How To Lose $17 Million

Katy Grimes: The case of the missing payroll money would be an easy scheme if it was not true.

“$17 million that Sacramento County entrusted to a payroll services company is missing,” according to a report in The Sacramento Bee over the weekend.

Apparently, Ingentra HR Services has not kept up with tax payments to the IRS, and it only came to light when county officials recently learned they owe at least $17 million to the federal government, according to the Bee story.

I worked as a Human Resource manager for twenty years, and was intimately involved in the payroll process as well as HR management and labor law –responsible HR managers have to be.

This latest episode of government mismanagement and gross negligence is… well… gross negligence. At a time when nearly every county government in the state is operating at a deficit, and government employees are being scrutinized for exorbitant salaries and outlandish dream benefits, county supervisors should be demanding internal and external audits to prevent this type of waste.

Sacramento County decided in 2004 to contract out payroll services, something they had always performed in-house with county HR employees.

Apparently, no one thought to do a background check on the company that would be handling payroll up to $8 million a week, for “76 special districts, county elected officials and some contractors,” nor did the county ever revisit or audit their payroll contractor.

The Bee reported that Ingentra’s legal troubles date back to 2005 when the company bought another payroll processing company, which was already in debt.

County officials plead ignorance saying they didn’t know they could track IRS payments to make sure payments were being made on their behalf. The Bee reported, “The suits allege that Ingentra operated similar to a Ponzi scheme. The company took money intended for tax payments and put it into a bank account. When a tax bill came due and there wasn’t enough to cover the cost, according to allegations in the lawsuits, the company would take money deposited by a new customer and use those funds to cover another customer’s tax bill.

Either the county’s Human Resource management are total boneheads or they were just grossly negligent – or both.

In my HR management roll, I reviewed every payroll before it was sent to the payroll processing company, and audited every payroll after processing to make sure that taxes were paid, garnishment checks went to the proper agencies, and sales commissions were paid properly. And while we were only a company of 250 employees and not 76 special districts, frequent audits were a mandatory process.

Sacramento County reported that they decided to outsource payroll processing in order to save money. Outsourcing means that a company no longer needs the employees who used to perform the job. But did the county terminate the payroll departments or just reassign all of the county employees? If the county did not cut the payroll jobs, there was no money saved, and instead, the county added a very large expense by outsourcing the payroll.

Human Resource outsourcing became a big business in the late 1990’s, when California labor laws were fast becoming a legal nightmare for employers. HR contractors offered all types of package deals to employers to “save money,” by offering to take over all hiring and termination procedures, manage benefits including health insurance and even 401(k) contributions, payroll, workers compensation, safety training, and even manager and employee training for legal compliance.

But the real problem is that even with contracting out the mundane and time-consuming data entry and processing for payroll and HR, a company is still legally responsible for compliance, taxes, and all legal and labor law procedures. The only way to do this is with frequent audits of each of the HR areas and payroll.

Obviously Sacramento County did not conduct audits. If they had, they would have quickly caught the payroll scheme.

Heads should roll. Managers should be fired. What the county Supervisors does about the very expensive scheme remains to be seen, and will speak volumes about their worth to Sacramento.

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