Red Flags Auditors Look for in Your Payroll Procedures

Any payroll professional can make a mistake. These problems usually reveal themselves in time. However, intentional payroll discrepancies are usually not simple mistakes but acts of deception. Following are some red flags auditors look for in your organization’s payroll procedures.

Red Flag #1 — Payroll Procedure Manipulation
Even with the best laid plans, payroll procedures can be manipulated. Does your organization use write-in timesheets? Watch for inaccurate data found on write-in timesheets. When reviewing payroll input data, have you noticed any employees who complete the timesheet by always beginning work at exactly 8:00 AM and leaving at exactly 5:00 PM. This lack of accurate timekeeping makes it possible for an employee on paid leave, to be paid for working an eight hour day plus overtime hours.

Red Flag #2 — Little Personal Information
Another situation worth investigating is when very little personal information is available about a particular employee or when that employee has a post-office-box home address. In addition, their paychecks may reflect few or no payroll deductions. This may indicate a fake employee. These pseudo-employees can be issued several checks prior to being discovered.

Red Flag #3 — One Bank Account Number/Two Employees
The procedure of direct deposits can make payroll processing easier; however, it may also lend itself to easier cover-ups. One such problem may be revealed if the same bank account number is used for two different employees. Check to ensure you really have two employees using the same bank account. Otherwise, you may have one employee and another pseudo-employee on payroll.

Red Flag #4 — Duplicate Payments
With paper checks there’s the risk of an original check gone missing or one issued for an incorrect amount. When that happens, payroll may issue an extra check. The action of check reissuance can result in a duplicate payment if the original check is never voided.

Red Flag #5 — All Eggs in One Basket
If one particular employee insists on completing all payroll activities or if that person insists on never taking vacation time, the resulting solitary exposure to payroll documents can lead to major problems. Divide payroll activities among several and/or insist payroll individuals take vacation for several days at a time to ensure you don’t have a problem with internal payroll procedure manipulation.

Managers must be diligent in reviewing all aspects of payroll production for the benefit of the company as well as for the employees. A sudden spike in payroll expenses, excessive overtime hours, missing check numbers, error corrections and other flags can all be signs of problems. However, these red flags or similar ones could reveal no problems at all. The best managerial action is alertness.

Check your online library for more on procedures, including courses like:

• Search and add to my training: Analysis of Income Taxes
• Search and add to my training: Approaches to Budgeting (CPE)