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There are many audit objectives related to the payroll function, some of which apply to the supplier and some to the data entry and inputting functions that are retained by the company Possible control objectives relating to the supplier are: Verify that payroll taxes are being deposited Verify that 401k deductions are terminated once they reach annual maximums Verify that garnishments are being sent to the appropriate legal authorities Verify that only authorized services and reports are being billed to the company Verify that prices charged match those listed in the original contract or its addendums Verify that payroll tax deduction percentages used by the supplier are up-todate Once the audit team has completed its audit program for the payroll supplier, it should go over its findings with the supplier s representative to verify that all audit findings are accurate and then meet with company management to present its findings and recommendations Another control is to create a separate line item in the corporate budget that shows the estimated cost of the payroll supplier When this information is listed in the monthly financial statements alongside actual costs, company management gains a clear understanding of the cost of the supplier and how that cost is changing in comparison to the budget If there are significant cost overruns appearing in the financial statements, management can take action to reduce them, either through negotiations, less use of the supplier s services, or by switching to a new supplier A final control area is the scheduled review meeting This is useful for going over the results of internal audits, reviewing progress toward predetermined goals, and discussing any problems that have arisen since the last meeting An agenda should be distributed in advance and strictly followed to ensure that all major areas are addressed The company should have a secretary record the minutes of each meeting, distribute them to all participants, and require that the chief representatives from each side sign off on the minutes as being accurate (or modify them as necessary and then sign off) These minutes should be kept on file in case there are questions later on about what was agreed upon during meetings Once a payroll system has been fully converted to that of a supplier, it should not be necessary to have more than one such formal meeting per year The combination of internal audits, financial comparisons to budgeted costs, and formal review meetings provides an effective mix of controls over a payroll supplier.



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A payroll supplier can be measured in terms of its cost, timeliness in providing information, and ability to provide services Here are some of the more common measurements that can be used to judge performance:

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Outsourcing Payroll / 233

Copyright # 2003 by the American Institute of Certi ed Public Accountants, Inc Reprinted with permission

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Timeliness in paying payroll taxes One of the primary tasks of the supplier is to pay all payroll taxes on behalf of the company This greatly reduces the labor and risk of penalties for nonpayment by the company It is a very easy measurement to track, for the government will notify the company of any late payments If there are no notifications, then the supplier has filed tax payments at the appropriate times The measurement is to divide the total number of missed tax payments by the number of payrolls per year to determine the average timeliness in paying payroll taxes Transaction fees per person A payroll supplier s services are billed as a mix of per-person costs and fixed costs that are not linked to headcount The bulk of these fees is based on per-person costs, however, and is therefore an excellent way to determine the per-unit cost of this service Most payroll providers send out highly detailed billing statements after each payroll, so the information used to derive this measurement is easily obtained To calculate it, summarize all costs per payroll for each person for whom a paycheck was created This may include fees for check preparation, check stuffing, extra calculations for vacations or 401k deductions, and direct deposits All of these per-person fees should be compiled when deriving the transaction fee per person The total fees are then divided by the total number of employees paid in the period to come up with the per-person amount If a company has different payrolls of different lengths (eg, once a week or twice a month), the costs should be annualized to properly account for the costs of all payrolls Proportion of fees for extra services A payroll supplier likes to gain business by charging low fees for basic payroll processing services, since companies make the decision to use suppliers based on these initial fees The suppliers then charge exceedingly high rates for all additional services, which companies ask for after they have enrolled with the supplier and are locked in One should separate these extra costs from the baseline fees to gain an understanding of incremental costs The calculation should be the total additional fees per reporting period, divided by the total fees during that period Proportion of payrolls delivered to correct locations One service provided by payroll suppliers is guaranteed delivery of payrolls to the company s various locations by payday, usually using overnight mail delivery If a payroll is sent to the wrong location or lost, this causes major personnel problems (since employees are not being paid), and therefore should be measured The measurement is to summarize all instances when payroll was incorrectly delivered and to divide this by the total number of payroll deliveries in the reporting period There is never a problem with collecting the information for the missing payrolls company employees will bring this information to your attention very quickly.

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Outsourcing the payroll function usually means that the payroll processing has been shifted to an outside entity, while the payroll data collection and inputting

Copyright # 2003 by the American Institute of Certi ed Public Accountants, Inc Reprinted with permission

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