cashier’s Office would then be able to input financial details for the new employee into GFS before any pay comes in.

Efficiency of Payroll Process

Summary Finding

Performance indicators are not utilized for maximizing the efficiency of the payroll process and for minimizing payroll related risk.

Efficiency and Performance of the Payroll Process

A performance indicator is a financial or non-financial measure used to help an organization measure its progress towards an objective.  The information collected can also assist organizations in determining the efficiency of processes and provide possible process improvements. The audit examined a few performance measures related to transaction workload per pay advisor, type of pay action processed and timeliness of processing to identify whether changes to the current process should be considered and/or further evaluated to increase the efficiency of the process.

According to the TBS standards, the number of pay advisors to full time equivalent employee ratio is 1:175.  NRCan’s NCR ratio is currently 1:232.  While the NRCan ratio is higher, it is impossible to determine if staffing is adequate without performance indicators. The type of transaction drives the frequency of pay and the workload for each pay advisor.  Non standard pay, defined as all non recurring pay transactions such as acting, overtime, severance and leave/vacation pay, where the pay action is initiated through a request or form, is more complex and therefore has an increased risk of errors when compared to standard pay transactions such as an employee’s regular bi weekly salary which is automatically generated by GFS. The NCR pay advisors are currently processing a ratio of 70% standard pay transactions to 30% non-standard pay transactions. It is possible to determine which pay advisors are processing a greater number of complex vs. standard transactions.  HR management can use this information when distributing the workload to ensure risks are minimized, that workload is fairly distributed amongst staff and that process efficiencies are achieved. For instance, staff who process non-standard pay transactions such as acting pay, may process a smaller total of more complicated transactions but would be more proficient at processing that type of pay action just as pay advisors who process standard pay transactions would be able to process a greater total number of transactions.

Timely Processing of Transactions

The timely processing of pay transactions is not occurring for all transactions.  Transactions considered priority by HR, such as establishing the pay for a newly hired employee are processed quickly. However other transactions such as an employee’s promotion to a new position are often processed much later, requiring pay actions to be completed retroactively. The current automated smart tool in RPS that functions as a bring forward system assists pay advisors in processing many of the pay transactions that are not considered priority in a timely fashion. The timeliness of processing transactions would improve with greater use of this tool.

Regular review and analysis of processing times and transaction types can assist management in assessing the efficiency and performance of the payroll process as well as the associated risks.

Recommendations

5. The HR Unit should utilize performance indicators and pay related information to minimize payroll risks and distribute the workload to staff. Together with ensuring the use of the automated smart tool in RPS, the timeliness of processing transactions will improve and efficiencies can be achieved in the performance of the payroll process. (SSO / HR Compensation Unit)

Management Response

5. SSO -HR C&B management is currently using performance indicators to distribute workload in a mix of senior and junior advisors as well as advisors in training. Pay advisors are strongly encouraged on a continuous basis to use automated smart tools.