Payroll Accruals 1959

  • My company’s accounting department has approached me with a concern regarding the appropriate way to record Payroll for Sox purposes. %0ACurrently, about 70% of our employees are paid hourly wages on a weekly basis. This means, typically, that there are a few days at the end of each month where the employee has worked, but the company has not recognized the payroll expense, because we do not create an accrual.%0AMy argument is that this is NOT a Sox issue because the amounts that would be accrued are not material.%0ADoes anyone have any insight on it’s relevance to Sox and whether or not some accounting principle is being broken by the way we are doing things?%0AThanks,%0AJ

  • I would say that it is an accounting issue. Not a controls /SOX issue.
    It would only be a SOX issue if the reason for non- accrual related to a specific controls weakness or deficiency.
    Technically, it should be accrued for, but, if it is not material, I would not be overly concerned.

  • Hi,%0AYou will need to document your entire payroll process in great detail for SOX purposes. Despite the fact that the few days at the end of each month do not add up to a material consideration (and thus might not in itself be a SOX consideration), you will need to document your other payroll controls. %0AFor instance, since you say that 70% of your payroll is hourly, do you use an electronic time-badge system? If so, how do you ensure that your employees aren’t ‘buddy swiping’? Do your department managers monitor the badge swipe times to make sure that they are accurate? Who else has access to timesheet data? Where/how are your paychecks stored before they are handed out to employees? Who ensures that the paycheck accurately reflects the times swiped by employees? %0AI could go on and on. Payroll is one of those functions that is easy to control and is almost always a potential area for material misstatement.%0AHope this helps.

    1. The accounting for payroll is not a SOX issue it is a GAAP matter.
    2. In relation to the accrual you are right to say that this is probably immaterial. In addition, you are likely to have an offsetting ‘error’ at the begining of the period where there has similarly been no accrual.
      You may, indeed, have to document your payroll process for SOX purposes and identify and test controls over that process, but I do not elaborate as that was not your question.

  • Thanks for all your responses. As we have Sox Compliant for about 3 years now…all our processes are currently documented.
    Basically all I wanted to know was what are the regulatory ramifications of not booking an accrual for the end of every month.
    Thanks again all.

  • It seems to me that selection of appropriate accounting policies and practices is very much a sox issue. Fairly presented financial statements don’t arise from highly reliable bookkeeping using an innapropriate basis for accounting. Of course I’m no soxpert:>
    In the case at hand I suspect that before treating the effect of no payroll accrual as immaterial, one needs to evidence the basis for that judgement. Otherwise, it’s a soft spot. A high level spreadsheet calculation by month and quarter that estimates the accrual would would likely do the trick. If posed the question by external audit during either sox or y/e attest work, I’m guessing it would be good to be able to pull out the calculation/evidence.
    On a related note, I anticipate that most well developed payroll systems (or payroll services) likely have the accrual calculation functionality built-in. Ours does. Until the need is demonstrated though there’s little value in burning a bunch of cycles on researching that.
    On the other hand, if the back of the envelope analytical review spreadsheet suggests the ‘bounce’ in quarterly expense from differences in accrual amounts may well be material to quarterly net income, then the payroll package/service can likely be configured to run the calculation each month end without actually doing the posting. That would provide the definitive evidence of whether monthly accruals are warranted to account for the difference in cash versus accrual accounting.
    On a final note, perhaps a periodic and evidenced management review of significant accounting policies and practices is the required control activity, and the payroll example could be considered just a potential symptom of its absence. Without generally accepted control standards for financial accounting and disclosure, whose to say. Wait a minute, thats GACS for FAD’s:>

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