Performing reconciliations is an indispensable part of the payroll process for ensuring that company payroll data is correct, a payroll professional said May 14.
Reconciliations should be performed to identify high-risk areas, to determine where compliance should be reviewed, and to catch mistakes or uncover opportunities for fraud, said Karen Davidson, CPP, assistant director of payroll systems for the city of Houston.
Reconciliations help to verify the integrity of a company’s payroll data and systems, establish if tax is to be owed, and provide documentation if tax returns must be substantiated, Davidson said at the annual American Payroll Association Congress in Long Beach, Calif.
Paycheck data and other employee-related data, such as the number of employees, hours worked, pay rates, addresses, and work locations, are among the types of data that should be reconciled.
Taxes, including reciprocal agreements for state taxes, and benefit programs also should be reconciled, said Susan Judah, CPP, senior information technology systems analyst for the county and city of Denver. Among the benefit programs that should be reconciled are those related to Family and Medical Leave Act, annual leave, sick days, disability pay, sick pay, and retirement benefits, Judah said.
Bank records should be reconciled to ensure that the number of transactions and amounts transferred are correct and to avoid fraud, such as fraudulent employee direct-deposit, Davidson said.
Every department that collects information that is used by payroll, such as accounting, human resources, and benefits, is responsible for participating in the reconciliation process, even if it is ultimately the payroll department that pays employees, Judah said.
Frequency of Reconciliation
Reconciliations should be done each pay period for high-risk payroll-data elements, such as those related to taxes, fraud detection, and compliance with union contracts, Judah said.
Reconciliations should be done monthly or quarterly for low-risk elements, such as detecting payments to deceased employees and the existence within the payroll system of those who do not work for the company, which might occur if a departed employee is fraudulently rehired, Judah said.
Additionally, some reconciliations must be done at certain times of year, such as at the end of the year for Forms W-2, Wage and Tax Statement, and Form 945, Annual Return of Withheld Federal Income Tax, and at the end of a retirement and benefit plan’s year, if it differs from that of a calendar year, Judah said.
Exact and Reasonable Reconciliations
Some types of payroll data, such as taxes, should reconcile exactly, meaning the amount withheld should exactly match the amount determined when the amount of wages subject to the tax is multiplied by the given tax rates, Judah said.
However, other types of data, such as hours worked, may be too complex to reconcile exactly in large companies and reasonable approximations may be suitable, said Karen Ward, CPP, director of payroll training for the American Payroll Association.
Any substantial period-to-period variances that are found in reconciliations should be documented by payroll professionals and supplemented with explanations and approvals provided by supervisors, Ward said.
Above all, professionals should be thorough, complete, and timely in reconciliations, and should retain documents, Ward said.
Performing reconciliations regularly for each pay period ensures that less effort is required at the end of the year for annual reconciliations, Judah said.