A physical payroll system is a traditional, the cash disbursements department to

manual method of processing payroll. It deposit a single check into a special bank
involves recording employee hours on account, which is set up to handle the
paper, calculating wages, taxes, and payroll funds.
deductions manually, and issuing physical
checks or cash. Finally, the general ledger department
reviews everything. They reconcile the
A basic payroll system primarily focuses payroll information with the data from cost
on simple payroll tasks. It involves a lot of accounting and accounts payable to make
manual data entry, limited automation, sure everything matches up and is
and basic features like calculating wages recorded properly in the company’s
and generating paychecks. financial records.

An advanced payroll system is highly

Let’s go over the key tasks of a basic
automated. It collects data from different
technology payroll system.
sources like time-tracking and HR
First, the payroll process starts with systems, offers full integration with other
personnel action and timekeeping. software, and supports cloud and mobile
Information about employee attendance access.
and hours worked is gathered from the
Let’s go over some key functions and
personnel and production departments.
technologies used in advanced payroll
This data forms the foundation of the
system
payroll process.
First, we have the Human Resource
Next, the payroll department takes over.
Management (HRM) system. This
They reconcile the information they’ve
system captures and processes a wide
received, calculate wages, and prepare
range of employee-related data, including
the paychecks. Once this is done, the
benefits, job planning, employee relations,
paychecks are handed off to the
skills, and payroll. One of its most
paymaster for distribution to the
important features is providing real-time
employees.
access to personnel files, which allows
Then, cost accounting comes into play. quick updates when an employee's status
They receive details from production changes.
about how much time employees have
Next, we have Cost Accounting, which
spent on each specific job. This helps
uses the labor usage file. This file is
track labor costs for various tasks or
where the cost accounting department
projects.
records job costs based on time spent by
After that, accounts payable steps in. employees. These records are updated
They get a payroll summary, known as the either in real time or daily to ensure
payroll register, from the payroll accurate tracking of labor costs for various
department. Based on this, they authorize projects.
Employee Timekeeping. Employees authorized personnel can make
directly enter their timekeeping data in changes.
real time. This can be done using various ●​ Independent Verification:​
technologies. For example, biometric Regular audits and reviews of
time clocks verify employee identity accounting records help verify the
using fingerprint or hand-vein scans. accuracy of transactions.
Magnetic swipe ID cards allow Independent checks can catch
employees to swipe their cards like a errors before they become issues.
credit card to record start and end times. ●​ IT Controls:
There are also proximity cards, which ○​ Data Input Edits:
work like swipe cards but don’t need to be Implement validation rules
slid through a reader, making them more during data entry to catch
convenient. mistakes early.
○​ Error Messages: Provide
Additionally, employees can use mobile immediate feedback to
remote devices to clock in from their users if incorrect data is
phones, laptops, or handheld devices. entered, allowing for quick
This is especially useful for employees corrections.
who travel or work remotely, such as field ○​ File Backup: Regularly
workers or international employees. back up accounting files to
prevent data loss and
Finally, we have Data Processing. The
ensure recovery in case of
employee records file keeps track of
errors.
new hires, employee terminations,
○​ Automated Posting to
changes in dependents or withholdings,
Accounts: Use automated
and job status updates like promotions or
systems to reduce manual
salary changes. HR clerks enter this
entry errors and streamline
information in real time, ensuring the
the posting process.
records stay up to date.
Risk of Misappropriation of Cash
Risk of Inaccurately Recording
through Payroll Fraud
Transactions
Payroll fraud can occur when employees
Errors in transaction recording can lead to
manipulate payroll processes to unjustly
financial misstatements, affecting
benefit from company funds. This can
decision-making and overall business
include practices such as reporting false
performance.
hours or creating ghost employees.
Controls to Mitigate Risks
Controls to Mitigate Payroll Fraud
●​ Physical Controls:​ Risks
Secure accounting records to
●​ Physical Controls:
prevent unauthorized access or
tampering. This ensures that only
 ○​ Transaction employee file, ensuring
Authorization: Ensure that accuracy.
all payroll changes are ○​ Direct Deposit Options:
approved by a designated Offering paycheck direct
authority to prevent deposit minimizes the
unauthorized modifications. handling of physical cash
○​ Segregation of Duties: and reduces the opportunity
Divide payroll for fraud.
responsibilities among
different employees to Report on the Risk of
reduce the risk of fraud. For Unauthorized Access to Payroll
example, those processing Records
payroll should not also
manage employee time Unauthorized access to payroll records
records. and confidential employee data poses a
○​ Supervision: Regular significant threat to organizations. This
oversight and monitoring of report outlines the risks involved and the
payroll activities help deter controls that can help mitigate these
fraudulent actions. threats.
○​ Access Control: Limit
access to payroll systems to 1. Risk of Unauthorized Access
authorized personnel only, Payroll information is vulnerable to
reducing the risk of insider unauthorized access not only from
fraud. external threats but also from employees
●​ IT Controls: within the organization. Such breaches
○​ Limit Tests: Implement can lead to identity theft, financial fraud,
automated checks to and loss of employee trust.
identify excessive hours
reported during each payroll 2. IT Controls to Mitigate Risks
period, flagging unusual
To protect payroll records and confidential
entries for review.
data, organizations can implement the
○​ Biometric Scanners,
following IT controls:
Swipe Cards, and PINs:
These systems verify ●​ Passwords:​
employee identities, Use strong, unique passwords for
ensuring that only valid accessing payroll systems.
employees clock in and out. Regularly update these passwords
○​ Automated Validation of to enhance security.
Time Cards: Use ●​ Multilevel Security:​
automated systems to Implement a layered security
compare time cards against approach, requiring multiple forms
a valid and updated of authentication before granting
 access to sensitive payroll
information.

3. Outsourcing the Payroll Function

Advantages:​
Outsourcing payroll can provide enhanced
security through specialized vendors who
have robust security measures in place. It
can also reduce the burden on internal
resources and improve efficiency.

Risks:​
However, outsourcing introduces risks
related to third-party access.
Organizations must ensure that vendors
adhere to strict security protocols to
protect confidential data.