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Home My WebLink About15.b. Receive Internal Audit Report: Payroll Operational Audit Page 1 of 9 Item 15.b. CENTRALSAN jdf A- hom CENTRAL CONTRA COSTA SANITARY DISTRICT December 1, 2022 TO: HONORABLE BOARD OF DIRECTORS FROM: BENJAMIN JOHNSON, INTERNALAUDITOR REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER SUBJECT: RECEIVE PAYROLL OPERATIONAL INTERNALAUDIT REPORT Enclosed is the Fiscal Year(FY) 2021-22 Payroll Operational Audit Final Report. In calendar year 2021, Internal Audit performed a design-only review of the payroll process, taking a detailed look at the design of internal controls. The audit report attached summarizes the results of phase two of this effort, which focused on the accuracy and timeliness of payroll transactions, and the operating effectiveness of the internal controls surrounding the payroll process. There will be regular follow-up to discuss remediation efforts and send reminders, as needed. Strategic Plan re-In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3- Maintain financial stability and sustainability ATTACHMENTS: 1. Presentation 2. FY 2021-22 Payroll Operational Audit Final Report December 1, 2022 Regular Board Meeting Agenda Packet- Page 134 of 157 Page 2 of 9 Attachment 1 December 1,2022 i FY 2021-22 Payroll 400 Operational • Audit Report " Board Meeting -- — - Benjamin Johnson Internal Auditor 1 Payroll Operational Audit Report Final report issued 11/01/22 Background 1 Since our initial review of this process last year, Human Resources(HR) and Finance have made significant efforts to enhance the internal controls surrounding the payroll process and further reduce payroll- related errors. Management is aware that system and manual errors continue to affect payroll payment accuracy and timing.Although error rates have decreased since the rollout of Oracle's payroll module, _. there remains an important need to automate key processes to further enhance accuracy and oversight. — _ — 2 December 1, 2022 Regular Board Meeting Agenda Packet- Page 135 of 157 1 Page 3 of 9 Attachment 1 Payroll Operational Audit Report Final report issued 11/01/22 Audit Objective J The objectives of this engagement were to assess the accuracy and timeliness of transactions and the operating effectiveness of internal controls surrounding the payroll process. r� Audit Scope '$ 1 Internal Audit reviewed payroll transactions for accuracy and 1 timeliness, and assessed the payroll process to verify that internal controls met organizational objectives and addressed key risks. 3 Payroll Operational Audit Report Final report issued 11/01/22 Audit Scope (Continued) ? The following Q4 FY 2021-22 payroll subprocesses were reviewed: - Policies and procedures Hires/additions Terminations/deletions Payroll processing W Salary adjustments Live checks Direct deposit GL reconciliations 4 December 1, 2022 Regular Board Meeting Agenda Packet- Page 136 of 157 2 Page 4 of 9 Attachment 1 Payroll Operational Audit Report Final report issued 11/01/22 Audit Scope(Continued) Key audit methods used while performing fieldwork testing: s 4. Selected 20 pay stub samples from regular payroll periods and tested for payment amount accuracy and timeliness,focusing on the following: Base salary Regular pay Telework regular pay _ _Holiday pay '{r Administration leave earnings Overtime earnings s Sick plan earnings . Vacation plan earnings Federal exemptions State exemptions MEWO Selected and tested samples of the subprocesses identified in the scope for accuracy,timeliness,and - internal control effectiveness :v. 5 Payroll Operational Audit Report Final report issued 11/01/22 Audit Results While there is only one formal finding,the need for continued improvement is recognized by staff, and includes items such as: Closing out remaining tickets for system fixes with the Oracle system implementer Continued documentation of procedures Continued training and development of back-up staff Automation of some calculations performed outside the system, including excess holiday compensation One finding reported Inaccurate off-cycle payments related to excess holiday compensation (Moderate Risk) 6 December 1, 2022 Regular Board Meeting Agenda Packet- Page 137 of 157 3 Page 5 of 9 Attachment 1 Payroll Operational Audit Report Final report issued 11/01/22 Next Steps Internal Audit will continue to follow-up with open finding owners via: Quarterly meetings with executive management and managers that have audit findings with approaching due dates as an opportunity for remediation updates and open dialogue Email reminders sent out to appropriate management and executive management three weeks before each finding component is due Meetings with finding owners to provide additional clarification,as needed Internal Audit will continue to work closely with the Human Resources and Finance Departments as an independent resource 10ftm 91,9A 7 December 1, 2022 Regular Board Meeting Agenda Packet- Page 138 of 157 4 Page 6 of 9 Attachment 2 C ENTRAL SAN CENTRAL CONTRA COSTA SANITARY r PLACE, MARTINEZ, CA 94553-4392 INTERNAL AUDIT REPORT DATE: November 1, 2022 TO: Teji O'Malley, Human Resources and Organizational Development Manager Kevin Mizuno, Finance Manager FROM: Benjamin Johnson, Internal Auditor SUBJECT: FISCAL YEAR (FY) 2021-22 PAYROLL OPERATIONAL AUDIT FINAL REPORT Enclosed is the Fiscal Year (FY) 2021-22 Payroll Operational Audit Final Report. In calendar year 2021, Internal Audit performed a design-only review of the payroll process, taking a detailed look at the design of internal controls. The audit report attached summarizes the results of phase two of this effort, which focused on the accuracy and timeliness of payroll transactions, and the operating effectiveness of the internal controls surrounding the payroll process. The actions taken and/or planned are responsive to the observations in the report. There will be regular follow-up to discuss remediation efforts and send reminders, as needed. Internal Audit would like to thank management for their partnership during the length of this project. If you have any questions, please contact me at (925) 229-7120. Benjamin Johnson Internal Auditor Enclosure cc: Roger S. Bailey, General Manager Philip Leiber, Director of Finance and Administration December 1, 2022 Regular Board Meeting Agenda Packet- Page 139 of 157 Page 7 of 9 Attachment 2 FISCAL YEAR (FY) 2021-22 PAYROLL OPERATIONAL AUDIT FINAL REPORT DATE: November 1, 2022 INTRODUCTION Audit Objective The objectives of this engagement were to assess the accuracy and timeliness of transactions and the operating effectiveness of internal controls surrounding the payroll process. Background The payroll function was transferred from Finance to the Human Resources (HR) Division in October 2017, although Finance still owns a few related processes. In FY 2020-21, Central San migrated most of its operational processes from SunGard to the Oracle Fusion Cloud (Oracle). In partnership with a third-party implementation resource and the Information Technology(IT) Division,the Oracle payroll module went live in January 2021. As part of the FY 2020-21 Audit Plan, Internal Audit performed a design-only review of the internal controls surrounding the payroll process, which resulted in several findings and recommendations. Since our initial review, Human Resources (HR) and Finance have made significant efforts to enhance the internal controls surrounding the payroll process and further reduce payroll- related errors. Management is aware that system and manual errors continue to affect payroll payment accuracy and timing.Although error rates have decreased since the rollout of Oracle's payroll module,there remains an important need to automate key processes to further enhance accuracy and oversight. Increased automation will be critical to the business needs of the payroll and finance functions moving forward as Central San continues to evolve to better serve its customers and personnel. Central San's actual salaries, wages and employee benefits net of capitalized overhead and benefits for FY 2020-21 are: Total as of Expense Category 6/30/21 Salaries &Wages $39,742,679 FO nefits& Capital Overhead Credit 13,186,374 EB UAAL 1,260,000 Retirement UAAL/Unfunded Liabilities 99,044 Additional UAAL Contributions 7 1,250,000 Total Labor Related Costs including UAAL and Additional Contributions 55,538,097 Source: Central San's Quarterly Financial Report for 6130122 FY 2021-22 Payroll Operational Audit Final Report 2 December 1, 2022 Regular Board Meeting Agenda Packet- Page 140 of 157 Page 8 of 9 Attachment 2 Audit Scope, Internal Audit reviewed payroll transactions for accuracy and timeliness, and Limitations, and assessed the payroll process to verify that internal controls met organizational Methodology objectives and addressed key risks,with a focus on the following Q4 FY 2021-22 activity: • Policies and procedures • Salary adjustments • Hires/additions • Live checks • Terminations/deletions • Direct deposit • Payroll processing • GL reconciliations The audit was performed using the following methods: • Reviewed available policies, guidelines, and procedures • Interviewed team members and performed process walkthroughs • Assessed the reasonableness of the processes within the scope of the audit • Selected 20 pay stub samples from regular payroll periods and tested for payment amount accuracy and timeliness, focusing on the following: a. Base salary b. Regular pay c. Telework regular pay d. Holiday pay e. Administration leave earnings f. Overtime earnings g. Sick plan earnings h. Vacation plan earnings i. Federal exemptions j. State exemptions • Selected and tested samples of the subprocesses identified in the scope for accuracy,timeliness, and internal control effectiveness • Reported on audit results and discussed recommendations INTERNAL AUDIT RESULTS Summary Based on Internal Audit's detailed transactional testing, and assessment of the operating effectiveness of internal controls surrounding the payroll process,the need for continued improvement exists to further minimize risk to the organization. While there is only one formal finding(below), the need for continued improvement is recognized by staff, and includes items such as (1) closing out remaining tickets for system fixes with the Oracle system implementer; (2) continued documentation of procedures; (3) continued training and development of back-up staff, and; (4) automation of some calculations performed outside the system, including excess holiday compensation, as noted below. As management continues to enhance the payroll process, Internal Audit will continue to work closely with the Human Resources and Finance Departments as an independent resource. FY 2021-22 Payroll Operational Audit Final Report 3 December 1, 2022 Regular Board Meeting Agenda Packet- Page 141 of 157 Page 9 of 9 Attachment 2 As a result of this audit, Internal Audit documented a single finding surrounding inaccurate off-cycle payments made for excess holiday compensation. The risk each finding presents to the organization is weighted using the following system: • 1—High Risk • 2—Moderate Risk • 3—Low Risk Finding 1: Inaccurate off-cycle payments related to excess holiday compensation 2—Moderate Risk In June 2022, excess holiday compensation time earned for seven District employees was manually calculated and processed as off-cycle payments. "Off-cycle" refers to a manual calculation performed and processed in the system after normal payroll processing. Although payments of this nature are quite common, Oracle has not successfully implemented an automated process to calculate and issue payments of this type. Due to the manual nature of this payment process, four of the seven employees were erroneously issued duplicate longevity payments on June 13, 2022. Management reports that on June 24, 2022,the duplicate payments were reversed as part of the regular payroll payments for that subsequent period. Recommendation: Internal Audit recommends that Human Resources automate the off-cycle excess holiday compensation calculation and payment processes to further reduce the risk of human error and process payments timely. Management's Response/Action Plan: Management agrees with this finding and is in the process of automating the cash-out of excess holiday compensation time. Target Date: 12/31/2022 Responsible Owner:Teji O'Malley, HR and OD Manager Internal Audit's Response: Management's action plan and target date appear reasonable given the level of risk associated with the finding and the remediation progress made prior to the issuance of this report. FY 2021-22 Payroll Operational Audit Final Report 4 December 1, 2022 Regular Board Meeting Agenda Packet- Page 142 of 157