Year 25 – 2012 – Vacation Leave and Sick days

 I always jump at the chance to perform analysis in non-financial areas.  Not only does this expand my knowledge of audit risks and different business processes, but it also further demonstrates the flexibility and power of analytics.  Some of the analytics I have perform include areas such as environmental control, HR – staffing, succession planning, transportation, maintenance, IT security, system conversion, control testing and risk.  Normally, there is an element of finance association to the area.  This could be: fine for non-compliance, cost to address inefficient process or outcomes, reputation or public confidence (affecting share price), etc.  However the analysis involves non-financial systems, data and processes – so I enjoy the challenge.

I was asked to take a look at a couple of focused questions that management wanted assistance with – more of a consulting engagement that an audit.  The first was the liability associated with employees carrying forward unused vacation and the second centered on both sick leave taken and the liability from accumulated sick leave.

Every employee was entitles to a certain amount of vacation credits – based on their collective agreement and years of service.  Since there were over 30 different collective agreements, managing the vacation entitlement was complex, particularly if employees changed job categories (and collective agreements).  Most agreements allowed employees to carry over unused vacations credits, but there was a maximum.  For most agreements, the maximum was one year’s worth of vacation.  This could be anywhere from 15 to 45 days depending on years of service.

As a result of some accounting changes management wanted to report the liability associated with the value of the unused vacation (don’t ask me accounting questions.  I took account 101 and “learned” than 1 + 1 could equal 2, but depending on the accounting rules applied, it could also equal 0, or -1.  This did not make any sense and still doesn’t, so I stayed away from accounting.)

The analysis was reasonably straight forward – calculate the unused vacation balance and multiply it by the pay rate.  The HR system already had the vacation balance for each employee, and the pay system had the pay rate.  However, management want to reconfirm the unused balance which made it a bit more complicated.  This required information about the employees, start date, union (for the collective agreement), union start date, and detailed transactions showing vacation days taken.

I calculated the number of years each current employee was in each union and their year of service.  Then for each collective agreement I created an expression that determined the vacation days – based on years of service.  This was multiplied by the pay rate and the liability was totalled.  Three things became evident: first the vacation system had the correct vacation balance in over 98% of the cases – a testament to the manual reviews performed by employees, managers and HR staff; second, there was a huge liability.  With close to 50,000 employees and the average unused vacation balance at 14 days – things add up; third, some employee had balances that were greater than their allowed maximum.  I reported the liability figure to management and made a recommendation concerning the “over the maximum” carry forward.

While the results were interesting and useful to management I also provided a recommendation concerning mandatory vacation for all employees.  This was supported from two perspectives: from an employee health and a fraud perspective, mandatory vacations are a good thing.  Employees, whether they realize it or not, need time of to recharge their batteries.  And many frauds are prevented and detected by forcing employees to take vacations and having another employee perform their duties while they are away.  Additional, it would help to reduce the unused vacation liability.

I think the third point was what sold it to senior management, and after numerous discussions with the unions, management put in place a mandatory vacation requirement.

The second analysis looked at accumulated sick leave.  Employees earned sick leave (similar to earned vacation, it was based on agreements and years of service).  They could use earned sick leave or bank it (no maximum).  The analysis determined that some employee had zero unused balance in their sick leave while other had hundreds of days of unused sick leave.  The liability was presented to senior management and I also highlight some interested facts including a list of employees who regularly took “sick” days on Fridays or Mondays during the summer.  The intent of banking unused sick leave was to provide employees with a cushion in case of a serious illness that kept them off work for weeks.  These employees did not have this cushion.  Other employees never took a sick day – probably came into work and infected everyone else.

I made recommendations regarding management supervision and validation of sick leave, communication strategy around the purpose taking sick days and for allowing carry forward of vacation days.

ACL Commands: EXPRESSIONS, TOTAL, CLASSIFY, AGE, RELATE

Lessons-learned: performing analysis in a business area always provides insight.  The obvious insight is related directly to the question you were trying to answer (what is the total liability of the unused vacation?), but often additional insights can also be made.  In this case, there was an increased concern about employee health and welfare and a fraud risk that became evident when we determined the amount of unused vacation that was being carried forward.  It is important to stop and think about was else the analysis is telling you about the business process.  Don’t just look at the numbers (14 days * 50,000 employees = 700,000 Days – QED), think about what it means (employees are not taking vacation) and the associated risk.

Finally, even when asked a focused and relatively simple question by management, the analysis could become tricky.  Also, the request to provide advice to management in one area (what is the liability?) can present an opportunity to provide advice and recommendations in related areas (mandatory vacation leave).  Don’t miss out on this opportunity because you did not try to obtain as much insight as possible from your analysis.

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