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Why should your organization perform payroll audits

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Charles Hall, a popular CPA and certified fraud examiner, asserts that “Payroll exceeds fifty percent of total expenses in many governments, nonprofits, and businesses. Therefore, it is often a significant transaction area.”

Payroll processing could arguably be one of the most important duties of an employer. It presents many challenges to the HR and payroll professionals. One small mistake can end up ruining plenty of things, including reputation. Naturally, it is important to find a well-reputed payroll service provider who will ensure that the organization’s niche requirements are met. The first thing to do, however, is regular payroll audits.

What is payroll audit?

A payroll audit, also known as a compliance audit, is an analysis of an organization’s payroll-related processes. It identifies compliance problems concerning employment laws, verifies tax withholdings, spots human errors, and prevents payroll fraud, to name a few. Thus, it is vital to frequently do a payroll audit. We have to note that payroll processing is not a linear process; it is multi-layered and complex.

Existing payroll problems

Payroll audits should be conducted regularly to get alerts on payroll mistakes sooner. Internal audits should be done as frequently as external audits. In fact, it will help the organization ensure their problems don’t become bigger issues that will be under the spotlight when external audits are performed. Some of these problems include:

  1. Non-removal of terminated employees
  2. Incorrect working hours clocked in
  3. Manual data feeding and calculation errors
  4. Payroll fraud
  5. Outdated employment laws
  6. Incompatible systems that bleed money
  7. Tight deadline for inputs, owing to long processing time

Sure, a payroll audit will identify these problems. But it will also help you better navigate payroll and therefore HR processes and help you strategize important functions, such as budget, better. It also helps you review your accounts. Interestingly, a payroll audit is mandatory for business loans and hence may come handy to you in times of need. In a short period of time, you will also begin to see the benefits of regular payroll audits, which makes it essential for a business.

Top reasons to conduct a payroll audit:

  • Analyze the information: The most important aspect of a payroll audit is to check if the information in the payroll system is updated and correct. Employee pay and the constantly changing pay distribution have to be updated regularly. Manual errors are a pesky problem and a payroll audit helps in rectifying these errors. The analysis also helps to verify the employee pay rates against each employee’s contract. Reputable payroll providers offer solutions with automated payroll processing equipped with advanced features such as an inbuilt anomaly detector and a data validation engine.
  • Ensures compliance with changing employment laws: A payroll audit will identify non-compliant practices and expose the areas that require improvement. Especially if you’re managing a global payroll, keeping up with the ever-changing regulatory laws of each country can be a challenge. And companies usually do try to keep accurate records, but errors are inevitable. Additionally, it can even turn out to be a big legal issue. An easy solution would be to get a payroll partner who can manage global payroll. It is integral to a payroll-service provider’s business to keep up with every country’s laws.
  • Reconciliation of payroll to bank accounts: Largely seen as a process for accounting teams, a thorough payroll audit also includes this aspect. It checks whether the payroll expenses in the business ledger match the payroll audit findings. A payroll audit also compares the money specified in payroll records to the money withdrawn from the account. Payroll automation aids this process.
  • Verifies employee status, tax withholdings and remittance: Any corporate giant will often see many changes in employee statuses – leave, promotion, new joinees, raises and allowances. A payroll audit will point out the discrepancies in this regard. Reviewing tax withholdings is a critical procedure in the payroll audit. It helps in finding solutions in case this has been overlooked during remittance of taxes and ensures timely payments. It is ideal that a good payroll services provider also offer detailed analytics, allowing the organization an opportunity to improve processes on the go.

How to conduct payroll audits? 

Payroll audits don’t just help in assessing the strengths and weaknesses of an organization. The results of an audit can lead to a more efficient payroll system and an improved cost & resource center. Conducting a payroll assessment will show you where you stand, in terms of payroll efficiency. You can perhaps start with a few free assessment tools before moving on to a rigorous process. 

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. Once you figure out what’s working and not working, it will be easy for you to make the necessary changes to your existing processes and strategize accordingly. And these consistent efforts lead to an error-free and efficient payroll system, which ultimately boosts the performance of the organization.

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Sabarjath Ali
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