Payroll system conversion horror story

Converting their payroll system has resulted in some serious errors to the tune of greater than $1.5 million for the Fort Worth (Texas) school district.

The school district overpaid employees and former employees at least $1.54 million, according to the [internal] audit. It also found that the district’s payroll system lacked proper controls, was cumbersome and inconsistent, and included manual paper entries that led to human error.

Aside from the poor conversion, it doesn’t sound like the new system is all that great if it requires manual entries. I’m assuming the entries are needed because the payroll system doesn’t interface with their general ledger system. Additional review controls over the process between systems is required in that case.

Some trustees are seeking an independent audit of the problems to get more assurance that fraud wasn’t a factor and that all the issues have been resolved.

[Trustee Christene] Moss said she wasn’t comfortable with parts of the report in which the [internal] auditors could not determine why various issues happened.

Yeah, I’d be concerned about that too! As well, the auditors aren’t certain that all the overpayments have been identified and fixed. I think these are the main reasons why an independent audit is needed. The situation calls for a specific engagement looking at the system conversion process and subsequent issues.

Board President Ray Dickerson reiterated that he didn’t think there was a need for a costly external audit. He said controls will be put in place.


Dickerson said the problems that were found are typical in such a transition.

“No matter how well you plan and train, once you flip that switch, you’re going to find things you didn’t know,” he said.

Uh, not really dude! And certainly not $1.5 million worth of “things you didn’t know” (on a monthly average payroll of $41 million)!

As a not inconsequential footnote, the conversion to a new system was required because the old system’s vendor was no longer going to be supporting it. A quick search for “open source payroll software” turns up many options which will prevent vendor lock-in in the future.

Update: Another story, this one in the Fort Worth Weekly, has more details about the internal audit’s findings and the attempts by the district to have some former employees repay the erroneous amounts.


Audit committees recognize IT risks should be a focus

Dan Meyer at Tick Marks has brought my attention to a KPMG survey that reports audit committees are becoming more concerned about IT risks on financial reporting.

90% believed that IT oversight deserved more time at audit committee meetings. By constrast, 80% of committee members were satisfied with audit committee oversight of management judgments and estimates and 60% felt that committees were spending sufficient time on these issues.

Good to see audit committees are looking into this area with greater scrutiny. IT is often an area where firms of all sizes could benefit from increased focus and constantly thinking of ways to improve their controls and processes.

But what about the 20% that is satisfied with audit committee oversight of management judgments and estimates, but do not believe sufficient time is being spent on the issue? How can you feel an area needs more time and yet be satisfied with the oversight? This is why looking at surveys is fun.

“The ACI survey findings demonstrate a huge gap between the importance that audit committees place on IT risk and how much time they spend focused on it during their already busy meetings,” Smith said. “Since audit committees generally have only basic IT experience, there may be a reluctance to invite chief information officers and chief technology officers to their meetings, in part, because there is a lack of common vocabulary.”

Audit committees need to have at least one member who has a high level of knowledge in IT as it relates to financial reporting. There is no excuse for lacking someone with a good grasp on the IT risks the organization faces. And CIOs and CTOs aren’t enough – CFOs need to have a more than basic understanding, and even lower down in the accounting department.

I’m really pleased that the CICA has been so proactive towards training CAs on this topic. IT is one of the six topics covered in the professional exam process. (The others are audit/assurance, performance measurement, tax, finance, and organizational effectiveness, control and risk management.) Clearly there is some overlap between the last competency and IT.

An in-depth discussion of the six CA competencies is published by the Institute and available here (pdf).


Hollinger audit committee had “no finance experts”

The Conrad Black trial has been good theatre, and the latest coming out of Chicago doesn’t disappoint.

Testifying at the trial of former Hollinger chairman Conrad Black, a former member of the company’s audit committee has testified that it kept watch over company finances for four years without any financial experts.

Economist Marie-Josee Kravis, sat on the committee during the time that Black allegedly helped steal $60m (£30m) from the company.

She said that no one on the audit committee between May 1999 and May 2003 had the financial experience required by its governing charter.

Kravis is referring in part (I’m assuming) to the best practices of an audit committee as outlined by the AICPA, which stipulate at least one member of the audit committee be designated a financial expert. The decision tree to determine whether a member qualifies as a financial expert can be found here (PDF).

Basically a financial expert is someone who is an accountant or auditor, has taken an accounting or auditing program or course, has experience in auditing or as a controller or financial officer of a company, has experience assessing a company’s financial statements, or has experience supervising the accounting function in a company.

On top of that, they must be familiar with GAAP, the function of an audit committee, internal controls, and how those apply to the company in question.

My question is: Why would you want anyone who doesn’t meet those standards on the audit committee?


Apple’s “select” listing on the Nasdaq in jeopardy

Apple logoApple has informed investors that due to the ongoing investigation into their options backdating problems, they may be removed from the Nasdaq‘s special “Global Select Market.” How select, you may ask? Well, a mere 1/3 of companies listed on the Nasdaq are privileged enough to make the cut.

Wait, was that a typo? One-third of companies on the entire exchange are “select?” Kind of redefines the word now doesn’t it? According to the Times Online story:

Membership confers an extra degree of respectability on a company’s accounting and corporate governance procedures and, accordingly, gives investors an increased level of confidence.

Given all the tech companies that are having options troubles lately and the concentration of tech companies listed on the Nasdaq in general, this may not be the last one we hear with their “selectness” up in the air. Heck, Activision‘s on it and they just filed a non-reliance 8K for the past 15 year’s financials last week! More details:

Apple acknowledged in December that it had falsified records to show that a board meeting was held to approve the move when no such meeting took place. Apple also said that Mr Jobs was not aware of accounting implications of backdating and that he returned the options so that he would not benefit from the practice.

Fair enough. He’s not an accountant, after all. But was Mr Jobs unaware of the implications of falsifying records as well? Or is legitimate corporate record-keeping now… obsolete?


Apple brings in new director: Google’s CEO

It has been announced recently that Dr. Eric Schmidt, currently the CEO of Google, is joining Apple’s Board of Directors. Boards are responsible for overseeing management, protecting shareholder interests and overall strategy.

The move has been hailed as a signal of future partnership between Google and Apple in their joint fights against Microsoft. I have to admit it basically looks that way to me too. I would even go so far as to say a Google-Apple alliance poses the biggest threat to Microsoft’s continued dominance on the desktop, ever.

I’ve always wondered why some Boards have an even number of members, what with the possibility of vote tying. They must have some other method of resolving those situations when they inevitably crop up.

Steve Jobs is obviously an exception to most rules, but it’s rare to see someone in management on the Board in a public company, because of the inherent conflict of interest. I think Jobs is invested in Apple long-term though, so that’s no doubt why he gets away with it.