Payroll Auditing Best Practices

October 13, 2021
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Thorough and accurate payroll auditing is critical to regulatory compliance. Many organizations rely on less than best practices when it comes to this critical task.  Understanding the objectives of payroll auditing and what constitutes best practices should be a top priority for all organizations.

The Goals of Payroll Auditing

The objectives of payroll auditing are straightforward and include:

  • Assuring the accuracy and relevance of the payroll information
  • Maintaining regulatory compliance and complete documentation
  • Verifying that hourly employees are recording the hours for which they have been paid
  • Confirming the employment status of employees
  • Reconciling banking activity (i.e., checking canceled checks associated with each employee for accuracy, matching bank account payments/transactions with payroll data)

As simple as these objectives of payroll auditing may seem, it is not without risks. Further, performing payroll audits in a cursory, less than thorough manner, can leave an organization exposed to compliance issues. If, for example, payroll assertions are incorrect and/or payroll fraud (i.e., under or over stating of the payroll expense) is identified. Errors are not uncommon, particularly when you have a few individuals performing multiple payroll control functions such as entering salary rates in the payroll system, approving payroll payments to employees, issuing payroll checks, performing payroll bank account reconciliation, etc. There is also the risk that payrolls are not being thoroughly reviewed and approved prior to processing. These deficiencies can easily lead to errors which are then carried over into other documents, thereby compounding the risks and associated liabilities.

Payroll Auditing Practices

To ensure accurate and compliant payroll processes, it is important these basic practices be followed:

  • Employee 941s should be reconciled to payroll
  • Accrued payroll liability should be recomputed
  • Payroll withholding accounts should be checked for accuracy
  • Payroll expenses, including those associated with benefits, should be compared to budget statements and reviewed for any discrepancies

In addition, a checklist of functions should be performed to make sure that the payroll audit functions comply with employment laws and other relevant regulations.

Payroll Auditing for Multi-Employer Plans

For multi-employer plans, the payroll auditing process can be even more complex. Therefore, their payroll audits require an even higher level of scrutiny and due diligence. At Amalgamated Employee Benefits Administrators, Inc, (AEBA) our audit services for multi-employer plans are detailed and encompass a meticulous review of every member for which contributions were made for periods of one year to five years. Using this approach, we assist employers and plan trustees in meeting their compliance requirements under the Employee Retirement Income Security Act of 1974 (ERISA). This comprehensive approach has returned contributions to our clients totaling an estimated $10 million over a single five-year period.

AEBA payroll auditing services for multi-employer plans are:

  • Obtaining and reviewing copies of collective bargaining agreements and the plan’s government documents to ascertain the method of contributions
  • Obtaining all payroll records from contributing employers
  • Performing the payroll audit, either in-house or onsite at the employers facility, as necessary, reviewing each year’s records and each member for which contributions were made
  • Determining if a plan is receiving the proper employer contribution and has complete and accurate data for each participant
  • Helping plan trustees demonstrate their due diligence in seeking an independent, third-party review of employer contributions, recording findings and improving the accuracy of contributions

For more information about best practice payroll auditing services, contact: