Identifying "Holes" in Your Timekeeping System

Throughout the eight + years of this blog's life, we've discussed, in various fashions, the critical importance of timekeeping systems as well as contract auditors' floorchecks and labor interviews used to test the adequacy of those systems. An adequate timekeeping system is perhaps the most important system of internal controls for a contractor with cost-type contracts. One could argue that an accounting system is more important but an accounting system can be recreated whereas a timekeeping system which captures employee time charges contemporaneously with the work performed, cannot be accurately recreated.

The first thing a contract auditor needs to do when performing floorchecks and other timekeeping reviews is to develop an understanding of the system as it currently exists. To do this, contract auditors will gather a lot of information. This data gathering phase helps them to establish their audit scope; obviously, more robust controls will require less transaction testing. This series of "determinations" include the following:

1. Determine how attendance is controlled; through electronic systems, clock cards, timecards, or other suitable time and attendance records.

2. Identify the process for controlling employee time records at each timekeeping station or the electronic timekeeping input and related records. Electronic timekeeping should include procedures to ensure that employees do not share their access credentials.

3. Determine the procedures for notifying the employee of the assigned job number and whether the procedures provide that all changes are properly initialed/approved by the employee and the designated approving supervisor. This is extremely important to ensure that labor charges get tot he proper cost objective.

4. Determine whether hours shown on the timecards or input electronically are reconciled periodically with hours recorded on attendance and payroll records. Many contractors fail to include this reconciliation.

5. Determine whether there is a division of responsibility within the company between personnel responsible for the preparation and or approval of time and attendance records and those responsible for the preparation and distribution of payroll.

6. Determine whether there is a division of responsibility between personnel having a part in the preparation and/or approval of time and attendance records and those responsible for operating within budgets. If a division of responsibility does not exist, the risk increases for affecting payroll in proportion to the number of personnel the employee/manager can influence.

7. Determine whether procedures have been established for coding and recording idle time. The Government will insist that idle time be prorated among all work.

8. Determine whether records of piece work and work performed under wage incentive plans are checked and controlled independently from production counts, approvals for allowances, and other operations.

At this point, the contract auditor is only gathering information and not making any assessments as to the adequacy and sufficiency of a timekeeping system. That comes later in the audit. Contractors can use this listing however to identify where weaknesses might exist in their own timekeeping system.