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The Importance of Conducting a Payroll Audit

All over the world, the word “audit” makes people a little nervous. But conducting your own payroll audit – whether you do it in-house or outsource the process – works in your favor. Payroll audits can help minimize both financial and regulatory risks by giving you the opportunity to correct problems proactively. Here are just a few of the reasons why conducting a payroll audit should be at the top of your to-do list.


Risk assessment

During a payroll audit, the auditor will closely examine the procedures used by your payroll department. They’ll identify loopholes and inconsistencies that could lead to fraud or other problems. For example, an auditor might point out the risk involved in having a single employee handle all payroll functions with no checks and balances. The results from this risk assessment usually determine how in-depth the rest of the audit needs to be. The more weak points an auditor finds in your processes, the greater the need to examine your records.

There’s also a side benefit to this step: Even if the audit doesn’t discover any problems, companies still wind up with documented processes, maybe for the first time in years (or ever).

Regulatory compliance

Another important purpose of a payroll audit is to verify regulatory compliance. This is especially important for multinational countries working in the Asia-Pacific region, due to the variety of laws and standards across different governments. A payroll auditor may, for example, verify that all foreign workers have the necessary documentation. Or he may check to see that employees are being paid in accordance with labor laws, particularly when it comes to things like hours worked, paid leave, and other benefits.

This is particularly important after changes in labor laws or when payroll functions are decentralized and being administered on a local level. There’s a lot of pressure to meet performance metrics, and some managers might try to get there by underpaying employees, not following through on paid leave requirements, etc. It’s typically much cheaper to correct these situations proactively than retroactively through fines and litigation.

Starting in 2011, for example, New Zealand lets businesses conduct self-audits through the Fair Work Ombudsman. It’s a collaborative process that works well for all parties involved: Employees get paid fairly, and both the government and private business avoid the costs (in both money and time) that go along with a formal investigation.

Elimination of waste and fraud

A payroll auditor will call attention to anything that seems out of the ordinary, whether that’s an expense report that shows a suspicious number of rounds at the hotel bar or two unrelated employees sharing the same bank account (which is a red flag for “ghost employee” fraud).

Proper calculation of taxable income

The laws on what counts as taxable income vary by nation. Some countries, for example, tax things like a company car and even free parking, while others don’t. In those situations, an audit can head off legal and financial problems for both the employee and the company.

Sweeping problems under the rug does nothing to help you or your company. It simply isn’t true that issues you don’t know about can’t hurt you. If there are problems to correct with your payroll system, it’s much better to do it on your own terms. A payroll audit provides that opportunity.

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