Finally, a “go-to” resource for Payroll Auditing.

bookPayroll Auditing: A Guide for Multi-Employer Plans
By Lawrence R. Beebe and Philip Vivirito

Payroll auditing guidance is lacking for professionals working with employee benefit plans who are responsible for and who perform payroll audits. Best practices in payroll auditing, procedures and methodologies of performing an audit have not been given enough focus. This book helps trustees fulfill their fiduciary duties by understanding payroll audits.

This book is published by the International Foundation of Employee Benefit Plans and is available at its [online bookstore].

Update on Payroll Litigation Case: Ruling Made
Thursday, 13 October 2011 08:49

Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

A few months ago, I shared my experience as an expert witness for a multi-employer benefit fund at a non-jury trial in Federal Court.  The case was recently decided in favor of the Funds (plaintiff).

The employer’s only defense was that the payroll audit was not actually conducted, but rather the accounting firm issued an “agreed-upon procedures report.". To this the judge wrote in his ruling:

Much of defendant’s case during the inquest focused on the assertion that an audit was not actually conducted and issued in this action, but rather AHM issued an “agreed-upon
procedures report,” which defendant contended was substantially different than an audit. The rebuttal testimony by plaintiff’s expert, Philip Vivirito, a senior manager with Bond Beebe Accountants and Advisors, established that while there is a significant difference between a payroll audit and an agreed-upon procedures review, the reports issued by AHM are essentially payroll audits and not agreed-upon procedures reports, despite the use of the “agreed-upon procedures” terminology by AHM. (1/14/11 Tr. 37-40, 45.)

The judge also pointed out in his ruling that the employer did not carry its burden by presenting evidence to dispute the audit findings. The judge wrote the following:

RRZ Trucking has failed to sustain its burden. While RRZ Trucking spent a great deal oftime during the inquest proceedings challenging the terminology used to describe the audit performed - i.e., whether it was an audit or an agreed-upon procedures review - and arguing that it was not supplied with all of the information necessary to determine whether the audit’s findings were accurate, it failed to produce any evidence that raised a genuine question as to the accuracy of the audit performed or Mr. Bamberg’s testimony. Moreover, RRZ Trucking failed to present any evidence that disputed the audit’s findings regarding the amount of delinquent contributions due and owing, despite having been in possession of both audit reports for approximately two years prior to the inquest proceedings and having control of all of its books and records.

The full court decision can be read by clicking here.
 
The Admissibility of the Auditor's Report: Implications of a Federal Appellate Court Decision
Monday, 10 October 2011 08:05
Written By Travis Ketterman
Whitfield McGann & Ketterman
P: 312.251.9700 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

For my next three blog entries, I will discuss important aspects of a federal appellate court decision that reviewed the admission of an auditor’s report in a trial seeking multi-employer trust fund contributions.  [See Trustees of Chicago Plastering Institute Pension Fund v. Cork Plastering Co., 570 F.3d 890 (7th Cir. 2009).] Importantly, the auditor’s report was premised on the assumptions set forth in agreed-upon procedures, referred to as “assumptions” throughout the appellate court’s opinion.

The appellate court affirmed the trial court’s ruling that the auditor's report was admissible.  In the ruling, the court addressed several issues.  First, the auditors used the company's own payroll records as the underlying basis for the report.  Of course, the company did not object to the authenticity or reliability of its own records.  Second, the assumptions used by the auditors were, in part, based on what the auditors found during their review of the company's records.  Moreover, the auditor was subject to cross examination during the trial on the assumptions made during the preparation of his report.  

The company's main objections were based on the auditor receiving the assumptions in out-of-court discussions, normally subject to the hearsay rule.  However, the appellate court noted that the discussions between the auditors and the trust funds were not being offered into evidence.  Importantly, the court noted, "Auditors, like other professionals, are often asked to analyze data based on a set of assumptions given to them."  Indeed, the court specifically cited the American Institute of Certified public Accountants Professional Standards AT § 201.

The court noted that the assumptions were not a secret.  The assumptions were instead a reflection of the conclusions about how the various categories of hours and payments in the company's records should be treated in assessing liability to the funds.  The court stated, "The assumptions in fact were derived from what [the company]'s own records disclosed or failed to disclose about its methodology in reporting hours and making contributions” to the various funds.

The appellate court also noted that the validity of the assumptions was debated throughout the trial in light of the auditor's testimony and the company's practices.  It was that evidence, and not any out-of-court communications, on which the trial judge based its decision to accept some assumptions and reject others.  Accordingly, the appellate court ruled there was no error in admitting the auditor's report.

In my next entry, I will discuss the appellate court’s review of the auditor’s testimony at trial.
 
The Benefits of Conducting a Payroll Audit On-Site
Wednesday, 24 August 2011 11:19
Written By Ira Mitzner
Dickstein Shapiro, LLP
P: 202.420.2234 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

There are many technical steps when conducting an effective payroll audit.  When you do have access to the company’s books and records, your presence in the company’s offices can open up opportunities to assist your client fund.  However, if you are denied access to those books and records, you must take firm and swift measures to convince the employer, through informal cajoling or by legal process, to comply with the employer’s obligation under ERISA.

It is always preferable to conduct the audit at the headquarters of the company.  Sometimes, in order to get on with the audit, it will be necessary to inspect the books and records somewhere else (often at opposing counsel’s offices).  Your presence at the company’s headquarters can lead to a wealth of useful information.

Let me give you an example.  An audit was conducted on an employer suspected of having an “alter ego” (a corporation, organization or other entity set up to provide a legal shield for the person actually controlling the operation).  When the phone rang in the front offices, the receptionist always answered, “Company A.”  However, during the course of the day, in the back room, the auditor heard the phone answered, “Company B.”  This information was very useful to counsel in proving that Companies A and B were alter egos.

By your physical presence at the company’s offices, you can serve as the eyes and ears of the fund.  Another approach is to become good friends with the company representative who is interfacing with you.  Ask questions, and through informal conversation you’ll be surprised what you can learn.

What can you do if the company refuses to let you have access to its books and records?  The usual scenario is that the employer makes dates for the audit and cancels them shortly before they are to occur.  This may happen several times.  First, a strongly worded letter should be sent by counsel, warning of the imposition of attorney’s fees under ERISA (the employer may be more impressed by a letter from counsel rather than the auditor).

It is critical that collection procedures contain language entitling the fund to impose attorney’s fees.  While ERISA has a mandatory attorney’s fee provision, there is a legal debate over whether those fees can be collected in the absence of a lawsuit.  If your collection procedures are clear, you have a potent weapon.  A specific date should be set in the letter as to when the auditor must be given access.

If the employer does not allow access, counsel should institute an action to compel the production of documents.  Rather than seeking an injunction (which may be time-consuming and expensive), counsel should merely demand the production of documents when discovery commences.  Often this process will lead to the capitulation of the employer.  If not, attorney’s fees should be sought in any lawsuit.

It may be that the employer will produce some documents, but not others.  This often happens in the case of the general ledger.  The auditor should take the position that the general ledger is necessary to detect alter ego companies.  This is also a convincing argument for the court.

If you have been given access to the company, use your eyes and ears.  If not, you can work to compell the production of documents.
 
Questions the Payroll Audit Firm Should Ask the Trustees During the Proposal Process
Wednesday, 27 July 2011 09:18
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

We previously began a series of blog posts on the questions that trustees should ask the payroll audit firm when they request proposals to perform payroll audits .  The payroll auditing firms being reviewed should also ask the trustees a series of questions during the request for proposal (RFP) process.

Here is the list of questions the payroll auditing firm should ask; these questions will each be discussed in future blog posts:

  1. How are disputes between the payroll auditors and the employer resolved?
  2. Do you have a collection policy?
  3. Do you have a Collection Committee, and if so, how does it function?
  4. How do you select employers for audit?
  5. Do you routinely audit the records of companies of employer trustees?
  6. What records do your agreement and declaration of trust allow you to request in the audit?
  7. Can the payroll records have real time access to plan records?  How about union records?
  8. Who does the audit firm call to receive an immediate decision on a problem with an employer?
  9. What is the process if an employer refuses to allow the audit or access to requested records?
  10. Are there different Collective Bargaining Agreements (CBAs) or participation agreements?  Are there any standard forms of agreement that override the CBA provisions?
  11. Do all employers pay based on hours, weeks, months paid?
  12. Do any employers remit only for hours worked?
  13. Are employers required to remit for all hours paid or are the hours capped?
  14. Are bonuses considered hours paid?
  15. Do we send draft reports to the employers after completion of our audit?
  16. Do you evaluate your entire payroll audit program annually?

Consideration of these questions will assist the payroll auditing firm in knowing what the work involved will entail, how knowledgeable the audit requestor is, and may provide insight into potential hurdles or obstacles during an audit if the project is awarded.
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