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].

How to Pick a Sample for Construction Industry-Based Plans
Thursday, 23 June 2011 09:07

Written by Kurt Needles
Needles & Associates
P: 303.430.4225 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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.