One of the unwritten rules of finance is that small errors add up quickly — and can have far reaching consequences.
As a result, it’s important to conduct regular internal payroll audits. They ensure that your payroll processes are robust and reliable, and allow you to correct small errors before they become big problems.
In this article, we’ll clarify the importance and benefits of payroll audits, and explain how to carry them out. We’ll also look at the unique challenges global companies can face during these audits, and provide some tips on how to manage them.
So let’s jump straight in.
What is a payroll audit?
A payroll audit is a methodical review of your company’s payroll data and payroll-related processes. It’s intended to catch and avoid errors, boost payroll accuracy, ensure full compliance with regulations, and optimize your payroll processes.
Why are payroll audits important?
Payroll audits are a safeguard, allowing you to account for human error and proactively correct mistakes. If you miss something small, this can potentially spiral into a large compliance issue.
Are payroll audits mandatory?
Payroll audits are not generally a legal requirement, but they can have a big impact on your ability to comply with payroll taxes, employee benefits, and employee deductions. Payroll audits also improve your financial transparency, which benefits multiple stakeholders.
When should you conduct a payroll audit?
Payroll audits can be conducted at any time, although most companies opt to perform them at the end of their fiscal year. This is because many of the required documents will be easily accessible, due to other ongoing annual financial checks and reviews.
How often should you conduct a payroll audit?
Again, this is at your discretion. Most companies perform payroll audits at least once per year, although the more regularly you audit, the easier it is to catch potential issues early.
While once or twice per year is OK for most companies, you may want to conduct additional payroll audits if you start noticing discrepancies in payroll-related documentation, or if your company goes through a notable change. Things like mergers, restructurings, and shifts in the size and scope of your workforce all have the potential to knock your payroll processes off-kilter.
Performing additional payroll audits proactively reduces the friction and instability that could grow from these shifts if ignored.
What about external audits?
An external audit is different to an internal audit, and is often required by law. In an external audit, an independent accountant or auditor examines your finances to determine your financial position and ensure compliance with accounting standards.
In some cases, your country’s tax authorities may decide to audit your books. By staying on top of your internal payroll audits, you can catch and correct payroll mistakes, and present a healthy and compliant picture of your payroll.
Who should conduct your payroll audit?
If you have the resources and expertise, you can conduct your own internal payroll audits. Alternatively, you can enlist the help of a third-party auditor, which is often the preferred approach for smaller businesses.
Larger companies with dedicated payroll and HR teams may prefer to handle it themselves, but keep in mind that payroll audits can take a lot of time and may distract your finance team from their other responsibilities. Outsourcing can be beneficial if the time and effort saved outweigh the additional cost.
We’ll discuss the pros and cons of outsourcing payroll audits further on in this article.
Payroll audits: what are the benefits?
Payroll audits are rarely quick and simple, but they’re often worth the effort. Conducting them regularly can benefit your company in a number of ways, such as:
Detecting (and deterring) payroll fraud
Unfortunately, there’s always a risk that some employees might attempt to deceive you. For instance, they may log hours they didn’t actually work, or submit overtime they aren’t eligible for. Payroll audits help to identify and correct these fraudulent activities.
If your employees know your company performs regular and thorough payroll audits, they may be much less likely to engage in any dishonest activity.
Uncovering errors
Small payroll errors are simple enough to brush off in isolation but, as mentioned, they can easily become large (and often expensive) problems. Small errors can also point to flaws within your payroll system or processes, giving you a chance to correct them and boost your accuracy.
“For any business, poorly-run payroll impacts retention, sentiment, and motivation. Those are all really big. It doesn't matter that you pay your employees well if you’re not paying them correctly.”
Jonathan Goldsmith, GM Payroll at Remote
Keeping payroll records organized
Payroll audits incentivize you to organize all your payroll data and related documentation. Not only does this help streamline future payroll processes, but it also assists during full financial audits and other major financial processes.
Remote’s Payroll platform ensures that all your payroll records and data are securely stored and easily accessible to the relevant people.
Ensuring accuracy and compliance
Benefits, tax withholdings, and other deductibles all come out of your employees’ salaries. A payroll audit allows you to confirm that all of these things are being correctly deducted from each employee’s salary every month.
This is crucial not just for your employees, but for your company’s compliance obligations. If there are discrepancies or errors, you can find yourself in legal trouble for not providing the relevant protections to your people.
Preventing issues with employees
As touched upon, payroll mistakes can leave your employees feeling unsettled and unhappy. With regular payroll audits, you’re more likely to identify any issues, catch and correct underpayments, proactively take care of your employees’ needs, and ensure that they are being paid correctly.
This, in turn, mitigates any potential issues, and ensures that their employee experience remains a positive one.
“For most people, getting paid is an emotional thing. If they don't get paid correctly, or they don't get what they were expecting, they might miss a medical payment or something else that can affect them significantly. Companies have to remember that payroll is really about the individual and their experience.”
Jonathan Goldsmith, GM Payroll at Remote
Helping improve your payroll processes
The biggest benefit to conducting regular payroll audits is that, when you encounter repetitive errors or problems, you can identify the root cause of those issues. Over time, your payroll systems and processes become more accurate and robust, resulting in fewer errors and — conveniently — quicker subsequent audits.
How to conduct an internal payroll audit
So, how do you actually audit your payroll?
Most businesses follow these steps:
1. Clarify which employees are on the payroll
Before crunching a single number, ensure all your employee data is up to date. Remove employees who have left the company, and ensure all new hires have been added to your payroll system correctly.
2. Verify your employees’ pay rates
Check that each employee’s pay rate is correct and (if applicable) whether they’re eligible for overtime pay. At the same time, confirm whether overtime payment eligibility has changed for employees who were promoted or transferred within the company.
This step may feel tedious, but an employee’s pay rate can change frequently over time as they adopt different schedules, hours, or positions. Verifying pay rates helps you catch overpayments and underpayments before they snowball into large, expensive problems.
3. Compare pay rates to attendance records
Reliable time and attendance data are crucial to payroll accuracy. To ensure everything is correct, compare your time and attendance records and time-off data to each employee’s monthly payslip. Account for vacation days, sick leave, and extended leave.
Again, pay attention to overtime hours and ensure each employee is receiving the right treatment. If an employee is eligible for overtime pay, confirm that they are receiving the correct overtime amount each month. If they aren’t eligible for overtime pay, ensure they’re not receiving additional money without reason.
4. Check paid time off data
Check your employees’ paid time off (PTO) days and ensure they were within your permitted allocation. While this step doesn’t directly involve payroll, it increases the accuracy of your time and attendance data and encourages a culture of honesty.
Many employee management systems use employee self-service to log time off and track remaining hours. This puts the emphasis on your employees to log their days off honestly.
When reviewing PTO data, run through each employee’s days off and check their labeling. Days off should be organized into categories, such as paid time off, unpaid time off, personal days, sick days, bereavement leave, and parental leave.
5. Examine all payment methods
If you have employees across the globe, you may use multiple payment methods or platforms to cater to them. To ensure accuracy and maintain organization, cross-check your payment records from each individual payment platform with the information recorded in your financial statements.
6. Analyze tax reports
Finally, analyze your company’s tax reports and cross-check all your payroll reports to records within the general ledger. Ensure that your total payroll expenses, withheld taxes, and net check amounts match the values within your general ledger records.
Since payroll tax laws can change regularly, review your payroll tax submissions to ensure they match the laws within all relevant regions.
When should you outsource your payroll audits?
It can be difficult to know when to hand your payroll audits over to a third-party auditor, especially if your business is new or has recently undergone significant changes. Letting your in-house finance team run your payroll audit may reduce your expenses, but it can also hoover up their time and resources.
While every business and situation is different, it’s generally advisable to outsource your payroll audits if:
You have the budget for it
Your finance and HR teams don’t have the time or capacity
Your previous internal payroll audits have been ineffective or incompetent
You require a fully objective perspective of your payroll-related finances
You suspect foul play
Outsourcing is also an option if your in-house team has never conducted a payroll audit before. Third-party specialists know exactly what needs to be done, and understand how to conduct the process smoothly and efficiently. This means your audit is completed faster and with a much lower chance of errors.
In addition, some third parties can provide actionable, post-audit guidance on how best to streamline your payroll processes, and organize the way you record and store payroll data.
What about global companies?
Payroll audits are tricky for domestic employees, but if you have people in different countries, they can be even more complex and time-consuming.
Some of the common payroll audit challenges for global companies include:
An unclear audit process: Since domestic payroll audits work differently in each region according to local laws and requirements, it’s not easy to create a process that reflects varying rules.
Inefficient data sharing: If you want to conduct an effective payroll audit, you need to have organized and accessible payroll data. Payroll data becomes increasingly difficult to organize and share securely as your company expands.
Complex payroll processes: Working with multiple locations, payment methods, and currencies means a more intricate payroll system, which can be difficult to manage.
Remote enables you to manage these challenges with ease. Specifically, our platform allows you to:
Accurately track time and attendance data:Our free HRIS makes it easy for your employees to log hours, vacation days, and other time and attendance data. It also integrates seamlessly with our Payroll platform, making it easy to ensure that your people are being paid accurately and compliantly.
Comply with all local payroll laws: We ensure that you’re fully compliant with all local employment and payroll tax laws in your employees’ locations, saving you the time and headache. We also constantly monitor for any changes to these laws and adjust accordingly.
Keep your payroll data organized: Our Payroll platform simplifies all your international payroll processes and stores all your payroll data in one centralized platform. When it’s time to audit your payroll, everything you need is fully organized and accessible in one place.
Ensure accurate payroll audits with Remote
Payroll audits may seem arduous, but they help ensure that your company is fully compliant with all relevant laws and regulations, boost your employees’ experiences, and protect your company from fraudulent activity.
And, with Remote Payroll , your audits can be conducted much more quickly. With accurate payroll history, benefits, and deductions calculations, as well as time and attendance data, you’re far less likely to find errors — and your records are much easier to navigate.
To learn more about how our Payroll platform can transform your processes, book a demo with one of our friendly experts today.
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