Human resource departments function in both a transactional and compliance capacity. The transactional function is concerned with process documentation, records maintenance and security, payroll and recruiting and hiring employees. Responsibilities within the HR compliance function focus on ensuring the business adheres to federal and state employment and labor laws. A strong internal control system that provides accountability and encourages sound management practices is an essential component of both functions.
Environmental Importance of Control Procedures
The importance of internal control procedures within HR lies in the efficient, effective and compliance-oriented environment internal controls create. Within this environment, internal control procedures work to identify control points — a position within an HR process where an error or irregularity is likely to occur — pinpoint control point risks and then mitigate or eliminate each risk. Strong controls along with sound risk management procedures frees HR, management personnel and the business owner to focus on achieving strategic goals.
Limiting Consequences of Uncontrolled Risk
HR internal control procedures are significantly important in limiting what can be severe consequences for failing to control risk. Among the most significant potential consequences are penalties, fines and damage to the business’s reputation for failing to comply with federal and state employment and labor laws. Instances of timecard fraud, the creation of “ghost” or fake employees and identity theft can cripple a business financially and erode trust. In addition, procedures that fail to control risks often decrease both the efficiency and effectiveness not only of the HR department, but of the entire business,
Importance in Risk Reduction
Preventative HR internal controls are an important first line of defense. Preventative controls decrease the likelihood of intentional or unintentional data entry errors and discourage or deter illegal or unethical actions. Examples include error-checking capabilities in HR system software, computer security procedures that limit access to employee records, authorization procedures that require a manager to approve employee timecards before they’re submitted to HR and segregating duties in payroll procedures so that the same employee isn’t recording data and also issuing paychecks.
Detecting and Dealing with Violations
Detective controls are a second level of defense designed to identify and deal with an error or irregularity after it has occurred. Examples include audit trail procedures that trace randomly selected payroll transactions from start-to-finish, which can be created during a regularly scheduled or random payroll audit. Procedures for reporting instances of workplace or sexual harassment or actions that violate Occupational Health and Safety regulations are essential. Strong internal controls incorporate consequences ranging from coaching to a warning to immediate termination for violating HR control policies.
