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Jacob Lenell

Faced with increasing pressure to reduce costs, hold the line on taxes, and balance the budget, local governments are turning to furlough days and layoffs as a way to generate cost savings.

Layoffs and Furloughs and Their Effect on Internal Controls

  • 7/23/2012

Layoffs and Furloughs and Their Effect on Internal Controls

Faced with increasing pressure to reduce costs, hold the line on taxes, and balance the budget, local governments are turning to furlough days and layoffs as a way to generate cost savings. While this may be an effective cost-cutting strategy, government officials must also consider the impact it can have on internal control structures.

Considering internal controls

There are several things to consider when determining if furlough days or layoffs are an appropriate mechanism to achieve savings:

  • The impact on the level of services provided by the affected employee group
  • The impact on employee morale
  • The expected savings from a reduction in workforce

Internal controls

Less public attention is typically given to another important consideration: The impact of furlough days and layoffs on internal controls. Internal controls are the policies and procedures that are designed to keep an organization safe. In a sense, they are checkpoints that are intended to slow the process down to make sure the best interests of the organization are in place. Many of these controls are executed by individual employees, and when these positions are temporarily or permanently vacant, there can be significant impact on the organization’s ability to protect itself.

Furloughs have typically been used to reduce an employee’s work schedule by a set amount of time, such as one furlough day per month. Layoffs are generally used when the return to work cannot be guaranteed, such as when there is a sudden drop in demand for a service provided by the organization. Because of their differences, furloughs and layoffs lead to different issues to consider within the internal controls of the organization.

The risk of furloughs

In the case of a furlough day, the organization’s natural response is to maintain the current duties and responsibilities within the existing control structure. Generally, the missed work is accomplished by working more efficiently during the remaining days. The cost savings are intended to be achieved without decreasing the safety of the organization.

However, there are still risks as a result of implementing furlough days. In order to achieve the same level of output in a smaller period of time, employees may rush to perform the work, leaving the process incomplete or inaccurate. In addition, employees may find shortcuts that work around the systems of control.

Problems can continue up the chain of command as well. Managers may also need to compensate for the furlough days. They may be in a similar rush if they were also furloughed, or they may be more involved in the details as they help staff catch up. Having management down in the trenches creates some additional risk. Sometimes the big picture can get lost and lead to an unnoticed opportunity or an unchecked risk that can cost the organization more in the long run than was saved in the short term.

Choosing the appropriate timeframe for a furlough can greatly reduce the need for staff to rush as they complete their tasks. This leads to a better work product that management can review instead of help create. Management can then maintain its focus on the bigger picture, looking for cost savings and additional revenue sources that may not have otherwise been identified.

The risk of layoffs

Layoffs typically have more of an impact on the organization’s internal controls than furlough days. With a layoff, the indefinite end creates a need to redistribute the duties and responsibilities of laid off employees. While management may conclude the service portion of a job can be managed by others, that employee may have served an aspect of the internal control structure that must now be shifted to other employees. As the pool of employees shrinks, so does the ability to properly segregate duties.

In addition, staff that become responsible for the new areas may not have the same level of experience or institutional knowledge as the former employees, which can lead to inefficiencies and inaccuracies in the process.

Be thoughtful in the approach

An organization needs to consider the risks created by layoffs and respond accordingly. Careful consideration should be given to the reallocation of tasks to minimize its risk exposure from overlapping responsibilities. Consideration must also be given to the skill sets available in the remaining staff to make sure they have the skills necessary to complete the job correctly.

When done right, furloughs and layoffs can contribute to substantial savings on the expense side of the government. Evaluating the impact on the morale of the employees, the level of service provided to the taxpayer, and the security of the organization, are critical to a successful implementation. With proper oversight and awareness of the risks, organizations can achieve the desired level of savings and maintain risk at an acceptable level.

Jacob Lenell, Senior Manager, State and Local Government or 414-476-1880