Payroll professionals: stay audit-ready with these 7 internal controls

Payroll is a mission-critical component of running any business, with the responsibility of payroll professionals extending far beyond ensuring accurate and timely payment to staff. Payroll pros like you play a pivotal role in supporting workforce management processes across the organization, and are often tapped on to gather information, produce reports, and help prove compliance in the event of an external audit. Having the right systems and tools in place can make all the difference when it comes to effective (and legislatively compliant) payroll practices.

One of the best ways organizations can keep a pulse on the performance of their systems and strive for early detection and correction of potential challenges is by establishing payroll controls and regularly performing internal audits to ensure the controls are working as expected.

Why is it important to audit your payroll?

Payroll is often one of an organization’s largest expenses, which means that even a small miscalculation or data entry error can end up being extremely costly. Internal audits can mitigate some of this risk by helping to:

• Identify and reduce data entry errors.
• Uncover calculation.
• Prevent payroll fraud.
• Ensure employees are paid accurately and on time.
• Verify statutory withholdings and remittances.
• Maintain compliance with employment laws and regulations.

Proactive organizations establish internal controls and perform regular audits to evaluate the effectiveness of their systems and processes, and subsequently determine if any changes need to be made.

Seven examples of internal controls for payroll

Here are seven examples of internal controls that the National Payroll Institute (NPI) recommends implementing and reviewing regularly to reduce the risk of data and compliance errors:

1. Worker’s status/employment type

Misclassifying a worker’s status or employment type is one of the most common audit issues identified by the Canada Revenue Agency (CRA). Because employment type directly affects a worker’s entitlement to Employment Insurance (EI) benefits and can impact how a worker is treated under legislation like the Income Tax Act and Canada Pension Plan (CPP)/Québec Pension Plan (QPP), it’s critical to get it right. The status of any workers being paid as self-employed contractors should be reviewed regularly to ensure the situation remains valid under the employment status guidelines provided by the CRA.

Payworks pro tip: Organizations that use Payworks to help manage their payroll can specify a worker’s employment type when setting up employees in the system, and can make changes at any time if needed. Payroll administrators can add on Global Report Writer to easily build ad hoc or custom reports to review all employee information, including employment type.

2. Standardized processes & records

Organizations should have a system that traces the steps and actions involved in hiring and setting up an employee on payroll. Payroll administrators should receive a signed and dated new-hire request from the individual with hiring authority; this way, there’s documentation to trace back to the source of the authorized entry. The new-hire request should include all of the employee’s information needed for payroll, such as their Social Insurance Number (SIN), start date, pay rate, and employment type.

Payworks pro tip: Organizations using Payworks’ Human Resources solution can set up automated administrative tasks and checklists to ensure standardized hiring processes are established and followed, and reminders are in place to review employee information as it’s submitted during the onboarding process. Admins can take advantage of the Read & Acknowledge and e-signature features to share and maintain a record of company documents that require input or action from the new employee. As a bonus, any employee information collected during onboarding automatically flows through to Payroll, eliminating the need for data re-entry and reducing the risk of data errors.

3. Segregation of duties and access levels

As a best practice, payroll administration duties should be segregated and assigned to different people. This way, tasks like processing new hire forms, setting up employees on payroll, and authorizing employee payments don’t all fall on one person, which would expose the organization to an increased risk of human error and abuse/fraud. In addition to divvying up the duties, an organization should establish and maintain strict access levels that ensure payroll and HR administrators only have access to the information and systems they need to perform their jobs.

Payworks pro tip: Payworks’ workforce management software gives administrators the ability to configure user access for each module individually, allowing for greater flexibility and configurability across the organization. Additionally, up to 10 levels of security access are available to control which employee information is accessible to managers and administrators.

4. Time and attendance

It’s recommended that the department manager whose budget covers the cost of an hourly employee’s wages reviews all time data entries for the employee prior to sending it to payroll. Payroll administrators are then responsible for balancing the hours to the time entry report or uploaded data to ensure the employee is paid accurately for their hours worked.

Payworks pro tip: Organizations using Payworks’ Time Management solution can rest assured that only approved time records flow through to Payroll. An employee time record is considered pending after they punch in/out for their shift or submit their time records manually using the Timesheet function in Employee Self Service. Pending time records require a manager to review before they can be paid out. Additional features like the statutory holiday calculator, warning messages on timesheets, and pending time off requests widget help ensure other factors impacting pay for a given period are taken into account and employees are paid accurately for the hours they work.

5. Variable pay

Variable payments – like bonuses, commissions, and shift premiums – should be recorded separately from regular salaries and wages on the payroll register to make it easier to identify and trace the source of the pay.

Payworks pro tip: Through Payworks’ Payroll solution, it’s easy to create an extra or bonus payroll run so you can manage regular and variable payments separately. The bonus runs show as a separate pay statement, which helps ensure accurate payroll. Payroll administrators can apply any applicable deductions to the bonus runs as well to make sure they’re staying compliant!

6. Classification of employment income

Employee compensation doesn’t always come in the form of regular pay. An employee may receive payment for items like a car allowance or even a non-cash performance award, which may still need to be classified as employment income and processed through payroll. Payroll professionals should regularly review the items processed through accounts payable to ensure any items that are considered employment income are accounted for and recorded as such.

Payworks pro tip: Payworks’ intuitive Payroll solution allows you to enter, edit, and reorder the display for any earning information applicable to your payroll through the earnings pay element. You can generate and access standard or custom reports at any time to review information related to employee earnings. Come year-end, you can count on our support and checklists that walk you through critical steps, like reviewing year-end box assignments by pay element for accurate reporting.

7. Employee consent for voluntary deductions

If your organization runs a charitable donation program, social club, or any similar program that relies on employee contributions for funding, employees may choose to participate by way of voluntary payroll deductions. Before any deductions can be applied to payroll, the employee must provide consent for the amount and frequency by which the contributions are deducted from their pay.

Payworks pro tip: Organizations using Payworks’ HR module can leverage the Read & Acknowledge and e-signature functionality to easily share documents and obtain a record of consent from employees. Through their Employee Self Service accounts, employees have 24/7 access to view all pay statements so they can maintain visibility into how the voluntary deduction impacts each pay.

Compliance is critical… and complicated!

Payroll professionals must comply with over 200 federal and provincial regulatory requirements, all while keeping up to date on new payroll legislation. When an organization has effective internal controls in place, the likelihood of data entry errors, miscalculations, payroll fraud and the costs associated with it decline dramatically. Having the right systems and solutions in place can make all the difference when it comes to paying your people accurately and staying onside with the latest payroll legislation.

We’re here to help guide you through the ever-changing Canadian legislative landscape and support your organization with holistic workforce management solutions and a dedicated Client Service Representative who’s always a quick click or call away.

To learn how we can support you and your organization in maintaining accurate employee and financial data and staying compliant, book a demo with our knowledgeable sales team: https://www.payworks.ca/landing-pages/campaigns/book-a-demo.