In this day and age where most things around us are fast-changing, payroll is no exception. It is also transforming to keep pace with the changing needs of employees and employers today. And when it comes to HR and payroll, companies deal with a variety of scenarios and challenges on a day to day basis. Many a time, these problems are caused due to missing payroll-related internal controls or insufficient audit on payroll inputs and outputs.
In our last blog on payroll auditing, we analyzed why an organization must perform payroll audits regularly. In this blog, we highlight the key points that must be frequently checked to maintain payroll hygiene which in turn will make the payroll process efficient, thus lowering the irregularities that will reflect during payroll auditing. We had mentioned in the earlier blog, “The general idea of regular payroll audits is to reduce the errors, maintain compliance, stay updated, and improve the payroll processes. This leads to good payroll practices.” And now, we are going to discuss exactly that!
Checklist for audit
A regular internal payroll audit is strongly recommended, ideally for every pay period. It will help identify errors in payroll inputs (these would be inputs fed in manually more often than not), false or fraudulent inputs in the payroll, etc. This will allow the organization to report and rectify it within the pay period, to avoid any losses to the organization or any dissatisfaction to the employees. Some important data points for audit are:
- Input data changes: Any change in data that can directly or indirectly impact the payroll output should be audited. A few examples of input data are compensation change, one-time payroll values, employment information change, etc. If the auditor finds any discrepancy in the input data, he/she should look for further details, the Who-When-How-Why of things to arrive at a solution, that should prevent the recurrence of the same issue in future payroll runs.
- Who made these incorrect entries?
- When did the user make these entries?
- How were these entries made/done? Using which medium?
- Why were these entries done? (To be explained by the user)
- Payroll Output Audit: Any inconsistencies in the payroll processed, without proper justification by the payroll maker/checker must be identified, analyzed, and resolved.
Establishing effective controls in the payroll process can result in minimum or no errors while processing payroll. Some of the internal controls include:
- Separation of tasks – The payroll system should not be user-dependent, but process dependent. The payroll process is a complex one with several stages, starting from getting the employee data, payroll inputs, time inputs to payroll processing, and payroll accounting. There should be in place a clear identification of a user’s role and the tasks that are to be performed by them. Dividing payroll tasks among different users will ensure that no one person has complete control of the payroll from start to end, which may cause an error or fraud.
- Single source of truth: If the employee data is integrated through a third-party system for payroll, then it will be considered as the source of truth for employee data. No changes should happen at the receiving source to ensure synchronized information in both systems which in turn drives the payroll output. For example, if employee data is integrated from 1 HRIS or payroll system to Ramco, integrated data should not be changed in the receiving system (Ramco). Any change required in employee data should be done in the source system and then it should be integrated with the receiving system (Ramco). This will ensure data is in sync in both the systems, making sure it results in proper payroll output without discrepancies.
- Maker & checker for all important transactions: All important input/ output transactions should have a maker and checker so that any discrepancy in the transactions can be identified at the stage of the input itself. For important transactions which have a direct or indirect impact on payroll output, there should be, at least, a single level of approval, i.e., a maker to make the entry and checker to verify it. This will ensure that if the maker makes a manual error or a fraudulent entry, it can be identified by the checker, during individual transaction which happens much before the payroll processing.
Minimizing human involvement: Any process in payroll that can be automated, using business logic, should be done so with minimum/no exception. This is one of the best ways to reduce errors and improve payroll efficiency.