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Internal controls play an important role in any organization. This paper will discuss how the internal controls came about in the accounting world. As stated in this paper, the Sarbanes- Oxley Act of 2002, made rules and regulations that companies have to follow to maintain honest financial audits. This paper will also discuss my findings in the Vance County School District payroll processing procedures. My objective was to determine if the Vance County School District's internal controls over the payroll processing operation was appropriately designed and operating effectively.
Unlike many other professions accounting has a long history, which is discussed and describe through the double-entry accounting. The history of accounting began with the genius of a Renaissance man named Luca Pacioli. Growing up during a time where few people could read or write, Pacioli made his mark in history. Pacioli had the knowledge of history, literature, science, art, business and mathematics, in which all contributed to his book.
In 1494, Luca Pacioli wrote and published a book called Summa (The collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality (deSantis, 1999). The book consisted of five sections and only 26 where on double-entry accounting. Pacioli did not invent double-entry accounting, he just made a system that was easier to use. The Summa was written as guidance to the existing knowledge of mathematics. Luca Pacioli accounting system included all of the accounting features that we use today. These features included journals, ledgers, memorandums and etc. (deSantis, 1999). He also described the year end closing entries and proposed a trial balance to be used to balance ledgers. Over the past decades there has been little modifications done to his accounting systems. Some of these modifications included the income statement in which was developed before the WWII and in 1886 our present day trial balance sheet was actually formed (deSantis, 1999). By the 1980's financial statements were in place.
Financial statements provided substantial information on the operating,investing and financing act ivies of an organization.
During the 14th and 16th centuries, the accomplishments of the Italian renaissance men soared to new heights. They are known worldwide in the accounting profession as the fathers of modern accounting. During this Era, Venice was the heart of Europe and it was here that merchants invented and practiced double-entry accounting (deSantis, 1999). The Italians took Arabic numbers and used them to their benefit. They became the first to use them in tracking business accounts. The Italian merchants kept extensive business records as the use of capital and credit on a large scale developed (Alexander, 2002).
What are internal controls? According to (Landes & Ratcliffe, 2009), internal control is a process, effected by an entity's board of director, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
- Effectiveness and efficiency of operations
- Reliability of financial reporting
- Compliance with applicable laws and regulations
Internal controls are designed to help businesses with achieving their objectives. Internal controls have been around in businesses for the past decades. . A system of internal controls is put into place to any organization on course toward profitability goals and achievement of its mission and to minimize surprises along the way (Landes & Ratcliffe, 2009). The internal control structure is a system that needs continuous improvements and organizations are always trying to find ways to implement a better and effective structure.
The Sarbanes- Oxley is a law that was enacted on July 30, 2002 as a reaction to the many accounting scandals that plague a number of major corporations such as Enron, WorldCom, Tyco International, Adelphia and Peregrine. These corporations are the reason that rules, regulations were put into place. The Sarbanes-Oxley is a requirement for most public companies. The Sarbanes-Oxley main purpose is to regulate corporate behavior to ensure the protection of financial audits. Section 404 of the Sarbanes Oxley Act, requires that all management file an internal control report with their annual report, confirming the effectiveness of internal controls and procedures over financial reporting (Norris, 2009). The Sarbanes-Oxley Act also requires that auditors attest this evaluation of effectiveness. The Federal Foreign Corrupt Practices Act of 1977 is a legal requirement for many organizations. This act requires companies who file reports to the Securities Exchange Commission to their books and records accurately reflecting business transactions as well as maintain effective internal controls (Dworsky, 2009).
There are five components of the internal control structure. The components of the internal control structure or the COSO Framework are risk assessment, control environment, control activities, information and communication and monitoring. The internal control structure is important to any organization because if the system is implemented properly the organization can identify and correct control problems on a timely basis, produce more accurate and reliable information for the use of decision making, prepare accurate and timely financial statements, and be in a position to provide periodic certifications or assertions on the effectiveness of internal control (Landes & Ratcliffe, 2009). Of the five internal control structures, the control environment plays an important role. The control environment helps ensure that internal and external reporting is in compliance with laws and regulation. There are seven important factors under the control environment segment that help establish and enhance an organization's policy and procedures (Bodnar & Hopwood, 2004). The factors included under this segments are: policies and procedures of human resources, organization structure, integrity and ethical values, commitment to competence, management philosophy and operating cycle, manner of assigning authority and responsibility and attention and direction provided by the board of directors. There cannot be an effective internal control environment. The control environment helps safeguard the investments of share holders as well as company assets.
The company that I chose to research was the Vance County School System payroll process working with one school in particular which was Eaton Johnson Middle School. The Vance County School District is governed by the Board of Education which has seven elected members. The board is responsible for the general management and control over the district's financial and educational affairs. The Superintendent is responsible for the oversight of the District's internal control structure and acts as the Chief Financial Officer. There are 16 schools under the Vance County School District. There are 10 elementary schools, 2 middle schools and 4 high schools. I will examine Vance County School District to see if they established proper controls over its payroll processing procedure.
Because there are so many schools in this district I chose to concentrate on one entity which is Eaton Johnson Middle School. The bookkeeper retrieves documents from staff members daily such as leave of absence forms and time correction forms to input daily attendance; including, fixing any corrections that need to be made due to someone not clocking in or out for the day. She has to manually check each employee's time to make sure they have clocked in for the day and manually key in time and corrections on online time clock software called Timekeeper.
The payroll processing starts when the pay period is due to Corporate and the procedures are as follows: the bookkeeper go in to Timekeeper to check for missed days of scanning in or out, fix any errors, print timesheets for both 10-month employees (teachers, TAs, some Counselors) and 12-month employees (Office staff including bookkeeper, Data Manager, Receptionist, Principal, Asst. Principals (3), and Counselors (2), Band director, and Custodians (7). The bookkeeper then have all Non-Certified staff (TAs, Custodians, Office Clerical) and Certified staff (Principal, Asst. Principals, Counselors come sign his or her timesheet is correct. Once timesheets are approved by employees as being correct and they are signed; then, the Principal must also sign behind each employee. Once everything is approved, the bookkeeper must go into Timekeeper and approve all timesheet to be pulled by Human Resources Finance/Payroll Department for processing. Then the bookkeeper must also take a copy of her payroll timesheet and leave forms to Payroll department as well. The payroll supervisor at the corporate office then retrieves the data via software download. Once the data is retrieved, a pro forma is run to verify/ edit/ correct data. Payroll data is then entered in to ISIS payroll data software. Once all data has been entered, verified, edited, and correct, another "pro forma" is run to lock in correct data. The payroll data is then sent to the finance manager electronically. Once approved, payroll checks and pay stubs are then processed and sealed for distribution. Payroll checks and paystubs are placed in a locked cash bags and delivered on pay day to each school by the school systems courier service. Only the bookkeeper and Payroll Supervisor have a key to the cash bag.
I could only go on what information the payroll specialist of Vance County School District would give me. They seem to have good internal controls in place. I could only base my findings on the information provided to me. The only deficiency at hand was that the payroll department had no written policies or procedures for their payroll process. Although written policies are not legally required, they are pretty much needed in any organization to help an employee establish a good faith compliance with federal and state laws. Written payroll policies and procedures combined with the job descriptions of employees can help ensure that payroll is processed consistently and accurately. District officials did not establish written procedures that describe employee responsibilities in processing and distributing monthly payrolls. In the absence of written policies and procedures, the payroll supervisor developed and implemented her own informal procedures to process payroll. My recommendation would be that Vance County School District adopts a written payroll policy and procedures to be used by the employees in corporate office who are responsible for processing and distributing payroll.
Payroll processing functions play an important role to ensure internal control for the accurate disbursements of salary, wages and other funding are accordance with policies and procedures and federal regulations. A sample written payroll procedure policy for Vance County School District would be as follows:
- All payrolls are processed through ISIS.
- Payroll Supervisor receives approved data via Timekeeper software also a hard copy from the District's department bookkeepers for preparation of payroll.
- Payroll Supervisor verifies payroll data and inputs data into the ISIS system.
- HR department maintains time and attendance supporting documents for approved absences, professional leave, bereavement leave and etc.
- Payroll Supervisor review, approve changes, additions and deletions through HR actions.
- Payroll Supervisor then generate a lock in payroll run to process payment disbursement,
- Payroll Supervisor must import, calculate and verify; leave taken, garnishments, and pay adjustments.
- The Finance Manager must approve payroll upon disbursement.
- Checks and Paystubs are sorted and delivered by Courier to each school for bookkeeper to disburse.
Organizations today have to come up with ways to implement better controls over their departments. Even though the Payroll Supervisor did not have written policies and procedures the District has not had any problems to arise. If they adopt a written policy payroll procedures or a policy for any department in the District, they can prevent any faults in their internal control structure. An effective internal control structure can limit many fraudulent acts within the organization. Having a well implemented control environment can help the organization succeed in the safeguard of companies' assets and prevention of fraud.
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