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Monday, 18 July 2011 11:47 |
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Written by Kurt Needles
Needles & Associates
P: 303.430.4225 E:
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You have completed the audit sample, turned in the results to the fund office [i.e., the Third Party Administrator (TPA)] – now what? How does the payroll audit program relate to the annual audit? What procedures should you perform at the Plan level before you issue? Following are my suggestions:
The Basics
Let me start with the basics. Some clerks, not knowing what to do when they see a payroll audit, may “file” the report when it hits their desk; literally, they just stick it in the file cabinet and they are done. The hours may have not been keyed and the employer was not billed for the hours due.
Other times the clerk may have sent the employer a bill, but since the discrepancy is generated outside of the TPA’s normal employer contribution system, a computer-generated follow-up may not happen. They forget and nothing else happens. Therefore, the annual auditor should track a sample of payroll audits to ensure they are being keyed and collected.
Can Payroll Audits Serve Any Other Purpose for the Annual Auditor?
I was in a TPA office last year and another CPA firm’s staff auditor was in the file room on a footstool with employer reports spread out on her lap, checking them to the eligibility report. If the payroll auditor instead uses audit workpapers that are set up using the Plan’s computer-generated reports, the above step becomes obsolete. Let me explain:
Every Employer Report Form (ERF) is keyed by the Plan’s clerk, and this keypunching is the heart of any employee benefit plan. If the keyed hours / shifts / dollars are wrong, eligibility is wrong, the actuarial data are wrong, hour / dollar banks are wrong and benefits paid could be wrong. You could then have a complete disaster.
Instead of getting photocopies of the employer’s remittance, you can ask for the computer-generated output of the keypunched ERF, essentially getting the same data that the staff auditor on the footstool was looking at. When using this data for your payroll audit workpapers, you test the hours in the system against the employer’s payroll. You could then jump over the company’s preparation of the ERF and the TPA keypunching of the ERF, and test employer payroll to Plan data. When you find discrepancies between the two, then you can document who entered the data incorrectly. I recognize that 99.9% of the time it is the employer, but if you document the accuracy of the Plan’s keypunching, you can keep your fanny off the footstools and save some time.
Typically, you would only find the type of discrepancies where “Joe Sr.” was given “Joe Jr.’s” hours or vice versa, or an employee was set up twice because of a SSN error. No matter what, these must be corrected. We have discovered several times where the report was keyed properly, but under the wrong employer, which is not a big deal unless they ask for a withdrawal liability calculation. If you see more than one small keypunch error in a plan year, it should be treated seriously. If the little errors go on too long, after a while how can you trust anything in the system? Also, any keypunch error by the Plan should be documented in the completed payroll audit report. We include notation of these errors in the quarterly payroll audit report to the Trustees.
How Do I Document the Completed Payroll Audits in My Annual Workpaper Files?
When a payroll audit is completed, the payroll auditor documents the employer, number of participants, hours audited, months audited and discrepancies noted. Then the annual auditor uses this information to project any error noted in the payroll audits to the contributions taken as a whole. My Firm documents this using a simple Excel spreadsheet we have named the “Tracking Sheet.”
The Tracking Sheet shows the number of actives from the prior year’s Form 5500. It multiplies out the sample needed to achieve the audit coverage of 20% to 33%. It assumes that every active employee worked all 12 months; we multiply that out to get the number of persons the Plan’s clerks keyed for the year. It calculates the number of man months audited. This is the documentation for testing the accuracy of data keypunching. (I don’t think the staff auditor on the footstool tested 4,462 participants back to the report forms.)
This sample Tracking Sheet shows we have audited more than the minimum number of participants needed. We would need a few more payroll audits to be completed if we wanted to achieve our minimum 20% testing for all 12 months. Auditing 20% of the people for one month may satisfy your firm’s sampling needs. You may want to sample 20% for the entire year – that is a decision for the individual firms or audit managers. The Tracking Sheet also provides access to prior years’ data (tabs in Excel) to document what type of error pattern the group is showing. That may add to or end the need for additional payroll audits for the year.
I believe this simple Tracking Sheet in the annual workpaper file achieves the documentation necessary to conclude various aspects of the Plan’s audit program.
After the completion of your next payroll audit, implement these basic procedures; they provide a helpful and thorough conclusion for your payroll audit and will allow your findings to provide useful information for future audits and other financial endeavors. |
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Tuesday, 05 July 2011 10:13 |
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Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E:
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Let’s say the trustees of a Plan have decided to request proposals from firms to conduct payroll audits. What questions should be asked of the payroll audit firms during the proposal process?
This list of 20 questions should be asked of every firm responding to the proposal. Ideally, these questions should be asked during the proposal process and the firms should be asked to respond to each of the questions in writing. Those firms selected to present to the trustees should then be asked to comment further on their responses during their oral presentations.
Following are the 20 questions the trustees should ask; these questions will each be discussed in future blog posts:
- How many years have you (the primary auditor who would be doing the audit) been doing payroll audits? How many years has your firm been doing payroll audits?
- How many audits do you do annually?
- What percent of your payroll audits have findings?
- What is the relationship of your audit findings to your audit costs?
- Do you audit all employees 100% or do you test employees?
- How long does your typical audit take if the employer has 30 employees? 100 employees? 500 employees?
- What are the qualifications of your payroll audit staff?
- Do you charge for travel time?
- Do you charge a flat fee per audit or an hourly rate?
- Have you done payroll audits for our industry or for similar industries?
- What is a typical time period between the assignment of an audit and delivery of the audit report?
- Will we receive progress reports?
- Should we have a three or four year cycle to audit all employers?
- Should all employers be selected randomly for audit?
- Should we ever change the time period between audits for a given employer?
- How long does it take to issue a report on a no findings audit?
- Do you discuss your findings with the employer when you complete your field work?
- How do you schedule a payroll audit?
- Do you have a dedicated payroll audit staff?
- What is the experience level of your payroll audit staff?
Asking these questions early in the search process will allow you to see the depth of the respondents and their ability to have a ready answer for many situations, and will help avert unwelcome surprises during the audit process.
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Thursday, 23 June 2011 09:07 |
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Written by Kurt Needles
Needles & Associates
P: 303.430.4225 E:
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About ten years ago, my firm was hired to be the payroll auditors for a construction industry-based group of Plans. Their payroll audit procedures required a stratified sample of payroll audits performed over a four-year period. We were given a list of all the contractors and their total contributions. We sorted it, large to small, and picked every fourth company for year one, the second for year two, etc. This seemed logical and simple but, because of delinquencies, a request for an employer to be audited by another trade (cost sharing), new employers working in the area and old employers deactivating, the list was a mess. Trying to hit all employers in a logical manner was impossible.
Problems with Audit Procedures for Contractors and Subs
Fixed or rigid procedures can also cause issues because they are easy to violate. If a procedure states to audit “everyone during a contract period” or “every employer over [fixed number] of years,” the Plan may violate their own policy because they may not get everyone audited. Some may not get audited because it is not cost effective, companies go bankrupt or close, or they had people in year one but no one in subsequent years. If the policy is rigid, all of them must be done. Additionally, in the construction industry there may be one company with an international agreement that does nothing other than, for example, industrial chimneys or install kitchens in Taco Bells. They come into an area, use key men, and hire a handful of workers from the Union Hall for several months and leave. The Union is not aware of any issues, there are no complaints from members, and the office of the company is in the middle of nowhere. A “mail audit” could be tried, but they also have drawbacks. Also, travel expenses for one small audit are not cost effective; it is not a good use of Plan assets because the probability of errors is small.
Taking a Different Approach for the Audit Sample
After this experience, I came up with (what I believe is) a reasonable and logical way of picking the sample. I use the number of active employees from the prior year’s Form 5500. We audit a variable number of employers so that we include between 20% and 33% of the actives’ participants. This does not draw boundaries around the number of employers, it uses the participants. If the firm had a stable number of employers and population, the 20% to 33% would mean every employer gets audited every 3 to 5 years, which is the industry average.
I believe you need to be flexible from year to year as employers change, the employer’s number of reported employees change and the Plan’s overall number of active participants may change. You can hit your target annually, adjust up and down, and do so without excessive cost to the Plans while accomplishing a proper audit.
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Friday, 17 June 2011 10:00 |
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Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E:
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
A US District Court in the Eastern District of New York, in the case of Finkel v. Lite Tron Ltd., ruled that a plan administrator can continue with his claim to hold the owner of union and non-union companies liable for unpaid company contribution obligations.
The BNA Pension and Benefits Reporter (www.bna.com), in its November 9, 2010 Issue, summarized the findings of the case:
“According to the court, a controlling corporate officer can be held individually liable under ERISA if he or she defrauds or conspires to defraud a benefit fund of required contributions. A court must determine if a controlling corporate official’s conduct rose to the level of common law fraud, which requires a showing of: (1) a material false representation or omission of fact, (2) made with the knowledge of its falsity, (3) with the intent to defraud, (4) reasonable reliance, and (5) that damages the plaintiff.”
In this case the judge ruled that the elements cited had been met and the corporate official could be held liable. There have been many court cases on whether a corporate officer can be held personally liable for employer contributions. In this case the judge concluded that fraud by the officer could be taken into account in determining whether the officer was personally liable.
For more information on this case, visit www.bna.com. |
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Page 4 of 11 |
Payroll Auditing: A Guide for Multi-Employer Plans