Payroll – Are You Getting it Right?
Payroll is at the heart of any business. It is the one financial function of any business that must be punctual and accurate. It also has enormous potential for assisting in other areas of Payroll, the business.
Even a small delay in paying staff can trigger a range of consequences from staff discontent through to full-scale industrial action. An underpayment or overpayment to an employee can cause problems as the employee will demand prompt correction and have a negative view of the company. Sometimes there are legal and practical reasons which prevent you from recovering an overpayment.
Every industrialised nation now has detailed laws on employment conditions. Although they tend to include similar elements, there are still significant differences. Overlooking a legal detail can bring serious penalties. It can also lead to significant errors in costing if some payroll costs are overlooked.
Payroll is also obviously vulnerable to security risks. There is opportunity for fraud, including putting ghosts on the payroll. There is also a security risk as the information is sensitive.
These are all very good reasons for you to run an in-house self-assessment/audit of your payroll and payroll function. But a payroll audit is not just concerned with avoiding mistakes. Payroll can also be used as a powerful management tool. Employees often trust payroll staff more than other accounts or personnel staff. Payroll data can also contain useful information about employees which may need to be shared with other departments. Finally, payroll functions can be integrated with other functions.
Too often businesses see payroll as no more than an administrative function, no more important than window cleaning.
The audit of payroll extends beyond ensuring that payslips are properly prepared and statutory returns are filed. The payroll audit should check that the most effective methods of determining employee payment are used, and that all elements of the payroll resources are used for maximum efficiency.
Structure of the Audit
A payroll audit should follow these six steps reflecting the key considerations of the payroll auditor. They are:
Step 1 Payroll in your Organisation
Step 2 Setting up the Payroll
Step 3 Supply of Information
Step 4 Resourcing the Payroll Function
Step 5 Payroll Security
Step 6 Developing the Payroll Function
In this briefing, I’ll give you an outline of the questions you need to ask at each step. For more details and a complete do-it-yourself payroll audit structure, see The Payroll Audit, from which this article is taken.
Step 1 – Payroll in your organisation
The process of auditing payroll begins by examining the functions that payroll performs in the organisation. Having defined the functions carefully, you then need to carefully examine the different payment methods that are to apply to employees including issues such as commissions and bonuses, share options and fringe benefits. At the same time, you also need to be satisfied that the systems for setting and increasing pay are effective. Finally, in this step, ensure that the correct payroll data is brought into the financial and management accounts of the organisation in order that effective decisions can be made about the resourcing of the organisation.
There are certain basic questions you must ask. For each step, these questions are summarised below (they’re explained in detail in the full Payroll Audit [see resource box at the end of this article], which also gives guidance on how to prepare for and run the audit).
Who is the payroll department answerable to?
What are the lines of communication from line managers to the payroll function?
How is authority defined for levels of information to payroll?
How is this information recorded and then filed?
What non-payroll functions are also handled by payroll?
Are there any functions related to payroll that are not handled by payroll and, if so, who does handle them?
How is employees’ gross pay calculated?
For employees paid by piece rate, what checks are in place that the work is properly inspected?
How many employees are paid weekly, monthly, or at other intervals?
How are employees paid their take-home pay?
What bonuses and commissions are payable? To whom?
Is the bonus and commission structure properly allocated to the sales or other figure to which they relate?
Is the bonus and commission structure linked to the objectives of the organization?
Do you provide any profit-related pay or performance-related pay?
Are the criteria for any profit- or performance-related pay appropriate to that employee?
Is the system for profit- or performance-related pay fair?
Do you provide any shares or options?
Does the payroll department have full details of employee share or option schemes?
Does the payroll function receive details when an employee share option is exercised?
What fringe benefits do you provide?
Do you offer employees a choice of fringe benefits? If so, are the benefits properly costed?
What analysis have you done of perceived value and tax effectiveness of benefits?
What systems exist for ensuring that payroll is notified of the provision, or any change in provision, of a fringe benefit?
How are pay rates set?
How are pay rates reviewed?
What systems exist for reporting payroll data for the purposes of the financial accounts?
What analysis do you make of payroll data for the purposes of management accounts? Is further analysis appropriate?