As much as you don’t want your business to get involved in a series of legal battles due to payroll mistakes, you also don’t want to get into other troubles, especially payroll fraud. This is why you need to ensure accuracy in your payroll processes, hence the need for payroll audits.

Payroll Services constitute a high expense on your income statement, irrespective of your business size. That’s why spending more time to get rid of errors in the process will save you a lot of money and other resources.

Simply put, a payroll audit involves an internal review process that aims at ensuring that your payroll records are accurate and you comply with the relevant laws in paying your employees. It is important that such an audit be conducted at least once a year.

Payroll Audit Procedure

More often than not, a typical payroll audit procedure will entail the following:

• A review of active employees listed on payroll to determine if they all work for you at the time of the audit process;
• An analysis of numbers such as pay rate, hours worked, total pay, withheld taxes, and any other number-related aspects;
• Verification of paid time off, if any;
• Reconciliation of payroll records with bank statements, tax forms, and general ledgers;
• Confirmation of the accuracy of payroll tax withholdings, remittance, and records; and
• Overall identification of areas for improvement in the payroll process

Benefits of Payroll Audit

Though it is a time-consuming process, auditing payroll comes with a lot of benefits.

Fraud Detection/Prevention

The most important benefit is how your payroll hr can help to detect and prevent fraud. For instance, in the process of auditing your payroll, you may discover that an independent contractor might have been enlisted as a full-time employee, thus earning undue pay benefits. During the process, you may also discover ghost employees or employees whose records are still in the system despite having already left the company.

On the flip side, when your employees are aware that you often check your payroll accounts, they will be dissuaded from messing up with the records fraudulently.

Error Unearthing

In most cases, payroll fraud may not be as common as payroll errors. Such errors are often a result of manual input of texts and numbers and may range from calculation mistakes to retaining data of terminated employees and even inaccurate accounts for paid or unpaid time off.

In cases of tax underpayments, you can be penalised, and such penalties often add up at the passing of each month. However, by checking for payroll errors, you would have minimised your chances of getting in trouble with the IRS.

Legal Compliance Improvement

Even if you comply with federal, state, and local payroll policies at the initial stage of your business, you need to be aware that state minimum wage and overtime laws tend to change from time to time. A good example is the Malaysia minimum wage that increased to RM1,500 per month starting Sunday, May 1, 2022.  You would not be able to factor in the changes – or comply with the new laws – if you fail to perform the payroll audit process.

Therefore, you will be able to improve legal compliance when you carry out payroll audits. For instance, you may realise the need to have a pay raise and adjust overtime pay with the new laws.

What Needs to be Done During the Payroll Audit Process?

Now that the employee payroll audit process is on, you may have to consider updating your policies to redefine access to payroll records. For instance, you should consider regularly changing authorisations, passwords, and log-in info, restricting access to passwords and having an e-tracking log secured by password.

You may also want to ensure that timesheets are submitted at a specific time each week upon the approval of a direct supervisor. If you’d be authorising bonuses for some employees, be sure that you communicate the variability in pay in writing. This should include the amount and payment date.

Conclusion

In conclusion, the purpose of a payroll audit is to save you from financial stress. That doesn’t mean that each payroll error you make will attract a significant negative effect. Nevertheless, little issues can snowball into bigger ones. Therefore, avoiding little problems is safer than considering them insignificant.