DOL audits can be made less intimidating if you feel prepared and confident that your practices can withstand the scrutiny. You can prepare your payroll staff by conducting your own self-audits in advance, with the goal of uncovering any issues before they become a real problem. The self-audit may take time and money, but it can save you in the long-run by avoiding costly penalties if a DOL audit discovers the problems instead.
Preparing for a DOL Audit: Strategies and Tips for Advance Self-Audits
If you’re still questioning whether or not to conduct internal audits, bear in mind the advice from Vicki M. Lambert in a recent BLR webinar: "It’s always better than the alternative. No matter what you end up doing to try to get yourself into compliance and ensure you are in compliance, it’s always better than the alternative – which basically is getting audited by the IRS, the Department of Labor, and/or their state equivalent and letting them find the errors for you. [It’s better] because when you find the errors, it’s going to be a lot less problems and a lot less money involved."
However, if you’re planning to use self-audits as a means of preparation for a DOL audit, just remember that this is not a quick project. It is a department-wide project that may take several months – or even up to a year – to conduct properly because any task payroll does is subject to audit. Here’s some guidance:
- The audit can and should be conducted with the full knowledge of the payroll staff. This is not a secret audit to find fraud or to catch someone doing something wrong. The purpose is to find areas that are out of compliance and fix them before ever facing an external audit. The payroll staff can be useful in this endeavor.
- Don’t confuse this type of audit with accounting firm audits or other internal audits. Those are looking for compliance with general accounting practices or principles.
- Audit both policy and practice. Your policy may be in compliance but your actual practice may not be. That said, you shouldn’t assume that your company policy is in compliance either. "We can never assume that the company policy is in compliance with the Fair Labor Standards Act, the Department of Labor (federal), or with the IRS’ internal revenue code – or with any state equivalent." Lambert told us.
- Get upper management to buy-in at the start. Otherwise you may run into avoidable hurdles. You likely need support of upper management to create or change rules if necessary, for example.
Preparing for a DOL Audit: Preparing for Self-Audits
There are two critical items for the payroll manager to complete before beginning any internal audit:
- Compilation of the laws and rules. The person conducting the audit should know all the laws, rules and regulations concerning the topic being audited. These should be put in writing and include both federal and state regulations. This should not be done from memory but from primary sources such as the DOL and IRS websites. Secondary sources – such as payroll manuals – can also be used if the source is comprehensive and includes its own source cites. The company policy for each topic should also be included. Many times, the federal or state requirements are exceeded by company policy.
- Compilation of the payroll tasks. A comprehensive list of all payroll tasks to be audited should be completed, in writing, prior to beginning the audit. This gives a "playlist" of the tasks to be accomplished and helps with assembling the law book/list discussed in the previous point. It also assists in determining the time frame and work schedule for the audit.
By keeping these tips in mind, you’ll be well-placed to start your internal audit – and thus be able to fix any issues before a DOL audit could happen!
For more information on preparing for DOL audits, order the webinar recording of "How to Find and Fix Pay Practice Problems: Mastering IRS and DOL Requirements." To register for a future webinar, visit http://catalog.blr.com/audio.
Vicki M. Lambert is a Certified Payroll Professional with more than 30 years of multi-state payroll experience. She is founder and director of The Payroll Advisor, a firm that provides unique and expert services for business owners and other professionals dealing with the complexities and technicalities of the payroll process.