When was your business’ last payroll audit? Here’s why your company needs one
- Last updated: October 16, 2024
Payroll audits are serious business – and your business might be in serious trouble if you fail to have one done.
A payroll audit is performed to ensure that everything about your payroll system is in working order. It ensures that there are no anomalies, no errors, and no outdated practices, among other things.
But when you fail to get this done on a regular basis, you expose your company to the risk of an external audit – one of a company’s worst nightmares come true.
In this article, you will find out:
- What exactly is a payroll audit
- What a payroll audit does
- How often you should do a payroll audit
- What risks are associated with not having a payroll audit
- Ways to ensure that your payroll is in capable hands
What’s a payroll audit?
The main goals of a payroll audit are to:
1. Check the accuracy of your payroll system & ensure compliance
Are your payroll processes in line with what is expected in the country you are operating in? Did your company pay workers wages according to local labour law, their contract specifications, and your company policies? If yes, did your company withhold the correct amount of tax, and pay it to the right authorities on time?
A payroll audit will check all of this information, helping your company achieve 100% compliance with local legislation.
2. Identify issues with your payroll system
Was a wrong value input, and as a result, is creating erroneous data? Is your current system not properly calculating leaves for part-time employees? Or is it not accounting for some bank holidays? A payroll audit helps identify any systematic issues your payroll process may have.
3. Create an audit report and implement recommendations
After the initial audit, payroll auditors will provide you with an audit report detailing any errors, recommendations, and adjustments deemed necessary to put your payroll system back on track.
How often should you do a payroll audit?
Payroll audits should be done every year to make sure that your system is running smoothly.
What can happen if you don’t get a payroll audit done?
Companies that don’t have their payroll processes audited regularly (i.e. at least once each year) expose themselves to the risk of an external audit… By this time, any irregularities that are found will be sanctioned, and the company will have to endure a long and costly legal battle. As a result, the company’s reputation will also be dragged through the mud.
What does a payroll audit do?
Concretely, auditors will do the following and more when performing a payroll audit:
1. Compliance checks
This includes checking whether your application of the labour law, whether local, state, or federal tallies with the legislative requirements.
2. Accuracy of records check
Are the hours worked and overtime hours that were input in your payroll system correct for employees? Were their leave entitlement and other compensatory benefits respected?
3. Employee classification check
Payroll auditors will also go through your list of independent contractors to make sure that they are not, in fact, eligible to be employees instead. To do that, auditors will take a look at whether these contractors have to work where and when you say so, using the tools you provide, among other things. If they determine that any of your independent contractors are, in fact, acting as employees, they will make recommendations to convert these contracts into legally recognised employees.
4. Error & fraud detection
Payroll fraud is a real risk – one which payroll audits can help detect early on. A payroll audit can detect frauds like ghost employees. A “ghost employee” is an individual who is added to your payroll to receive income even if they aren’t actually employed by your business. It might be someone who has passed away and isn’t accidentally removed from your payroll, but usually, it’s someone who was included deliberately.
5. Record-keeping check
Payroll audits evaluate accuracy of payroll data and documents. After all, maintaining accurate records is necessary for tax Organisations’ audits and may prove important in court later on. Different countries have different policies when it comes to record keeping. In Nigeria for instance, companies are required to keep employee records for 3 years.
6. Benefits Management check
Payroll audits are a useful tool for employers who offer benefits to their staff members. Auditors may verify that benefits are being paid out correctly and that the business is fulfilling its responsibilities regarding pensions, medical care, and other perks. This helps prevent employee dissatisfaction and
7. Risk management check
Performing routine payroll audits is a preventive method of risk control. By detecting and resolving problems early on, auditors reduce the possibility of negative legal and financial repercussions further along the way.
8. Process improvement check
Is your payroll system operating well, but not optimally? During the auditing procedure, businesses can improve your payroll process by making adjustments, once improvement opportunities have been identified.
What makes a payroll audit difficult?
1. Changes in labour law
Payroll regulations and legislation do not always stay the same. Take for instance, the minimum salary requirements: they are constantly changing to catch up with the rising cost of living and cultural as well as labour trends.
2. Decentralised payroll systems
Do you record employee attendance on one program, and calculate employee benefits using another? When you use several applications and programs to manage your payroll system, you create opportunities for errors to happen.
The solution to this kind of problem is to use a digital, centralised payroll system which unifies data entry, data collection and data storage for a more optimal payroll experience.
This is where Africa HR Solutions comes in. With our centralised payroll system that offers an employee self-service portal among many other perks, there is little risk of data getting lost or corrupted somewhere along the way.
How to ensure that your payroll is in capable hands?
Place your trust in a well-known and recommended payroll provider. Trusted by over 400 changemakers in Africa, Africa HR Solutions offers digital payroll and payroll audit services to help keep payroll trouble at bay.
Want to learn more about how we can help you? Get in touch with our team here!