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Payroll audits help organizations protect the integrity of their payroll process and keep regulatory bodies away from their doorsteps.
However, many HR leaders never grasp the importance of audits until their organization faces an external audit or loses employee trust in their payroll system.
In this article, you’ll see why payroll audits are non-negotiable for your organization. And you’ll learn a step-by-step process for conducting a payroll audit for your organization.
What Is A Payroll Audit?
A payroll audit is a thorough examination of your organization’s payroll records, processes, and procedures. The aim is to ensure compliance with legal requirements, accuracy of calculations, and proper handling of employee compensation.
If your payroll software and payroll processes are like a big puzzle, a payroll audit is how you check each piece to ensure that they all fit together correctly.
What Makes Payroll Audits Non-Negotiable For Your Organization?
Payroll audits are vital for the following reasons:
Compliance
Unless you have a payroll system in place to ensure your compliance with federal and state regulations, the government will eventually notice your recurring tax infractions and pay a visit to your organization.
A payroll audit allows you to be proactive and prevent this from happening.
By meticulously examining your payroll process, you can verify that your organization is adhering to relevant operations, reducing the risk of legal issues and penalties.
Maintaining Employee Trust
There aren’t many quicker ways to destroy your employees’ trust than making errors in their compensation.
Research shows that 1 in 2 employees will start looking for a new job after just two miscalculations in their salary. Employees don’t want to hear reasons why they’re not getting the pay they were promised.
This is where a payroll audit comes in.
A payroll audit doesn’t just ensure that your employees are paid accurately. It also demonstrates your commitment to fairness and transparency in your payroll processes.
Operational Efficiency
What gets measured gets improved.
A payroll audit allows you to look under the hood of your payroll process to assess if every part works correctly.
It reveals opportunities for streamlining operations, improving efficiency, and reducing administrative costs.
Fraud Prevention
You might not hear a lot about it but payroll fraud is fairly common.
Around 27% of businesses have dealt with payroll fraud.
Payroll fraud is not preventable – anyone can steal at any time, but you can catch it in time to minimize its risks to your organization.
This is where a payroll audit comes in. An audit can help you uncover ghost employees, unauthorized overtime, and falsified hours, helping your organization save money.
6-Step Process For Conducting An Efficient Payroll Audit
Here’s how to conduct a payroll audit for your organization in 6 steps.
- Define your audit scope
- Review employee information
- Verify hours and days worked
- Note every variable pay or off-cycle payroll
- Reconcile payroll with accounting, bank, and tax records
- Analyze report and proof
Define Your Audit Scope
The first step in conducting your payroll audit is to define the scope of your audit.
If you have a large organization, it might be impractical to audit the payroll of every employee in the organization.
Payroll is ongoing. Your audit can’t afford to be.
Take a sample of your employees and establish a timeframe for auditing. It is best practice to have two consecutive pay periods and conduct your audits at least once a year.
Review Employee Information
It takes only one wrong digit in payroll calculation to result in incorrect paychecks and tax errors.
So even if your payroll is automated, you could still be running a faulty payroll operation due to wrong employee information. Watch out for details such as paygrade changes due to a promotion and employment status.
A robust HRIS and payroll platform like Pade can help you manage your employee information and track changes.
Do you want to see why Pade is trusted by organizations like Flutterwave, Mono, and TSL? Request a demo today.
Verify Hours And Days Worked
Next, if you have hourly workers, confirm that their hours logged are accurate.
There are a couple of ways to do this, depending on how you record your time and attendance data. You could:
- Compare report work hours to employee work schedule.
- Check for unusual patterns like early departures, frequent late arrivals, or even consistently rounded hours.
- Conduct interviews with supervisors to validate reported hours.
Alongside misclassification of employees, time and attendance discrepancies is a common payroll issues faced by organizations. To reduce their occurrence, use a payroll software that allows you to properly classify your employees and automate the computing of their time and attendance records.
Lastly, don’t forget to account for any sick or vacation time that may affect the pay of your employees.
Note Every Variable Pay Or Off-Cycle Payroll
If you pay your employees outside your regular pay cycle (off-cycle payroll), you should keep that in mind when auditing your payroll.
This is especially important for legal compliance: some off-cycle payments have legal implications, like severance payments and payroll deductions.
You should also audit variable pay such as bonuses, commissions, stock options, and so on.
Reconcile Payroll With Accounting, Bank, And Tax Records
For organizations that manage their payroll from a bank account separate from the general business account, verify that payroll transactions are reflected in your general bank records.
This is important for fraud prevention and gets you ready for external audits.
Analyze Report And Bring In Stakeholders
A major point of an audit is to help you find inefficiencies in your payroll process and fix them.
After you complete every step above, take everything you’ve audited and decide if any change needs to be made.
Analyze your findings and report them to leadership. It could be that you want to update how your timesheets are approved or how bonuses are authorized.
And when it is time to implement these changes, keep your employees in the loop so you have your workforce behind you.
Make Your Payroll Audits Simpler With Pade
Conducting a proper payroll audit requires organizations to invest in modern payroll processing systems and processes.
Pade’s payroll processing capabilities help HR leaders automate the calculation and processing of payroll, reducing the risk of human errors in salary calculations, tax withdrawals, and benefits deductions.
Also, our platform centralizes payroll data, making it easily accessible for auditors. If you’re ready to streamline your payroll processing, book a demo with our payroll experts today.
They’ll walk you through our platform’s capabilities and demonstrate how Pade can transform your payroll process and make your payroll audits stress-free.
