Is your payroll department ready for an audit? Do you know what information to provide and where to find it?
A recent survey by Angus Reid Forum for the Canadian Payroll Association (CPA) found that 54 per cent of business leaders would not know how to prepare for a payroll audit. Among those who are directly responsible for payroll, 66 per cent said they would not know.
The survey also found that close to 70 per cent of business leaders were unaware of or did not think about the potential for a payroll audit.
This is despite the fact that many different types of agencies conduct payroll audits.
They include the Canada Revenue Agency (CRA), Revenu Québec, employment standards boards, workers’ compensation bodies, and provincial finance ministries that levy employer health taxes.
Peter Tzanetakis, president of the CPA, said the association did not expect that such a high percentage of employers would be unaware of payroll audits.
“To us, that is extremely surprising, given the potential for an audit and the potential for penalties and the stigma that is associated with non-compliance,” he said.
“One of our intentions (in doing the survey) was to draw attention to the fact that approximately 48,000 businesses across Canada are reviewed just by the CRA alone on an annual basis and they dole out just under $30 million in penalties,” said
“I think (an audit) is something that whether you are the payroll practitioner or the CFO or the CEO, you need to be aware of.”
For payroll professionals, in particular, it is vital to know what payroll audits are and how to prepare for them, said Sheena Graves, senior manager payroll delivery at Ceridian Canada.
“It is important for payroll professionals to understand the payroll audit process simply because they are often the front-line resource working with the auditor and responding to their inquiries,” said Graves.
“In addition, understanding the audit process can help to ensure that all necessary records are being kept for the appropriate period and that they are organized and stored in the most efficient way to reduce additional effort and time the payroll team will need to set aside for an audit,” she said.
“While individual auditors may approach employers differently, there are general rules of engagement,” said Graves.
“Payroll professionals that understand their role are better positioned to represent their
When a government agency contacts an employer to set up a payroll audit, it will normally provide a list of documents that the auditor will want to see when they arrive for the audit.
“The documentation can include payroll input and output, manager sign-off, variance reasons, payment dates and the processing schedules,” said
The type of information may depend on which agency is conducting the audit.
For instance, an employment standards audit may focus on records showing when and how much employers paid employees for regular hours, overtime, and vacation pay, among other issues.
A CRA audit may look for proof of compliance with withholding, remitting and reporting statutory deductions, which could include T4s, T4As, and cancelled cheques, according to Tzanetakis.
“Are the employees set up properly in terms of the tax bracket and pension contributions? Are all of the earnings set up correctly in terms of the taxable benefits? Are taxes being withheld and remitted on time and do they balance back to the financial reports?” he said.
“In addition, there are pensionable and insurable earnings for both the CPP and EI. They are really looking for the appropriateness of the tracking of all of that and also the accuracy around that,” said Tzanetakis.
When the auditor provides the list of documents that the employer needs to produce, it is important that payroll professionals review it carefully to ensure that they know which records to provide, said Tina Beauchamp, payroll compliance adviser with the CPA.
“It’s not always just payroll. Sometimes they are going to want to look at certain financial documents. If you have a board of directors, they may even want to see meeting minutes. Sometimes it’s not always at payroll’s fingertips. You have to work with other departments,” she
When an auditor contacts an employer, the auditor will also normally propose a date and a time for coming to the employer’s office to conduct the audit. If the date is not a good one for the employer, Beauchamp said employers can reschedule it.
“Just because the auditor has proposed a date, it doesn’t mean that it is carved in stone. If that doesn’t work for your organization, if you are not going to be able to have all of the necessary documents together for that date because sometimes things are stored off site, contact the auditor and negotiate a date that works for everybody,” she said.
In previous payroll positions before working at the CPA, Beauchamp said there were times when she had to reschedule audits.
“One time I had to call and say, ‘Listen, we’re just finishing off an implementation. We’re putting in a new time and attendance system and this really isn’t a good time for us,’” said Beauchamp.
Most of the time auditors will reschedule if the employer’s request is reasonable, she said.
When the audit begins, normally the payroll professional or someone else in the organization knowledgeable about the documents will spend some time with the auditor, showing them the printed records and where to access the electronic ones.
“They key is to ensure that you provide access to the auditor, work with the auditor, have assigned people who understand where to access the information, and to be co-operative with the auditor,” said Tzanetakis.
Once the audit is underway, Beauchamp said the auditor will generally work on their own, conferring with payroll only when they have questions. The length of the audit will vary depending on the agency conducting it and on what the auditor finds.
“If it’s an initial ‘everything looks good, I don’t see any issues,’ they may be done relatively quickly. If they start detecting issues, it could be a little longer,” she said.
When the audit is complete, the auditor will present their findings and identify any issues of concern.
In some cases, there are no issues. In others, employers may owe outstanding amounts, including penalties or fines. Employers may appeal audit results with which they disagree.
While audits may seem daunting, organizations can prepare for them by proactively implementing good internal controls and periodically conducting their own internal audits.
“Setting up appropriate internal controls (and consistently implementing them) is the best preparation for a government-initiated audit, along with storing all backup documentation by pay period, so that it is readily available,” said Graves.
“Diligent internal processes, including proactive spot-checks on all payroll setups and outputs can reduce organizational risk,” she said.
To help payroll professionals prepare for an audit, the CPA has created best practices guidelines and a tip sheet on what to expect.
Payroll professionals who want to know more audits review the CPA’s information, as well as talk to others in the profession and in their organization who have gone through a payroll audit, said Beauchamp.
She also advised that payroll professionals look at audits as an educational opportunity.
“Some of the best lessons that I learned as a new payroll person came out of audits,” said Beauchamp.
“It wasn’t that I was intentionally doing something wrong. It was just that at the time I was new. I didn’t necessarily understand all of the compliance legislation and through an audit went, ‘Oh, I guess I should be doing it this way,’” she said.
“It was one of those, ‘It’s always been done that way.’ ‘It’s how I was taught to do it.’ But maybe it wasn’t necessarily the right way.”
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