- Payroll audits should be a crucial part of every payroll organization
- Objectives of a payroll audit include: accurate reporting, data and compliance
- Payroll audits should be conducted annually at a minimum
Paying employees precisely what they are owed and doing it in accordance with the law are usually among the top concerns of payroll professionals. According to Deloitte’s latest Global Payroll Benchmarking Survey, the top two areas for improvement are compliance (81%) and accuracy (71%).
The best way to ensure accuracy and compliance, along with maintaining payroll security is to conduct payroll audits regularly. Whether you conduct the audit internally or with the help of a third party, reviewing your payroll operation periodically can help keep your company’s payroll records organized and strengthen its financial control.
A payroll audit is a periodic review of a company’s payroll processes and records to verify that it’s paying employees accurately, timely, and in compliance with the law.
How to conduct an effective payroll audit
Determine the time frame of the audit
Depending on the complexity of the company’s payroll, this can range from a single pay period to an entire fiscal year.
Review your employees’ data
Important things to look at include names, titles, start dates and pay rates. Verifying employee pay rates is crucial, given all the changes in an employee’s pay over time (due to promotions, shifting to different schedules, etc.). Another crucial part of this review is making sure that the list of employees on your payroll matches your employment records. This is key to weeding out ghost employees, i.e., people who don’t actually work for you but receive a paycheck.
Verify the working hours
Check hours worked against time cards to ensure that all employees are paid correctly. This is especially important for hourly employees, who are entitled to overtime pay.
Check variable payments and types of compensation
Your payroll journal entry should distinguish between base pay and variable pay and other types of compensation, such as bonuses, commissions, profit-sharing, and overtime pay. Focus on employees that have recently received a raise or moved from hourly wages to salary, and make sure the information has been updated.
Analyze gaps and inaccuracies between the data resources
Compare your payroll audit findings to your business’s general ledger and bank statements to verify that your totals match. If there are any discrepancies, you’ll need to examine your records and identify the problem. Reconciling the data on all three sources is the most essential – and time-consuming – part of the payroll audit.
Check tax withholdings and deductions
Make sure you are withholding the right amount of federal, state, and/or local tax from each employee’s wages. In addition, verify that deductions for Social Security and health care are calculated correctly.
What are the main objectives of a payroll audit?
Accurate tax reporting and payments
Tax authorities require companies to file accurate tax returns and submit taxes withheld from pay. An effective payroll audit is vital to ensure that your business meets these requirements and avoids penalties and fines.
Compliance with employment and tax laws
Staying on top of changes in labor and tax laws can be incredibly challenging, especially for companies with an international workforce. Regular payroll audits can identify compliance gaps and allow the company to close them in time, ahead of an official audit by the tax authorities.
Provide employees with accurate data
Whether it’s payslips or documents they need to file taxes, your employees rely on the data you provide them. Global companies that experience frequent turnover in their workforce often struggle to maintain accurate employee records, which, in turn, can lead to inaccurate data on paystubs or tax documents. Conducting payroll audits regularly can eliminate this problem.
Identify errors and frauds on time
Errors are an inherent part of payroll. Even companies that automate their payroll process must enter some of the data manually, which means mistakes are inevitable. Regular payroll audits help you catch these mistakes on time and correct them. In addition, a thorough payroll audit can help you uncover fraud attempts, such as creating ghost employees and pocketing their wages. The audit should also identify areas where the business could be susceptible to payroll fraud, allowing it to make changes that reduce this risk.
How often should you conduct a payroll audit?
At a bare minimum, payroll audits should be conducted once a year. However, companies could benefit significantly from performing payroll audits more frequently, especially those with an international workforce. Depending on the maturity of the payroll process and the available bandwidth, global companies should aim for quarterly or half-yearly audits.
The benefits of conducting an internal payroll audit
- Payroll compliance: In an era where remote and hybrid work is the norm, complying with labor, tax, and record keeping regulations has become much more challenging. Conducting internal payroll audits can help you overcome this challenge, eliminating the risks and costs associated with non-compliance.
- Payroll fraud: The Association of Certified Fraud Examiners (ACFE) defines payroll fraud as “any scheme in which an employee causes their employer to issue a payment by making false claims for compensation.” The most common forms of payroll fraud are ghost employees, falsified wages, and benefit schemes. According to the ACFE, payroll frauds last an average of 30 months before they are detected, which makes preventing them via audits incredibly beneficial.
- Cleaner data: Periodic payroll audits identify employees whose data remains in the system, although they no longer work for the company. Former employees’ data can take up needless storage space; removing it is a big step toward cleaner data.
- Accurately account for paid or unpaid time off: Every type of paid time off – vacation days, sick leave, bereavement leave, etc. – must be accounted for to ensure that employees are not over or under-compensated for their work. Payroll audits help you achieve that.
- Reduce time theft: Part of any payroll audit is making sure that what’s recorded in your time and attendance software matches the data in your payroll system. This allows you to reduce time theft, also known as timesheet falsification.
Maintain a healthy payroll process
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Why should you conduct a payroll audit?
Payroll audits help companies ensure compliance with labor laws, verify tax withholdings, identify errors, and prevent fraud. By conducting regular payroll audits, you can deal with these problems proactively through adjustments and corrections.
What documents do you need to prepare for a payroll audit?
You’ll need to prepare the following documents: payroll register, general ledger, bank statements, year-end statements, payment advice notes, employee timecards, and check requests.
What is a Payroll (Compliance) Audit?
A payroll compliance audit is designed to conclude whether an organization is remitting contributions to employee benefit plans in compliance with the collective bargaining agreement (CBA) and specific rules and regulations.
What can trigger a payroll audit?
A payroll audit can be triggered by several things: a complaint by a disgruntled worker, late submissions of tax documents, or suspicious behavior within your industry regarding payroll. It can also be part of a broader investigation by the authorities.
How long does a payroll audit take?
A payroll tax audit process takes approximately six months to complete.