Payroll Accounting 3e FOR EVALUATION ONLY © 2016 Labyrinth ...
How to Avoid A DOL Payroll Audit · ©2015 The Payroll Advisor 1 Presented Thursday, October 1,...
Transcript of How to Avoid A DOL Payroll Audit · ©2015 The Payroll Advisor 1 Presented Thursday, October 1,...
How to Conduct an Internal Audit to Avoid
an External One
©2015 The Payroll Advisor
1
Presented Thursday, October 1, 2015
To earn RCH credit you must
©2015 The Payroll Advisor
4
Stay on the webinar, online for the full 60 minutes
Be watching using your unique URL
Certificates delivered by email, to registered email, by November 2nd
About the Speaker
©2015 The Payroll Advisor
5
Vicki M. Lambert, CPP, is President and Academic Director of
The Payroll Advisor™, a firm specializing in payroll education
and training. The company’s website
www.thepayrolladvisor.com offers a subscription payroll
news service which keeps payroll professionals up-to-date on
the latest rules and regulations.
As an adjunct faculty member at Brandman University, Ms.
Lambert is the creator of and instructor for the Practical
Payroll Online payroll training program, which is approved by
the APA for recertification credits.
What We Will Cover Today
©2015 The Payroll Advisor
6
Learn the best practices for payroll departments to avoid audits
How to beat them at their own game: strategies to conduct your own internal audit
Auditing for internal fraud: what to look out for including phantom employees and reverse deductions
Auditing for Wage and Hour law compliance on both the federal and state level
What We Will Cover Today
©2015 The Payroll Advisor
7
Auditing for tax law compliance on both the state and federal level
How to get management to buy into the idea of an “internal audit”
What to do if a compliance issue does arise during an internal audit
When to conduct the internal audit
New areas of audits on the horizon
Strategies to Conduct Internal Compliance Audits
Not a quick project but a department wide project
Allow months to a year to conduct
Any task payroll does is subject to audit
Conduct the audit on an aspect by aspect basis to allow a starting and stopping point along the way
8
©2015 The Payroll Advisor
Setting Up…
©2015 The Payroll Advisor
9
This makes it easier to complete each phase of the audit
Can handle other projects, and then return to the next phase
Speed is not the concern for this audit but accuracy
Must conduct the same kind of thorough audit of all the payroll procedures as an external auditor would do—You are the IRS Agent!
Setting Up…
©2015 The Payroll Advisor
10
When to start the audit is a tough call
Best time is beginning of a new year—March is fine
Employees are less likely to notice/question the changes that may occur
Forms W-2 are easy to adjust
Entire department can be verified in same calendar year
Strategies…
The audit can be conducted with the full knowledge of the payroll staff
Not a secret audit to find fraud or to “catch” someone doing something wrong
Purpose is to find areas that are out of compliance and fix them before ever facing an external audit
11
©2015 The Payroll Advisor
Strategies…
Payroll staff can be useful in this endeavor
Staff can audit each other and manager
No one working on the focus of audit does the audit for that task
12
©2015 The Payroll Advisor
Strategies…
Don’t confuse this type of audit with accounting firm audits or other “internal audits”. Those are looking for compliance with general accounting practices or principles
Audit both policy and practice. Your policy may be in compliance but your actual practice may not be.
Never assume your company policy is in compliance as demonstrated by the First Ohio Banc case.
13
©2015 The Payroll Advisor
First Ohio Banc Example
March 2007 company paid $307,702 in back wages to 298 employees for minimum wage violations. Company policy required loan officers to be paid commissions on a twice-monthly basis and receive no pay if they had not closed loans during a pay period. DOL disallowed this policy.
14
©2015 The Payroll Advisor
Getting Management to Buy In
Upper management must buy in at the start
May run into the “we’ve never had a problem yet” mentality
SOX is helpful if it applies
Use case history to convince management
Example CVS Pharmacy case
15
©2015 The Payroll Advisor
CVS Pharmacy Case
December 2006 CVS Pharmacy Inc. was assessed civil penalties and required to pay back wags to 51 employees most for improper editing of time cards by store managers. The penalties were $11,220. The back wages were $38,151. The back wages would have to be paid in an internal audit but not the PENALTIES.
16
©2015 The Payroll Advisor
Setting Up the Internal Audit
There are two points that are critical for the payroll manager to complete before beginning any internal audit
17
©2015 The Payroll Advisor
First Point…
The person conducting the audit should know all the laws, rules and regulations concerning the topic being audited:
These should be put in writing and include both federal and state regulations
This should not be done from memory but from primary sources such as the DOL/IRS website
18
©2015 The Payroll Advisor
First Point…
Secondary sources (such as payroll manuals) can also be used if the source is comprehensive including source cites
This can be done prior to each audit for each topic or the entire audit book can be compiled prior to starting the audit
19
©2015 The Payroll Advisor
Including…
The company policy for each topic should also be included
Many times the federal or state requirements are exceeded by company policy
Employees can sue if company policy is not followed even if the federal and state requirements are, so they should be included in the audit as well
20
©2015 The Payroll Advisor
Second Point
A comprehensive list of all payroll tasks to be audited should be completed, in writing, either prior to beginning the audit or as you go along:
This gives a “playlist” of the tasks to be accomplished and what lies ahead
Helps with assembling the law book discussed in the previous bullet
Also assists in compiling the time frame and work schedule for the audit
21
©2015 The Payroll Advisor
What to Cover
Comprehensive sample list in the handout but should include:
All facets of paying employees that are covered by the Department of Labor
All taxation and reporting facets
Don’t forget the state equivalents
22
©2015 The Payroll Advisor
Spreadsheet
The topics are in written form to know what to look for. On your spreadsheet you would list each individual area as a topic or subtopic. Example for Regular rate of pay could be listed as:
Topic: Regular Rate of Pay
Subtopic: Bonuses
Commissions
Shift Differential
Each topic and then subtopic would be audited.
23
©2015 The Payroll Advisor
Setting up the Spreadsheet
Many ways the spreadsheet can be organized on Excel:
Have a separate sheet for each topic
Excellent for small payrolls with limited auditing
Use a separate file for each topic and use a separate sheet for each item
24
©2015 The Payroll Advisor
Setting up the Word Spreadsheet
Can also set up on Word using a table style
What works best for your department
25
©2015 The Payroll Advisor
Exempt Employee Example for DOL Audit
Although payroll does not usually make the decision on whom is exempt or not, it is responsible for the application of paying under those rules. Thus, it is part of the audit to determine if all employees who are paid as exempt employees indeed do qualify for that exemption.
Are deductions from an exempt employee’s pay for such items as vacation, sick, or other leaves done correctly under federal and state regulations?
Does company policy for deductions from exempt employee’s salaries comply with federal and state regulations?
26
©2015 The Payroll Advisor
Before Beginning…
Create template for conducting the audit for each task
Create report template for audit findings for each task
Create compliance problem template
Create general template of final audit report for department
27
©2015 The Payroll Advisor
How to Conduct It
Written, formal report for each procedures or policy reviewed
This report the basis for new controls if needed
Not a quick scan
Set up spread sheets and review forms
Compare the regulations to the actual practice and then to policy
28
©2015 The Payroll Advisor
Conducting the DOL Audit
Include all facets of payroll subject to FLSA or state equivalents
Auditing all facets not just your own—remember CVS case dealt with store managers. Violations can occur anywhere.
29
©2015 The Payroll Advisor
Conducting DOL…
Pay special attention to payroll calculations and your department’s understanding of how they are conducted
Audit each employee not the department as a whole—it only takes one employee who fails to understand…
One area that definitely requires scrutiny is “regular rate of pay”.
30
©2015 The Payroll Advisor
Regular Rate of Pay
Does the company have any factors that would affect the regular rate of pay such as bonuses, commissions, or shift differential?
Do the state and federal regulations match or must payroll allow for a higher state requirement?
Can regular rate of pay be calculated by the payroll system? This question is not a quick answer. Most payroll systems do not have the capability to calculate regular rate of pay especially if it crosses over to more than one payroll.
31
©2015 The Payroll Advisor
Regular Rate of Pay
If the regular rate of pay cannot be calculated by the computer system, are manual spreadsheets being used?
If manual spreadsheets are used to calculate regular rate of pay, are they being done correctly?
Are retroactive pay raises being included when calculating regular rate of pay for back overtime due?
32
©2015 The Payroll Advisor
Regular Rate of Pay
Does the payroll staff understand the rules concerning regular rate of pay and are they applying them to the payroll processing? This is critical. The company policy and the procedure manuals may state the calculation correctly but the staff does not follow through because they do not understand the concept is a compliance problem.
Does the company policy meet or exceed the federal and state requirements for regular rate of pay? Does the payroll staff understand the policy?
If the employee works more than one job with more than one rate are weighted averages used?
33
©2015 The Payroll Advisor
Auditing For Regular Rate of Pay
Use your primary source as a starting point
DOL has a overtime calculator that can be used to test your calculations
http://www.dol.gov/elaws/otcalculator.htm
Better to look to secondary sources for the actual understanding of the calculations in this case
Make sure you understand what “premium pay” is and how it is calculated
34
©2015 The Payroll Advisor
Sample Steps for Regular Rate of Pay Audit
Determine how the regular rate of pay is currently being calculated on your payroll using three example employees with different types of payments such as shift differential, bonus payment and commissions
Use the DOL calculator to see how the DOL would perform the same calculations for the same employees
Compare the two outcomes
35
©2015 The Payroll Advisor
Overtime Calculator
©2015 The Payroll Advisor
36
Explains the rules of overtime and then demonstrates how to calculate using your own information
Let’s you calculate how the DOL would calculate overtime but without the auditor sitting in your office by completing a series of questions
Let’s do an example to see how it works…
Continue…
©2015 The Payroll Advisor
38
From this point on you will answer the questions related to the employee such as:
Are you a government employer or is this a tipped employee
The advisor will give your information as to what you will need to continue to the next screen based on the answers to the last screen
You will input day of the week the workweek starts on, hours worked, hourly rate, bonus information, type of payroll period etc.
When you finally hit submit…
The Results
©2015 The Payroll Advisor
39
The website will show you the results of the calculations—exactly what the employee’s gross wages should be
It will explain each step of the calculation and then show the calculations
The advisor will also explain the rules it used to determine the calculations
We entered a weekly employee who is paid $10.00 per hour and received a $100 bonus this week for completing a project on time and on budget
For the Internal Audit
©2015 The Payroll Advisor
42
We compare our employee’s gross wages with what the DOL Overtime Calculator results
If they match within 2 or 3 cents we have a good system for handling overtime
If they don’t match within 2 or 3 cents we have a problem
Increase the audit scope if unsure
Other Areas of Concern for DOL
Lunches docked but not taken
Overtime for semi-monthly payroll periods
Weighted averages used for overtime payment when employee works at more than one rate per week
Off the clock work
43
©2015 The Payroll Advisor
State Side…
Now look at the same areas for the states where employees are performing work
Anything unique such as CA OT?
Do they follow federal?
Are meal and rest periods mandatory?
Check for postings, paystubs, notices and other state related items
44
©2015 The Payroll Advisor
Auditing for IRS Tax Compliance
All facets of taxation including all payments made through the payroll and through accounts payable and offered through human resources---Everything!
Sample list in handout
Don’t forget the state and local taxes
45
©2015 The Payroll Advisor
Example Area of Audit—Prizes and Awards
Does the company offer rewards for performance? Taxation audit should include such items as:
Length of service awards
Safety awards
Employee referral programs
Employee of the day/week/month/quarter or year
Performance bonuses
Prizes
46
©2015 The Payroll Advisor
Steps to the Audit of Length of Service
Awards
1. Do you offer such awards—don’t offer—note in audit report and move on
2. If offering determine IRS requirements by reading IRS publications such as Circular E or Pub 15 series
3. Determine company program requirements and actual practice
4. Compare IRS requirements to program
5. Determine the results for taxation requirements—compare to current company taxation practice
47
©2015 The Payroll Advisor
Steps to the Audit of Length of Service
Awards
1. Do you offer such awards—don’t offer—note in audit report and move on
2. If offering determine IRS requirements by reading IRS publications such as Circular E or Pub 15 series
3. Determine company program requirements and actual practice
4. Compare IRS requirements to program
5. Determine the results for taxation requirements—compare to current company taxation practice
48
©2015 The Payroll Advisor
What to Do If Noncompliance Issue Is Found
Set up procedures in advance to report to management any noncompliance issues that are discovered.
Deal with each one as they arise after the completion of the audit for that procedure
Keep written records to show corrections to procedures or to show why they were not corrected
49
©2015 The Payroll Advisor
Auditing for Internal Fraud
Payroll fraud is defined as “anything that uses payroll to take money from the company in a deceptive or illegal manner”.
Can take many forms
Phantom employees
Deduction reversals
Fraudulent additions to time cards
50
©2015 The Payroll Advisor
Phantom Employees
A fake or phantom employee is “hired” and set up in the payroll system. This phantom employee is then paid normally, no excess hours or overtime to make the employee stand out on an edit report.
Usually the payroll staff member works with a supervisor of another department. This allows a time record to be submitted that would pass auditing.
51
©2015 The Payroll Advisor
Phantom Employees
Once the phantom employee is set up it is almost impossible to detect and can go on for years. This is especially true in large companies where one extra employee in a large department would go undetected.
The best method for finding phantom employees or to make sure there are none on the system is to conduct a headcount of employees to payroll checks. This is called a phantom employee check.
52
©2015 The Payroll Advisor
Phantom Employees
During a phantom employee check, a team of employees not related to the payroll department pass out the paychecks in person to each employee. The employee must show identification before receiving the paycheck. This confirms that the employee whose name is on the payroll check is available in person.
53
©2015 The Payroll Advisor
Phantom Employees
Phantom employee checks cannot be announced in advance; it must be done in secret. The direct deposits are cancelled for this phantom employee audit. This is due to the fact that the phantom employee is frequently set up as a salaried employee with payments that follow automatically. This is particularly true in the case of electronic payments into bank accounts where a check does not need to be collected.
54
©2015 The Payroll Advisor
Phantom Employees
No one can pick up someone else’s check—even the supervisor
All unclaimed checks on payday are retained in payroll and must be picked up in payroll
Account for sick or vacation employees
If the check is never picked up or suddenly the employee “quits” this is the sign of a problem
55
©2015 The Payroll Advisor
Signs of Fraud
Remember what my accounting professor once said “If you are going to embezzle or steal, do it once, do it big and get out of town”.
Not everyone follows my accounting professor’s advice
Little bits over time is the norm—no one thinks they will get caught
56
©2015 The Payroll Advisor
Pay Raise Input Fraud
If payroll inputs pay raises or has access to input on this master screen, all pay raises should be compared to the actual paperwork
Better fraud prevention: someone other than payroll inputs pay raises perhaps Human Resources
Someone other than HR verifies pay raises such as payroll
3rd party such as controller is best
57
©2015 The Payroll Advisor
Reverse or Refund Deduction Fraud
Reversing a deduction is a rare input and any reverse deductions should always be verified immediately by someone other than the one who did the input
Refunds of deductions are rare as well
All refunds of over deductions should be verified by a third party and fully documented including the complete “proof” i.e. payroll records that it actually occurred
58
©2015 The Payroll Advisor
Garnishments
Garnishment checks should be processed as a third party check directly from the payroll system if possible. If accounts payable checks are used, then proof of a deduction from the payroll should accompany each check request.
Harder to do for child support nowadays but if sending child support via EFT will prevent fraud
59
©2015 The Payroll Advisor
Tax Refunds
Tax Refunds Or Adjustments: The payroll department should never refund taxes to employees. Whenever this is done an audit should be conducted.
Especially watch for state and local tax refunds—less harder to spot
60
©2015 The Payroll Advisor
Other Fraud Methods
Anything out of the normal usual current dollars times current hours should be reviewed by someone other than the person who input it
It must be KNOWN that you are keeping watch!
61
©2015 The Payroll Advisor
Preventing Fraud
One of the best ways is to make sure that the duties in the payroll department are properly distributed among the staff so that a separation exists for all check producing or input to checks tasks.
62
©2015 The Payroll Advisor
Implementing Internal Controls
Have internal controls in place for every single payroll process no matter how small
If you can find a way around the process so can someone else
Every process has to have a break somewhere for a review by a 2nd party
Example: input timecards and process paychecks on a normal payroll run—where is the break? Where is the audit?
63
©2015 The Payroll Advisor
The following are some of the control features that should
be in place when running a payroll:
Auditing procedures prior to input
Auditing procedures to verify input
Reconciliation of the payroll
Error correction controls
Manual checks, void checks and check stock
Procedures for the proper distribution of payroll checks and unclaimed checks
Audit trail requirements
Controls on distribution of payroll information and reports
System documentation
67
©2015 The Payroll Advisor
Best Practice for Protecting Data
Two questions to ask of staff members:
1. Do you need access to do your job or want access to do your job?
2. Do you have access as a requirement of your job or as a promotion or reward
68
©2015 The Payroll Advisor
New Areas for Potential Audits
IRS is looking at fringe benefits for executives such as personal use of housing or vehicles and club memberships
Independent contractor misclassification is the big area of audits right now both federal and state
©2015 The Payroll Advisor
69
How Can Ascentis Help Me?
71
Process payroll
• Real time flexible processing
• 100% accuracy
• Reduce processing time by up to 30%
Employee portal
• Paycheck data
• Paystubs
• Tax forms
• Paycheck simulation tools
To earn RCH credit you must
©2015 The Payroll Advisor
72
Stay on the webinar, online for the full 60 minutes
Be watching using your unique URL
Certificates delivered by email, to registered email, by November 2nd