 Deloitte Report 6f
This report has been prepared on the basis of the limitations set out on page 14.
Appendix 1 – Audit Framework 13
Appendix 2 - Staff Interviewed 14
Statement of Responsibility 15
This report and the work connected therewith are subject to the Terms and Conditions of the contract dated 20/06/2007 between Greater London Authority and Deloitte & Touche Public Sector Internal Audit Limited. The report is produced solely for the use of Greater London Authority. Its contents should not be quoted or referred to in whole or in part without our prior written consent except as required by law. Deloitte & Touche Public Sector Internal Audit Limited will accept no responsibility to any third party, as the report has not been prepared, and is not intended for any other purpose.Executive Summary
Introduction & Background
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This audit forms part of the 2007/08 Internal Audit Plan, which has been approved by the Mayor and the Audit Panel. The plan entails a review of the systems and controls operating over the Authority’s Payroll system.
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The Authority’s Payroll is outsourced to an external provider, Northgate, who has provided the Payroll service to the GLA since April 2002. A new service specification was agreed with Northgate in January 2006, which included the provision of an integrated Human Resources System (Resource Link), which performs both Payroll and Human Resource functions.
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The average monthly payroll cost to the GLA during 2007/08 was approximately £2.9 million, which accounts for a large proportion of the GLA’s annual budget.
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The Financial Services team is responsible for ensuring that the total payroll balances are complete and accurate. Financial Services, in conjunction with Human Resources, is responsible for ensuring that controls are maintained to help maintain the integrity of the payroll system.
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Since our last review of this area during 2006/07, there have been no significant changes to the control environment and this area continues to provide consistent and efficient management and control over the perceived risks within this area.
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The aim of this audit was to ascertain and assess the adequacy and effectiveness of the internal controls put in place for the management and monitoring of the Payroll arrangements and to establish the extent of effectiveness of the controls put in place to confirm the completeness and accuracy of the Authority’s payroll.
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Random samples of prime source documents were selected and tested to evaluate the effectiveness of the controls in operation. A summary of the findings is contained within the following paragraphs.
Starters and Leavers
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The Human Resources department have a number of standardised processes and forms to manage the appointment of new starters. A Human Resources Officer completes an Appointment Form for each new starter. The information entered on the form includes the job reference number, job title, annual salary, grade and interview date. An offer of appointment letter is signed by the Senior Human Resources Manager and placed on the employee's file. A contract of employment for each new starter is prepared by a Human Resources Officer, signed by the Senior Human Resources Manager and then signed by the employee. The signed contract is placed on the employee's file.
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In testing of 15 new starters, it was found that one contract had not been signed by the employee.
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Each new starter completes a New Starter Details Form, entering their NI number and bank account details. The form includes a checklist which is completed by the Human Resources Officer. A Human Resources Officer enters details of each new starter on Resource Link and enters the employee number generated by the system and input date on the New Starter Details Form.
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When a new starter is entered on Resource Link, the system automatically sends notification e-mails to Northgate (the payroll provider) and to the GLA's Financial Services team. A member of the Exchequer Team in Financial Services receives the New Starter Details Form from Human Resources and records the document on a weekly GLA Payroll Changes schedule, which is checked and signed by a Finance Manager. The schedule and attached documents are sent to Northgate.
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When a member of staff wishes to leave the GLA, they send a letter of resignation or e-mail notifying of their resignation to Human Resources. The letter or e-mail is placed on the employee's file. A Human Resources Officer sends a letter to the leaver confirming their last day of service and listing items which have to be returned (such as staff identity card and IT equipment).
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In order to notify departments of someone leaving, Resourcelink sends electronic notification of the leaver information to Information Services, Financial Services and the Technology Group. In some instances leaver’s checklists were found to be in use on some leaver’s personnel files, however this was removed from normal operations when Resourcelink went live. There is an established process for handling resignation letters etc and therefore the reinstatement of general use of the leaver’s checklist is not considered necessary.
One recommendation has been raised as a result of our work in this area.
Creating New Accounts
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New payroll accounts are created by Human Resources staff on Resource Link. Financial Services staff only have enquiry access to Resource Link.
No recommendations have been raised as a result of our work in this area.
Changes to Standing Data
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When the annual national pay award for local government employees has been agreed, the Senior Human Resources Manager e-mails a spreadsheet to Northgate showing the revised pay rate for each salary grade. Northgate actions the required salary increases.
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Financial Services do not carry out any spot checks when a pay award has been actioned to confirm that salaries have been correctly increased. The Chief Accountant only performs a global check on the increase in payroll costs arising from a pay award.
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Employees who change their bank details notify Financial Services by sending an e-mail or letter or completing and signing a standard form. Each document is included in the next weekly batch of documents sent to Northgate, and listed on the covering schedule which is signed by a Finance Officer and authorised by a Finance Manager. The changes are actioned by Northgate on Resource Link. Address changes are entered directly onto Resource Link by Human Resources staff.
One recommendation has been raised as a result of our work in this area.
Other Amendments to the Payroll
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Overtime claim forms are authorised by line managers. Members of the Exchequer Team in Financial Services check the forms and send them to Northgate in weekly batches. There is a GLA Payroll Changes schedule for each batch which is certified by a Finance Manager. Overtime details are entered on Resource Link by Northgate.
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Expenses claim forms (with supporting receipts attached) are authorised by line managers. Members of the Exchequer Team in Financial Services check the forms and enter expenditure details on coding analysis sheets. The forms are sent to Northgate in weekly batches, which are certified as above. Expense details are entered on Resource Link by Northgate.
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An employee planning to take maternity leave notifies Human Resources and submits an MAT B1 certificate stamped by the relevant Health Authority. Human Resources sends a letter to the employee which confirms the period of maternity pay.
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A request for an honorarium payment or acting-up allowance is made on a standard form which is approved by the relevant Director or Head of Service, Director of Corporate Services, Director of Finance & Performance and Senior Human Resources Manager. Other allowances (e.g. out-hours allowances and dry cleaning allowances) are specified in employees' contracts of employment (which are signed by the Senior Human Resources Manager).
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Requests for voluntary deductions from pay (e.g. for trade union subscriptions or regular charitable donations) are received by Financial Services. The request documents are sent to Northgate in weekly batches; there is a GLA Payroll Changes schedule for each batch which is certified by a Finance Manager. The required deductions are entered on Resource Link by Northgate. Each employee receives a monthly payslip which lists all deductions made.
No recommendations have been raised as a result of our work in this area.
Segregation of Duties
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New starters are entered on Resource Link by Human Resources and checked by Financial Services. Payments to new starters are checked during the monthly reconciliations performed by the Chief Accountant.
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Overtime payments and expenses payments are authorised by line managers, checked by Financial Services and entered on Resource Link by Northgate. They are subsequently checked during the monthly reconciliations by the Chief Accountant.
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Monthly payroll processing is prepared by Northgate, and approved by senior management within the GLA. Monthly gross to net reconciliations and general ledger reconciliations are performed by Financial Services.
No recommendations have been raised as a result of our work in this area.
Completeness and Accuracy of Monthly/Supplementary Payroll
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Northgate submits a Pay Release Form for each main pay run, supplementary pay run and third party pay run (for tax and NI payments) for each month. Each form shows total gross pay, total net pay, total BACS payments, total foreign currency payments and the total number of payments made. The Pay Release Form is checked by a Financial Services Assistant and authorised for payment by the Head of Financial Services.
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Northgate provides a monthly file containing payroll accounting information which is loaded on to the general ledger. The Financial Services Assistant completes and signs a monthly analysis sheet listing all debits and credits, which is reviewed and signed off by the Chief Accountant.
No recommendations have been raised as a result of our work in this area.
Payroll Reconciliation Process
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A Financial Services Assistant performs a monthly gross pay to net pay reconciliation (which covers both the main and supplementary payroll). Each reconciliation is signed by the Financial Services Assistant and is then checked and signed by the Chief Accountant.
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The Chief Accountant reconciles each monthly payroll to the establishment list and other supporting payroll submission records (e.g. for overtime claims and expenses claims). Each reconciliation is signed by the Chief Accountant and is then checked and signed by the Head of Financial Services. A separate reconciliation is carried out for each main monthly payroll and supplementary payroll.
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At the time of the audit, reconciliations had been completed and signed off for the current financial year, up to the end of February 2008, and the March reconciliations were awaiting sign-off. Reconciliation statements were supported by comprehensive and detailed working papers. There was evidence on file that queries arising from the reconciliations were resolved in a timely manner.
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The Payroll Reconciliation Methodology procedure notes agreed by Internal Audit as a result of previous audits, state that at the end of March, June, September and December, Northgate will be asked to prove the payroll calculations for overtime, Statutory Sick pay and Occupational Maternity pay for staff selected at random. The Chief Accountant stated that the random quarterly checks by Northgate on pay calculations referred to in the procedure notes have not yet started. This matter has been raised with Northgate, and will be attended to when they have completed their year-end procedures.
One recommendation has been raised as a result of our work in this area.
Management Review and Exception Reporting
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The Chief Accountant monitors monthly gross pay, pension contributions and NI contributions on a set of spreadsheets. The gross pay spreadsheet shows month-on-month percentage changes, and explanations of significant changes are recorded. Northgate provides detailed reports for each main and supplementary pay run, and any exceptions are identified and investigated during the detailed monthly reconciliation processes described above.
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The Chief Accountant and Senior Human Resources Manager attend quarterly service review meetings with representatives from Northgate (Payroll Manager, Operations Manager and Team Leader). The most recent service review meeting was held on 25/4/08. A set of performance indicators was agreed at this meeting; it is planned that Northgate will submit performance data relating to these indicators two weeks before each future meeting.
No recommendations have been raised as a result of our work in this area.
Audit Opinion
Substantial Assurance
Evaluation Opinion: While there is a basically sound system there are weaknesses, which may put some of the system objectives at risk.
Testing Opinion: There is evidence that the level of non-compliance with some of the controls may put some of the system objectives at risk.
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Observations and Recommendations
In order to assist management in using our reports:
We categorise our opinions according to our assessment of the controls in place and the level of compliance with these controls
Full Assurance
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There is a sound system of control designed to achieve the system objectives
and the controls are being consistently applied.
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Substantial
Assurance
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While there is a basically sound system, there are areas of weakness which put some of the system objectives at risk,
and/or there is evidence that the level of non-compliance with some of the controls may put some of the system objectives at risk.
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Limited Assurance
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Weaknesses in the system of controls are such as to put the system objectives at risk,
and/or the level of non-compliance puts the system objectives at risk.
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No Assurance
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Control is generally weak, leaving the system open to significant error or abuse,
and/or significant non-compliance with basic controls leaves the system open to error or abuse.
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b) We categorise our recommendations according to their level of priority.
Priority 1
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Major issues for the attention of senior management.
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Priority 2
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Other recommendations for local management action.
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Priority 3
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Minor matters.
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Starters and Leavers
1. Monitoring contract agreements (Priority 2)
Recommendation
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Rationale
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Consideration should be given to developing a monitoring spreadsheet to ensure that all contracts of employment are signed by employees.
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Monitoring contract agreements for all new starters will help to ensure that terms and conditions are formally agreed with all staff.
The contract of employment on file for one new starter in the audit sample (ref. 02920) was not signed by the employee.
Where a contract of employment is not signed by an employee, there is a risk that it may be more difficult to enforce the terms and conditions in the contract.
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Management response:
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Agreed by the Senior HR Manager. Such a spreadsheet already exists. The case in question related to an employee who had been working for the GLA for sometime prior to their formal appointment. Use of the spreadsheet will continue, however staff dealing with this element of the starter process will be asked to double check a signed contract is in the GLA’s possession when the new member of staff attends their human resources induction. If there is no signed contract this issue can be remedied at the human resources induction meeting.
Implementation Date: Completed.
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Changes to Standing Data
2. Annual Pay Awards (Priority 2)
Recommendation
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Rationale
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When an annual pay award is due to be actioned by Northgate, Financial Services should carry out spot checks on a sample of employees to confirm that their salaries have been correctly updated. Details of the checks should be retained on file.
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The payroll provider (Northgate) actions annual increases to salaries when requested by the Senior Human Resources Manager. Checks by Financial Services help to ensure that salary changes are updated accurately.
It was established that although there is a global check on the total payroll after an annual pay award has been actioned, there are no checks on individual employees to confirm that their salaries have been correctly updated.
Where spot checks are not carried out during the implementation of an annual pay award, there is a risk that employees' salaries might not be correctly updated, resulting in overpayments or underpayments of salary, complaints from employees and possible financial loss to the authority.
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Management response:
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Agreed by the Chief Accountant. The checks will be made in the month the pay increase is awarded.
Implementation Date: In the month of the next pay increase being awarded.
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Payroll Reconciliation Process
3. Spot Checks on Pay Calculations (Priority 2)
Recommendation
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Rationale
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Northgate should provide a breakdown of Statutory Sick Pay, Statutory Maternity Pay and Overtime payments for five staff receiving such payments every quarter.
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The Payroll Reconciliation Methodology document agreed by Internal Audit in March 2008 includes a requirement that Northgate proves pay calculations for selected staff at the end of March, June, September and December.
It was established that the spot checks on pay calculations required by the Payroll Reconciliation Methodology document have not yet started.
Where spot checks are not carried out on pay calculations, there is a risk that incorrect pay calculations might not be detected and rectified, resulting in possible underpayments or overpayments of salary, complaints from employees and possible financial loss to the authority.
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Management response:
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Agreed by the Chief Accountant. The Chief Accountant notified Northgate in March 2008 that the spot checks were required from March onwards, and should be added to the Payroll Procedures Manual (PPM) maintained by Northgate. It is planned that the checks will commence when Northgate have completed their year-end procedures.
Implementation Date: June 2008.
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Appendix 1 – Audit Framework
Audit Objectives
The audit was designed to ensure that management has implemented adequate and effective controls within the Authority’s Payroll system.
Audit Approach and Methodology
The audit approach was developed with reference to an assessment of risks and management controls operating within each area of the scope.
The following procedures were adopted:
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identification of the role and objectives of each area;
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identification of risks within the systems, and controls in existence to allow the control objectives to be achieved; and
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evaluation and testing of controls within the systems.
From these procedures we have identified weaknesses in the systems of control, produced specific proposals to improve the control environment and have drawn an overall conclusion on the design and operation of the system.
Areas Covered
Audit work was undertaken to cover controls in the following areas:
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Starters and Leavers
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Other Amendments to the Payroll
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Creating New Accounts
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Changes to Standing Data
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Completeness and Accuracy of Monthly/Supplementary Payroll
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Payroll Reconciliation Process
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Management Review and Exception Reporting
Appendix 2 - Staff Interviewed
We would like to thank all staff within the GLA that provided assistance during the course of this audit, and in particular:
Frances Nguene – Chief Accountant
Meriton Krasniqi – Finance Manager, Systems and Exchequer
Patrick Alleyne – Senior Human Resources Manager
Siobhan Fennell – Assistant Human Resources Officer
Statement of Responsibility
We take responsibility for this report, which is prepared on the basis of the limitations set out below.
The matters raised in this report are only those, which came to our attention during the course of our internal audit work and are not necessarily a comprehensive statement of all the weaknesses that exist or all improvements that might be made. Recommendations for improvements should be assessed by you for their full impact before they are implemented. The performance of internal audit work is not and should not be taken as a substitute for management’s responsibilities for the application of sound management practices. We emphasise that the responsibility for a sound system of internal controls and the prevention and detection of fraud and other irregularities rests with management and work performed by internal audit should not be relied upon to identify all strengths and weaknesses in internal controls, nor relied upon to identify all circumstances of fraud or irregularity. Auditors, in conducting their work, are required to have regards to the possibility of fraud or irregularities. Even sound systems of internal control can only provide reasonable and not absolute assurance and may not be proof against collusive fraud. Internal audit procedures are designed to focus on areas as identified by management as being of greatest risk and significance and as such we rely on management to provide us full access to their accounting records and transactions for the purposes of our audit work and to ensure the authenticity of these documents. Effective and timely implementation of our recommendations by management is important for the maintenance of a reliable internal control system.
Deloitte & Touche Public Sector Internal Audit Limited
St Albans
June 2008
In this document references to Deloitte are references to Deloitte & Touche Public Sector Internal Audit Limited.
Deloitte & Touche Public Sector Internal Audit Limited is a subsidiary of Deloitte & Touche LLP, which is the United Kingdom member firm of Deloitte Touche Tohmatsu. Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither Deloitte Touche Tohmatsu nor any of it member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.
©2008 Deloitte & Touche Public Sector Internal Audit Limited. All rights reserved.
Deloitte & Touche Public Sector Internal Audit Limited is registered in England and Wales with registered number 4585162. Registered office: Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom.
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