Nobody enjoys doing an audit. It’s like doing a tax return, and who wants to actually do their tax return? We all do them of course, but only because we’re required to.
Audits and tax returns will always be important and both are a whole lot easier if you stay on top of things from day one and maintain your records throughout the year.
When it comes to payroll, what most people don’t realise is that there are two different types of audits: an Accounting Payroll Audit and a Payroll Process Audit. Let's consider what each involves.
Accounting Payroll Audits
An Accounting Payroll Audit is a formal process that analyses a company’s payroll with a view to ensuring accuracy. It usually involves hiring an accounting firm to come in and crunch the numbers on a certain percentage of staff members.
This percentage varies from company to company but it’s generally around 10%. If you’ve got 100,000+ employees, it will probably be a lower percentage. Organisations will have a budget in place for the audit and the auditors will essentially see how much they can get done with the money that has been allocated for this work and that satisfies the relevant regulations (depending on the type of organisation).
The Accounting Payroll Audit usually focuses on a random sampling - although some companies will provide the auditors with the specific data that they want them to look at. There are different ways of doing it but the final result requires that they have validated the pay for a percentage of the organisation’s employees and made sure that they’ve been paid the right amount.
However, there are obvious issues with an Accounting Payroll Audit. For example, there’s every possibility that there are employees being paid incorrectly who aren’t included in the sample. As a result, those discrepancies will never be seen. That’s bad for the employees of course but it’s also bad for the company because it means that they have a problem that they are not aware of.
This type of audit also won’t help to validate whether payroll is running the right calculations in the first place. They’ll validate that 4 x 2 = 8, but they won’t check whether they were actually supposed to be calculating 5 x 2 (≠ 8). This is because the Accounting Payroll Audit can only work with the numbers in the system, it can’t see if the numbers in the system actually reflect reality.
Payroll Process Audits
That’s why it’s more effective to carry out a Payroll Process Audit, which will look at the process by which those numbers are generated. Accounting Payroll Audits only look from a high level and try to find error exceptions but if you are auditing the processes, you will find systemic issues – the source of all errors.
You can think of it as being like a simple maths exam. Students are rarely asked to give just the numerical answer because that can often be found by simply punching the equation into a calculator. Instead, they are asked to show the working so that the examiners can check that the process is understood and accurate.
As a general rule, Payroll Process Audits are more effective and comprehensive because they target the source of all errors and can therefore capture more errors before they actually happen, and not after the fact.
Let’s take a closer look at some of the problems that Payroll Process Audits can spot that an Accounting Payroll Audit wouldn’t find.
Three Major Problems an Accounting Payroll Audit Won’t Find
1. People Being Paid Under the Wrong Award
The award that employees are assigned will depend upon their role at the company. The problem is that these awards aren’t always assigned correctly.
If the system is set up to pay an employee under a particular award, an Accounting Payroll Audit will simply check that the calculations are correct. It takes a payroll process audit to validate that the employees are being categorised under the right award in the first place.
In other words, not only will an Accounting Payroll Audit miss the problem, but they’ll also charge you for this omission. It will leave you feeling a false sense of security because they’ll tell you that you don’t have a problem when you actually do.
2. Data Not Making it Into the System
Your IT system is only as good as the data it has access to and an Accounting Payroll Audit will only look at the data that you’ve captured. A Payroll Process Audit will examine the way that you capture data in the first place and ensure that the data, and the way that you gather it, is as accurate and robust as possible. An example that we have seen before was when an employee’s role changed and they were then promoted to a different award area. If the information for the new role didn’t make it into the system, it would hardly be a surprise that the employee was paid incorrectly.
There may also be issues with data not making it into the system due to operational problems and inaccurate systems. A common scenario that we have seen is when employees were told that they must arrive early,\ but they should not clock in until their official start time. There’s a discrepancy there that the Fair Work Commission could rule upon and fine the company for underpayment and non-compliance.
3. Incorrect Data Outside the Sample
An Accounting Payroll Audit can only find issues with the sample that it looks at.
Some auditing teams will go out of their way to get as much coverage as possible, ensuring that there’s coverage for every facet of every type of employee. They’ll try to cover every award, part-time and full-time employees and people who work different shifts.
The problem is, although this effort is admirable, it’s very expensive and it will never capture everything unless they look at every single employee.
Payroll Process Audits, however, look at the systems, as opposed to the end result. They can track these inaccuracies to the source and then correct them before they become an issue.
What Happens When These Problems Are Left Undiscovered?
When these problems are left undiscovered and businesses are paying their staff incorrectly, they raise ethical and moral issues. In fact, the best companies want to pay their employees correctly simply because it’s the right thing to do in addition to its being a sound business and financial decision.
Let’s look at the issue of non-compliance. If the Fair Work Commission investigates, they’ll want to see that you’ve taken adequate care to ensure that your employees are being paid correctly.
An Accounting Payroll Audit can instill a false sense of confidence and lead you to think that you’re paying people correctly.
They don’t double-check that your processes are aligned to “doing the right thing”. They just occasionally pick up that you’re doing the wrong thing, and even then, it’s only on a case-by-case basis rather than checking your processes as a whole.
Accounting Payroll Audits aren't always going to be considered sufficient as far as Fair Work are concerned. This is especially true when there is evidence inside an organisation that shows there is a known problem, and it hasn't been resolved.
Often, this unresolved problem comes in the form of someone from payroll reporting an issue and then either being ignored completely or told that management will “look into it”. Unfortunately, these sorts of reported issues often get forgotten about or filed under “we’ll do that later”.
If a company is found by Fair Work to be non-compliant, they can face huge fines and will still have to do the work of fixing those processes and ensuring that everyone has been paid correctly. It’s much better to tackle it proactively rather than leave it and allow the wound to fester.
Payroll Process Audits deliver proactive support for an organisation’s own teams to be monitoring and fixing their own issues. The Payroll Process Audit implements processes for the payroll team itself, uplifting the understanding and capability of the payroll team.
These audits can independently assure that the processes around the organisation’s entire Time & Attendance and Payroll function are compliant and robust, and actually documented to provide Payroll Business Continuity in case of unexpected absences.
Businesses can email contact@agilexperts.com.au or call 1300 287 213 for free first-step advice on how to ensure your payroll processes can safeguard your payroll compliance. Follow us on Linkedin or sign up here to receive our articles direct to your email inbox.