Payroll
Preparing for a payroll audit
Payroll consultant and the APA’s 2015 Payroll Woman of the Year, Gretchen Inouye ACIPP , advises howpayroll audits are conducted in the USA
A payroll audit (or examination) can take various forms depending on which entity performs it. Internal audits by organisation staff generally review the existence and effectiveness of controls and the effects of transactions on financial records. External audit teams engaged by the organisation concentrate on financial accounting and the accuracy and reliability of various financial statements, such as the balance sheets, income statements, cash flows and other records. Publicly traded corporations are required to have certified audits to meet the requirements of the accounting industry reform act – the Sarbanes-Oxley (SOX) Act of 2002 – so those audits will also look at controls. Other external audits may be conducted by various federal, state, and local tax, labour, unemployment insurance, workers’ compensation and immigration agencies, financial institutions, bargaining units, etc. Those audits will primarily focus on compliance in performance, contract terms, reporting and payments. All these audits involve the payroll department’s time, effort and a certain amount of coordination and communication with other departments, including management, because payroll is often not the sole source of information under examination. Human resources, accounts payable, accounting and finance are frequently included. Payroll records including wage and hour information, gross-to-net tax calculations, deductions, reports, operating documentation and everything else that payroll touches may be requested within the scope of an audit.
Failure to produce requested records to government agencies frequently results in fines or penalties and higher assessments based on the agency’s calculations. In a wage and hour audit triggered by worker complaints, the employees’ claims will be the basis of any back pay if the employer does not have sufficient accurate records. Payroll can assist in preparing for an audit by establishing a basic set of policies and procedures, including the following: ● prepare an audit procedures document ● maintain a log of the records retained, the format they are in, where they are and the retrieval processes and associated time frames ● coordinate data security and retrieval protocols with IT ● request a written scope/extent of the audit ● have an assigned coordinator for the audit requests to help avoid duplication and ensure consistency ● keep a record of which physical documents have been provided to auditors and when they were returned
● require a detailed signed receipt or log if the auditors are working outside the payroll office ● document questions and responses ● maintain confidentiality by limiting information and discussion to the audit scope. Occasional self-audits may identify issues before an official audit is requested. Announcement of a scheduled audit states the specific timeframe in which the employer is required to produce requested data — commonly three business days. A test of that retrieval window, for example, could prevent a problem. Some organisations and agencies may permit or request a self-audit following specific formats in lieu of sending their auditors. Audits can be invasive, time consuming and stressful — and may be inevitable — so preparation is key to survival and success. Payroll may even find benefits from an audit for improvement and added value. Relax, prepare and enjoy your next audit. n
The American Payroll Association (APA), www.americanpayroll.org, is the nation’s leader in payroll education, publications and training. This nonprofit association conducts more than 300 payroll training conferences and seminars across the country each year and publishes a complete library of resource texts and newsletters. Representing more than 21,000 members, the APA is the industry’s highly respected and collective voice in Washington, D.C. Get more information at www.americanpayroll.org. The Global Payroll Management Institute (GPMI), www.GPMInstitute.com, spearheads the APA’s global initiatives to provide the world with a leading community of payroll leaders, managers, practitioners, researchers and technology experts. Subscribers connect with each other through networking discussions, collaborative opportunities, and access to education and publications dedicated to global payroll strategies, knowledge, research, employment and training. GPMI also publishes several global payroll texts and white papers as a benefit to subscribers. Get more information at www.GPMInstitute.com.
REPRINTED FROM APRIL 2021 PAYTECH
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| Professional in Payroll, Pensions and Reward |
Issue 74 | October 2021
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