Hiring a Payroll Auditing Firm, Question 16: Should we Ever Change the Time Between Payroll Audits for a Given Employer?

Posting by Larry Beebe, CPA

A hypothetical example helps illustrate the importance of selecting an appropriate audit cycle for different employers. Let’s say a multiemployer plan has 300 contributing employers and a three-year audit cycle- It scheduled 100 audits each year. For each group of 100 audits, the plan has 30 with no deficiencies and at least 10 with deficiencies of $25,000 or more over the three-year period. Assume that the audit of each employer in the group with no deficiencies costs $1,200 to perform while the large-deficiency audits cost $2,500.

What would happen if employers with no deficiencies were audited on a five-year cycle? These 30 employers would be audited 3 rather than 5 times in a 15-year period. Over a 15-year period, the savings would be $72,000 ($1,200 cost per audit x 2 audits x 30 employers). With the same savings in the second or third year of the cycle, the total 15-year savings would be $216,000 ($72,000 x 3).

Next, consider performing audits on the problem employers every year. There would be no increase in audit costs because the plan requires employers to pay these costs when there are significant findings. The plan does not collect any more money from these employers than it has in the past, but it collects it faster- a portion every year versus the entire amount every three years. This means more investment income for the plan. The figures in this example make a convincing case for varying the audit cycle for contributing employers.

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