The Importance of Payroll Audits to Highlight Risks

27th November 2020

If not managed correctly, for the likes of small businesses and many others, payroll can be one of the largest operational expenses when it goes wrongTo avoid payroll errors, fines, and penalties, it’s mission critical that an employers audits are compliant just as much as their reports are accurate.  

Regardless of your payroll system, whether it’s an internal or outsourced solution, there’s always room for error. Even the most reliable, low-risk payroll solutions can be susceptible to human mistake. A regular payroll audit can mitigate these risks, by ensuring that your employee information is up-to-date, accurate, and reliable.  

What is a Payroll Audit/ Payroll Risk Assessment 

In payroll administration, routine audits are performed as a kind of risk mitigation. It’s a process that ensures a compliant payroll solution at all times. For businesses of all sizes, certain mistakes are too common to ignore. It’s imperative to catch any slips in your payroll reporting early on, because mishaps with unreliable reporting can escalate to HMRC penalties, payroll fraud, or upset employee relations.  

Payroll risks’ describe the peril of unreliable reporting that can quickly become a nuisance to your operation, leading to costly financial and reputational damage.  

A payroll audit is an important step towards compliance. But to avoid risk altogether, managers should regularly audit their payroll system. It’s key to make a routine habit out of payroll auditing because information is always changing and updating as your workforce grows and expands.   

It’s often recommended to audit your payroll solutions at least yearly, if not more commonly. This can clarify whether or not your operation is legally compliant.  

Payroll audits or payroll risk assessments highlight potential risk by analysing payroll systems to ensure reliability and accuracy. The audit will investigate a business’s active employee information, their pay rates, wages, and general taxes.  

Who Needs a Payroll Audit / Payroll Risk Assessment 

Payroll auditing is really a matter of compliance. This is normally a challenge for HR and payroll professionals, but the errors can be risky for any business. The goal of a payroll audit is to pre-empt anything unreliable in your reporting that could open up your operation to costly damage.  

For businesses wishing to avoid payroll risks, consider making auditing a regular process to ensure information is reliable, accurate and that your operation is compliant all the time. 

Tips to Avoid Payroll Risks 

Empower your payroll with the following tips to ensure a compliant payroll solution.  

1. Perform Payroll Walkthroughs  

For any operation, whether your payroll is delivered by a third-party outsourced solution or is controlled in-house, payroll walkthroughs can help you identify any weaknesses. This is a retrospective action that should walkthrough the story of each hired employee – start at the beginning of their employment and conclude with how they’ve progressed so far. This should cover their whole journey through hiring, employment, and thereafter.   

It can be helpful to ask questions about your payroll as you journey through its delivery 

  • How often is payroll processed?  
  • Who is processing payroll and how?  
  • Who approves payroll budgets?  
  • Who controls the reporting of payroll in your business?  
  • Who monitors banking activity?  

2. Have a Named Authority for Risk Detection

Risks are especially common and costly for smaller businesses. It’s not uncommon either for one risk to multiply, becoming something far worse, like exposure to expensive penalties or potential payroll fraud.  

Having a named authority responsible for ensuring compliant payroll is essential. Being aware of snags early on in your payroll solution means that quick corrections can help steer a business away from costly penalties, fines, and the reputational damage of fraud.  

If, for example, payroll expenses aren’t compared to budgets, then there’s a financial risk. Or, another common example, offboarded employees no longer with a firm are still mentioned in payroll reporting.  

One of the most common payroll risks is a lack of the right controls in place that limit exposure to costly risk. One of the best remedies for businesses with internal solutions is to perform a surprise audit.  

3. Understand and Be Proactive About Payroll Fraud  

One of the greatest risks of unreliable payroll reporting is fraud. Without routine reviews of payroll expenses, especially unexpecting ones, it’s hard to gauge how accurate your financial reporting truly is.  

Payroll fraud comes in many shapes and sizes, but it could be costing your operation a great expense. Fraud is associated with theft that occurs from your payroll function, typically when an employee is accessing more funds than what they’re entitled to.  

A routine audit will detect this kind of activity early on, which is key in preventing any harmful threat to your operation.  

For those with an outsourced solution, this kind of activity is more likely to be detected quickly or avoided altogether. This is because a third-party expert is monitoring the continued delivery of your payroll. Yet, SMEs could be greatly at risk if they entrust a busy internal team without the proper tools or resources to detect risk and understand how to identify fraud.  

4. Plan for Common Payroll Mistakes  

Payroll mistakes occur when error is unintentional. This is sometimes the result of employees with insufficient payroll knowledge or can simply be a casual mistake or human error. Many mistakes only become damaging if left unadjusted.  

Payroll auditing can properly, and compliantly, detect these mistakes and help businesses plan to make adjustments. Common examples range from misinformation, or outdated employee records, to under/over payments for staff and a substandard record of payroll.  

If you plan for mistakes – that is, anticipate them – you can more easily spot mishaps in your reports and quickly make the adjustment into complaint payroll.  

Yet, with a fully managed payroll solution, compliance and an expediated payroll delivery can be expected. Businesses often opt into an outsourced payroll solution precisely because there’s greater security involved. When you partner with professionals like FMP Global, our years of experience in mitigating payroll risks can ensure you only see rewards.  

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