Eight Ways to Improve Your Internal Controls Over Labor Charging

Almost every Government contractor with cost-type contracts has experienced or is at least aware of the possibility of "floorchecks". That's is the process where Government auditors interview contractor employees to determine whether they are familiar with and are following the contractors' timekeeping policies and procedures.

Before an auditor conducts interviews however, he/she must have a very good understanding of the timekeeping system itself and the system of internal controls necessary to ensure accurate recording of time. To accomplish this, there are eight considerations an auditor will undertake to establish whether the timekeeping, payroll, and labor distribution systems are sufficient for ensuring that the hours worked are converted to dollars and recorded against Government contracts.

These eight considerations include:

1. Determine whether employee attendance is controlled by clock cards, timecards, other suitable time and attendance records, or are input and captured electronically.
2. Identify the process for controlling employee time records at each timekeeping station or the electronic timekeeping input and related records. Employees should maintain their own timecards and if using an electronic system, should access with user identifications and passwords that are not shared.
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.
4. Determine whether hours shown on the timecards or input electronically are reconciled periodically with hours Master Document recorded on attendance and payroll records. Someone in the company needs to be assigned responsibility for 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 preparation and distribution of payroll. Ensure a proper division of responsibility exists within the payroll department.
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.
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. 

The sufficiency of these controls will greatly influence the number of interviews auditors will need to conduct in order to satisfy themselves as to the propriety of labor charged to Government contracts. Contractors will do well to implement systems to reduce the risks of improper labor charging.