Formal reports on employee performance are not intended to replace direct observation, but to supplement it. Direct observation is important, but a manager cannot observe all employees all the time. It is also difficult to accurately summarize detailed observations across time. Well-designed reports provide quantitative summary measures of aspects of employee performance that are believed to be important to achievement of the organization’s goals. Quantitative measures facilitate tracking performance trends over time. These benefits, however, will be difficult for many managers to understand until they have had experience in using such reports. There are also legal issues at stake. If an employee or former employee brings suit against the employer, supporting documentation may justify the employer’s position.
The following changes may be made to improve the Kowal Manufacturing Company’s system of internal control for payroll procedures:
a.
| Weakness | Threat |
| 1. Factory supervisor hires all job applicants and forwards their W-4 form to the payroll clerk. | The factory supervisor could hire fictitious employees and submit their W-4 form. |
| 2. Factory supervisor verbally informs payroll of all employee pay raises. | No documentation on pay raises could lead to employee disputes and litigation. The factory supervisor could give the fictitious employees raises. |
| 3. Blank time cards are readily available. | An employee could have another employee fill out a time card when they were late or not even at work. |
| 4. Weekly time cards are not collected until the next Monday. | Time cards could be altered over the weekend with fictitious or false information in the case of a vendetta against another employee. |
| 5. The factory supervisor distributes pay checks. | The supervisor can conveniently keep the pay checks of fictitious or fired employees. |
b.
- A system of advice forms should be installed so that new hires, terminations, rate changes, etc., are reported to the payroll department in writing. Such forms should be submitted by the employee and verified by the appropriate supervisor.
- Before applicants are hired, their backgrounds should be investigated by contacting references to determine that they are not dishonest and have no other undesirable personal characteristics.
- The supply of blank time cards should be removed. At the beginning of each week the payroll department should provide each worker with a time card stamped with his name.
- The foreman should collect the time cards at the end of the week, approve them, and turn them over to the payroll clerk. All time cards should be accounted for and any missing cards investigated.
- If the Company has a cost system that requires the workers to prepare production reports or to account for their time by work tickets, the time cards and the production reports or work tickets should be compared.
- The payroll checks should be prenumbered to control their issuance.
- The payroll checks should be distributed to the workers by a responsible person other than the foreman. Unclaimed checks should be sent to internal audit until claimed by the worker.
- A responsible person other than the chief accountant and the payroll clerks should reconcile the payroll bank account.
- From time to time an officer of the Company should witness a payroll distribution on a surprise basis.
