Cookridge_Carpets

A review of the payroll system Analysis of the Accounting Systems at Cookridge Carpets Southampton Name: AAT: Centre: Word Count: 4604 Student: Date:09 /04/13 Contents Section Page 1. Terms of reference 2 2. Methodology 3 3. Executive Summary 3 4. Introduction 4 5. Review of the accounting system 7 6. Recommendations 10 7. Cost Benefit Analysis 11 Appendix 1 14 Appendix 2 15 Appendix 3 16 Appendix 4 17 Appendix 5 18  1. Terms of Reference 1.1 This report has been prepared to cover the requirements of the internal control and accounting systems unit of the AAT 4. 1.2 The objective of this report is to analysis the accounting function of Cookridge Carpets and to identify any weakness, and then to make recommendations for improvement. 2 Methodology 2.1 The day to day transactions were monitored in the accounts department and it was observed for a period of six months. 2.2 The Six month diary of event was reviewed. 2.3 The current policies and procedures were analysed in detail to make recommendations for appropriate changes. 2.4 Researched various sites on the internet, along with help from my current employer please see appendices, bibliography. 3 Executive Summary 3.1 After a review of the accounts department in particular the payroll system, a number of weaknesses were highlighted that need to be addressed. A detailed explanation of each individual problem is shown in the report. 3.2 Main areas of concern shown in the report are: - Petty cash tin with free access to all employees. - There is only one staff member trained on sage payroll system - There is a weak system setup with regard to the weekly wages for the sales staff. - There are no proper guidelines for safeguarding of the pay packets in the safe. It can be accessed by anybody on the accounts floor - The wages clerk who calculates the wages also prepares the cheque for the amount of cash to be withdrawn from the bank. There is a high risk of fraud here, hence an overpayment can be made or fictitious employees can be created. - The same password is used on all the computers throughout the company. - There is no back up taken, hence is case of a power failure there can be loss of information. - Non-integrated accounting system for sales ledger and purchase ledger, stock control. 3.3 Main recommendations shown in the report are: - Petty cash should be signed with receipts. - Training of one other staff member on sage payroll will ensure that there is no disruption to the weekly wages being paid on time when the wage clerk is on leave or is unable to work any extra hours. - A robust procedure should be in place for checking and authorising rotas before passing it onto wage clerk. This is to ensure that all sales staff is paid for the actual hours worked and eliminate any underpayment or overpayment of wages. - The safe should be locked at all times and only wages clerk or the supervisor should have the key to it. - The wages clerk should not approve the cheque payments. Instead supervisor should check the wages calculated by the wages clerk and then approve the cheque for the authorisation. - An individual user should be able to change the password which should be linked to the individual log in. Hence each employee should be able to have a unique password of his or her own choice and that can be kept confidential. - All the computers should be joined in a network and data backing up should be done on daily basis. - An integrated accounting system Sage 50 should be introduced to prepare accounts. 3.4 Based on all the recommendations being implemented, the initial cost savings will be approximately £13800 in the first year. This will be an on-going benefit. (see appendix 4) 4 Introduction 4.1 Cookridge Carpets Ltd. is a family run business and they are a large carpet, soft furnishings and bed dealership in Southampton. It is owned by two brothers Peter and John Cookridge. 4.2 In terms of Cookridge Carpets, the main stakeholders are the customers who directly make purchases from their showroom or buy their products over the internet. The employees are also the stakeholders as they are responsible for the sale of carpets and beds. Other stakeholders are the suppliers, lenders and the accounting bodies themselves. 4.3 The company was set up in the year 2007 however in February 2010 Cookridge Carpets became the main dealers for Memo beds in Southampton. The business not only generates revenue through the direct sales but have also been very successful in selling carpets and beds over the internet. 4.4 The company employees twenty members of staff: (see appendix 1) - 9 Direct sales staff - 3 Internals sales staff - 2 Cleaners - 2 Carpet delivery drivers - 1 Accessories sales person - 3 Part time staff in Accounts Department. 4.4.1 The Accounts Department is further segregated into three key areas with each being responsible for a different section of accounts; Wages Clerk, Accounts Receivable Clerk and Accounts Payable Clerk. (see appendix 2) 4.5 The company uses sage payroll, accounting software for employee payroll purposes. The inventory (stock) information is maintained on Microsoft word and is used for invoice purposes. 4.6 The company produces financial statements as defined by their company status. The statements are governed by the Companies Act 2006, International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). 4.7 The company also produces the following financial statement: 4.7.1 Income statement is prepared to reflect overall revenues and expenses for the company. It summarises revenue generated from each of the products sold by the company. 4.7.2 They also annually produce a statement of financial position to show a snapshot of assets and liabilities of the company. These assets and liabilities are further separated into current and non-current and equity sections of the statement details, the amount available to the company owners. 4.7.3 In accordance with IAS 7 cash flow statement is produced. This shows the liquidity of the business and examines where cash has originated from and where it was it distributed to. It also reconciles the profits for the business. 4.7.4 The company currently does not have an Employee hand book, this Hand Book should contain all the company procedures relating to Health and Safety, Data protection etc. The hand book should be issued to all staff and they should sign to say they have read and understood its content, and also that they will work to the regulations and procedures contained in it. 4.7.5 Changes to any regulations should be communicated to all staff and they should sign to say they have received the amendment and also that they have read and understand its content. The amendments should be filed in each individuals Employee handbook, and the Employee handbook should be updated. The companies’ policies and procedures should also be updated to reflect any changes to regulations. 5 Review Of The accounting System 5.1 In an ideal system the Payroll system should robust and free from fraud. The system should be fully integrated into the IT systems within the organisation, and staff suitably trained to operate that system. There should be some form of “ clocking system “ to ensure pay is set against actual time worked, and any bonus or commission payments should be linked to the actual sale to allow clear traceability. In addition there would be a designated person in charge of petty cash with all requests signed for along with the reason and receipts provided. 5.1.1 After an investigation of the accounts department, it was concluded that there was sufficient control in most of the areas however the following weaknesses and frauds were identified within the payroll function: 5.1.2 A notebook is inside for persons taking money out to explain what the money was used for. Unfortunately, cash is taken out of the tin without explanation , whilst this a medium impact on the company, without improved control of the petty cash the opportunity for theft or fraud is obvious. 5.2 Lack of training on sage payroll: 5.2.1 Currently only the wages clerk is trained to use sage payroll software. She works only two days a week. In her absence there is no one who can prepare weekly wages. This requires the wages to be made up in advance and payment of overtime and commissions can be delayed or paid in advance. The impact of paying commissions or overtime in advance, is it can impact on the cash flow of the business. In addition payments made in error can take time to recover from the staff who have been overpaid again affecting cash flow, also it could have an effect on the moral of the person having to pay back. It is also possible that mistakes may not be noticed and this could result in money that has not been earned being paid. 5.2.2 Also if ever any overtime is required then the wages clerk requires a minimum of a week’s notice. Hence when there is extra workload no other member of staff was able to assist in completing the task and there is a possibility of some jobs not being completed within the desired timeframe. If employees do not receive their payments on time this may affect their Moral, also the additional workload and pressure to complete in the desired timeframe can result in mistakes being made which may not be noticed or if they are noticed will take time and resource to correct. 5.3 Manual calculation of wages due to the employees: 5.3.1 The wages clerk prepares the weekly wages information from the rotas provided and manually calculates any overtime hours worked by the staff. This can be a very time consuming process. 5.3.2 Also there is scope for making an error while calculating the wages manually. As her work is not being checked by any supervisor, thus any errors made in calculation can go unnoticed. This can lead to either an employee being overpaid or underpaid in their wages. 5.4 Pay packets are not secure: 5.4.1 In the current situation once the pay packets are prepared they are stored away in the office safe for the showroom manager to collect the next day for handing over to the sales and office staff. The safe in the office is not locked at all times. Also anybody can open the safe and access the pay packets from it. Thus the overall risk of money being stolen or misplaced is high. 5.4.2 It also appears that there is a lack of accountability as no reconciliations are carried out confirming that what was prepared by wages clerk is being handed over to the showroom manager. Therefore if any money is missing then it will be very difficult to hold any individual responsible. 5.4.3 When the pay packets are handed over to the employees, a proper sign off should be taken. Also the pay packets should only be given to the employee and not to any other individual on their behalf. The current system does not require a signature and there is no formal method of ensuring pay packets reach the correct staff. The impact of this weakness is pay packets could go missing or be stolen and Cook Ridge may have to pay an employee “ twice “. 5.5 Supervisor approval is not obtained: 5.5.1 The wages clerk is solely responsible for the calculation of the wages for the sales and office staff. As a result there is a high risk of her committing fraud by making overpayments to some of the employees or by creating ghost employees. 5.5.2 Also the wages clerk prepares the cheques for the cash withdrawal from the bank which is then authorised by the company owners. Because there is no one checking her work or authorising whatever she is calculating, hence she has an opportunity here to withdraw more cash from the bank for her personal use. This can impact on the company by removing funds that are required to operate the business this could ultimately result in losses for the company or in an extreme situation result in bankruptcy. 5.5.3 The fact that the internal controls in this function are extremely weak highlights that the fraud is at a higher risk. (see appendix 3) 5.6 Lack of timesheets: 5.6.1 The company owners have trusted their employees completely and have no system in place for the staff to sign in or sign out. Neither do the employees maintain time sheets. As a result the sales or office staff can show more hours worked. Due to the lack of the time sheets being prepared there is no check with the actual hours worked against the rotas. The potential impact on the company is that they pay staff for hours they have not worked, and if staff are not working the correct hours, the work that should be completed in this time, but is not may result in additional hours ( overtime ) being worked to allow it to be completed. There is also an issue if salesmen are not working the full hours to service potential customers then the company can lose sales. 5.7 Computers are on stand-alone basis: 5.7.1 The computers used by the wage clerk are run on the stand-alone basis and they all share the same password. This is a high security risk as anybody can access any info on the computers and make changes to it without having an audit trail. If people are allowed access to the computers that control payroll etc. then it is possible that they could fraudulently adjust their payments or that of their colleagues. (see appendix 3) 5.7.2 Also there is no contingency plan in case of a power failure etc. Hence there is a scope of loss of data. This loss of data could take a long time to replace or it may not be possible to replace it at all. The impact on the company of this lack of contingency could result in sensitive data being lost. This could result in losing problems with customers and also staff. Failure to control sensitive data may result in the company being fined under the data protection act or even potentially being sued.(see appendix 3) 5.8 Non-integrated accounting system. 5.8.1 Currently Cookridge Carpet is using Excel to record sales and purchases. All suppliers are paid by cheque if funds are available at the end of the month, this is leading to inadequate purchase ledger control and an ineffective sales system is resulting in customers not paying their accounts on time. They are also using Excel for stock control. This is leading to inaccurate stock recording and ordering. In return this is affecting sales and profitability as changes can’t be tracked and potential more errors can be made. It’s recommended that Sage 50 should be introduced as an integrated accounting system.(see appendix 3). 5.9 Lack of control to petty cash. 5.9.1 The petty cash of £100 is drawn from the bank on a monthly basis and simply placed in a tin near the drink facilities so all staff have easy access. This presents a high potential risk of theft as anyone can take the money without getting any notice. The current system is not reconciled and people do not provide receipts.(see appendix 3) 6 Recommendations 6.1 The following recommendations are made to address the issues that have been highlighted in the payroll system. These recommendations have a minimal cost involved however the benefit is to prevent it from any scope of fraud. 6.2 Lack of training on sage payroll: 6.2.1 The knowledge of using sage payroll should not be limited to the wage clerk only. Accounts receivable clerk should also be trained on using Sage Payroll. A self-study CD from sage can be used to impart knowledge of using Sage Payroll. This can be completed in approximately 12 hours or a two day classroom training course can be attended. 6.2.2 If the wages clerk is absent then somebody will be available to cover her duties. When there is a requirement of any overtime she is unable to do any as she requires a minimum of one week’s notice to work any extra hours. Therefore if such a situation arises then the account receivable clerk can cover for the extra hours needed. 6.3 Manual calculation of the wages 6.3.1 The wages clerk manually calculates the wages of the sales and office staff based on the rotas provided to her on weekly basis. Instead of following this time consuming process she can use sage payroll for processing all the information and calculating all the wages that are due. This would also be time effective and would minimise any scope of making an error while doing a manual calculation. Also this way there will be optimum utilisation of the software. 6.3.2 A supervisor must check her work and do a check between the wages being calculated and the pay packets. This would eliminate any scope for errors being made while calculating the wages. Also there would be a little chance of an employee being over paid or underpaid. 6.4 Pay packets are not secure 6.4.1 The pay packets that are prepared should not be placed in a safe that can be accessed by anyone. Instead a new safe should be purchased and should be locked at all times. Only the account receivable clerk should hold a spare key in case of an emergency. This would prevent the cash from being stolen or lost. 6.4.2 It is necessary for the showroom manager to count and check each and every pay packet. Also he must reconcile that he has been handed over the right number of pay packets as prepared by the wages clerk. Hence there should be a sign off sheet confirming what wages clerk has prepared, is what is being received by the showroom manager for the distribution to the office and sales staff. 6.4.3 The pay packets should be only given to the employee whose wages are enclosed in it and sign off should be taken from them confirming the receipt of the wages and the amount received. The wages should not be given to any relatives or friends. If the wages are given to somebody else then the employee can deny that they received their wages. This can result in making another payment to the employee and company might not be able to recover their money. 6.5 Supervisor approval required 6.5.1 The showroom manager should tally and authorise the information used by wage’s clerk for preparing the weekly salaries against the completed rotas confirming the hours worked and paid are correct. Also he should check the commission being calculated on the carpet sales and paid to the staff. 6.5.2 Once the wage’s clerk has prepared the cheque for the cash withdrawal, it should then be approved by the showroom manager in order to confirm that the value mentioned on the cheque is exactly the same as the amount needed for paying weekly wages. Only then it should be passed onto the company owners for signing off. The scope of fraud can be eliminated if the preparation of cheque, approval and signing the cheque are done by three different individuals respectively. 6.6 Lack of timesheets: 6.6.1 There should be signing in and sign off register. Hence every employee should sign in and enter time of starting their shift as soon as they come to work and also sign out and enter the time of finishing their shift. Also they should maintain individual time sheets that records their expected hours of work, shift start time, shift end time and breaks that are taken. These should be handed over to the showroom manager at the end of each week, who then can tally that with the rotas and be able to prepare the accurate information for the wages clerk to pay out the weekly wages. All this information can be maintained on spread sheets that would enable a weekly calculation of wages. The showroom manager can train all the sales staff on how to fill information on the time sheets. A thirty minutes training will ensure that they all understand the process of accurately filling the timesheets. 6.7 Computers are on stand-alone basis: 6.7.1 The computers used should not be on stand-alone basis as this limits for anybody else to access the information needed. Hence if a staff member is absent then the others are unable to access the information from their computer and there can be delays in processing information. Therefore all the computers in the office should be joined in a network and each employee should have their own unique ID and password to log in. 6.7.2 A back-up system should be in place. Backing up data twice a day would prevent data loss in the event of power cut. 6.8 Non- integrated accounting systems. 6.8.1 Sage 50 should be installed on all accounts computers this will allow all purchases to be recorded. Delivery can then be confirmed and provision for payment authorised. Types of items e.g. Memo bed to be given a nominal code. By giving nominal codes, reports can be run on a weekly basis to check when payment is due. All sales including cash sales to be recorded onto Sage 50. This way sales can be allocated to sales person or categorised such as internet orders. The new version of Sage allows for stock levels to be kept on there. Each day when the previous sales are recorded, the stock level can be adjusted. New orders will only be raised in relation to demand. Credit sales can be given a different nominal code so that they can be tracked accordingly and ensure that at the end of the free credit period, they are contacted for payment. 6.9 Lack of control to petty cash. 6.9.1 cash to be kept locked in the accounts office. Petty cash receipts should be signed and then entered onto the new Sage software system. All members of accounts staff to have access and training on Sage. 6 Cost Benefit Analysis The following costs relate to the recommendations mentioned in section 6: - Integrated accounting system can be achieved by purchasing a Sage 50, the cost of Sage 50 will be £595 plus £132.5 per extra user, and £270 for a 4 days course totalling to 24 hours of training. 10% of this cost discount the service provider will install, maintain the system. Total cost for 4 users plus training and maintenance package is £1255.5 ( Note – Information obtained from Sage Website:www.sjsoftware.co.uk/Sage50Accounts ) - The training cost of an employee for sage payroll will be £175 for a two day course totalling to 12 hours of training. This can be achieved by a self-study course CD from sage. Another option is to attend a two day Sage Payroll classroom training course at a training and consultancy centre. The cost for attending a training course can be in a range of £175 to £220.( Note – Estimated cost based on local training company used by my current employer ) - A new electronic fire and water resistant safe can be purchased from an office supplies shop and will cost the company one time investment of £399. (Note – Prices obtained via E Bay ) - An IT consultancy firm can be hired for assisting in setting up all the computers on the network on a weekend. They would charge a consultation fee of £45 per hour and the networking cost will be £450. - The showroom manager should be approving and authorising wages prepared by the wages clerk. This will have a zero cost and the benefit is the prevention of employees being overpaid or underpaid. This will also minimise any scope for fraud. - Introducing a procedure for backing up data would benefit the accounting system in the case of a power cut. There would be slightly more work involved but no cost required. This can approximately save the company a day’s work which is worth £178. - Allowing the accounts receivable clerk to gain experience in Sage Payroll will result in smooth processing of wages and also improve the employee morale. Thus no overtime has to be paid to the wages clerk. This would save the company approximately another £40 a week. Appendix 1 Appendix 2 Responsibilities of Wages Clerk (Sales Ledger): - To prepare weekly and monthly payroll information. To accurately calculate all monies due (wages and commission) - To make up pay packets for the weekly paid staff and prepare BACS returns for monthly paid staff - To prepare all associated returns and documentation - Must be willing to undertake extra hours as needed Responsibilities of Accounts Receivable Clerk: - To prepare sales invoices - To manage credit accounts - To ensure that all payments are made within 90 days - To prepare monthly management information - Must be willing to undertake extra hours as needed Responsibilities of Accounts Payable Clerk (Purchase Ledger): - To check GRN and purchase invoices - To liaise with carpets, beds and soft furnishings suppliers. - To manage accounts payable accounts - To ensure that all payments are made accurately and on time - To prepare monthly management information - Must be willing to undertake extra hours as needed Appendix 3 Department Of Risk Grade Of Risk Risk Identified Consequences Payroll High - The same employee calculates and prepares cheques for wages. - Wages are not authorised by the showroom manager. - Can result in fictitious employees being paid. - Duplicate payments can be made - Over or under payment of wages to staff. Payroll Medium - The wages are being calculated manually by the wages clerk. Errors can be made which can go unnoticed. - As a result employees can be overpaid or underpaid. IT Petty cash Medium Medium - As the computers are on stand-alone basis there can be lack of accessing information. - There is a possibility of power failure and no back ups are being taken - Cash are left in a tin unlocked with free access to every one - As a result time is wasted and the continuity of work is not possible. - There is a scope for data loss or even losing a day’s worth of work. - Can result in theft. Appendix 4 (Note: The cost of Fraud is estimated and could be far higher) **IT downtime is just an estimate of loss of one day’s work in a year. However in reality it will be more than that. *** Wages clerk salary is calculated at single time for any overtime hours worked. Appendix 5 Bibliography: Sites researched included. Sage 50: www.sjsoftware.co.uk/Sage50Accounts IT consultation: http://www.rhea-solutions.co.uk/ Security Safe: http://www.thesafeshop.co.uk/contact-us. Network Systems: http://www.capitalnetworks.co.uk