Payroll audit in Russia

It is important to understand that, when audits are conducted, they cover different aspects of an organization. In this article, we will consider the specifics of payroll audit.

Employee wages, the correctness of calculations of payments, compensations and deductions are important in any company as they affect the interests of employees as well as the atmosphere within the company and staff attitude to work, not to mention the importance of complying with the law. Ensuring transparency of the different types of accruals and openness of information to employees is a key success factor for strong leadership. To achieve this, it is necessary to account for payroll payments well and without errors. This also helps passing mandatory audits successfully as well as effectively organizing work while reaching high level of employee motivation. Some companies voluntarily request payroll audits as this is an area which is objectively essential to the running of any organization.

What should management do to successfully pass a payroll audit? 

It is first necessary to draw up the basic documentation (i.e. staffing table, salary and bonus policy, employment contracts and job descriptions) as logically and as clearly as possible. Employees should have only very few questions, if any, after reviewing such documentation.

Auditors warn the employees of finance departments that it is important for inspectors from the state labor service that the salary amounts specified in employment contracts and staffing tables match those indicated in payroll statements. It is precisely to this end that companies should draw up internal documents regulating the procedure and grounds for salary accrual according to the wage systems currently in place.

It is then important to calculate recurring payments and preferably automate this process. Recurring payments include salaries, compensations, vacation pay, business travel expenses, sick pay, maternity benefits, deductions under writs of execution, personal income tax.

We also consider below the particularities of payroll audits.

Procedure for payroll audits

Auditors, as a rule, conduct audits on a sampling basis. Such selectivity should not disconcert company heads because, when auditors set up a particular verification scheme, they assess relevance and determine an optimal selection option at the initial stages.  For efficient and quick verification, it is in the interests of company heads to provide all the necessary information to auditors as well as answer some questions. It can sometimes be a good idea to assign a particular employee for easy communication during the audit.

To get a complete representation of the operations performed, auditors may select certain accounting entries and track their recording in accounting up to the relevant primary document which should confirm the existence and appropriateness of such operation. It is convenient to check settlements with staff in several stages corresponding to objectives and requested documentation (please see table below).

Audit stages, stage objective and relevant documentation

Objective	Requested documentation
Compliance of employment relationships with applicable law and regulations	Available and duly drawn up internal regulations, employment orders, employment contracts, dismissal orders
Correctness of wage calculation (verification of correct application of piece, time and other rates for calculation of wages), compensatory payments and bonuses	Primary documents for accounting of labor and wages; sample-based calculation of average salary, vacation pay, sick pay. Sample-based recalculation of several accruals
Incentive and compensatory payments	Internal regulations, bonus orders
Validity and completeness of deductions from wages	Documents used as basis for deductions upon calculation of personal income tax: applications, statements and confirmation copies, if necessary Alimony is a documentary outcome of court decision. Control over the maximum withholding from wages
Financial statements	Reconciliation of figures in financial statements with registers of synthetic and analytical payroll accounting
Social insurance contributions to extra-budgetary funds	Correctness of calculation of tax base and social insurance contributions

For convenience and optimal allocation of time to audits, auditors may devise and submit a questionnaire or test. These questions are asked and answered orally during a preliminary assessment of the condition of payroll accounting as well as during the audit and when clarifying individual business operations.

Key moments from practice

I have come across several payroll issues which, in my opinion, are interesting and which should be brought to the attention of company heads when their companies are audited.

1. Bonus payments and their documentation

Not all incentive payments may be included in labor costs when calculating profit tax even if they are specified in internal regulations.

Letter No. 03-03-06/1/602 of the Russian Ministry of Finance dated September 21, 2010 upholds that payments not related to employee performance may not be deemed to be deductible expenses for profit tax purposes. To avoid any misunderstandings with tax authorities or employees, it is better to ensure that documents are duly issued and expressly state that bonuses are paid to reward employee performance. The connection of bonus payments with performance should be clearly and directly specified in internal regulations and bonus orders.

2. Cash is deemed paid not when payment documents are sent to the bank but when cash is received by employees

This issue has become particularly relevant since the law has allowed employees to receive their salaries in the bank of their own choice. If the date of cash transfer does not coincide with the date of cash receipt by employee, such payment will be deemed late, and the payment of compensation for each day of delay will be required (even if it is only a small amount). Such delay could also result in administrative liability for the employer (Article 5.27 Russian Code of Administrative Offenses).

3. No advance payment provided that employees have signed an application for payment of wages once a month and that such practice is provided for in internal regulations

Such wording makes the situation of employees worse than what is provided for them by law (Article 8 Russian Labor Code). A solution would be to provide for a minimum constant advance payment. The wording “payment according to the staffing table” should be avoided in employment contracts instead of indicating a specific amount. Remuneration terms (rate (salary) amount, additional payments, allowances, and incentive payments) are essential conditions that must be included in employment contracts (Article 57 Russian Labor Code).

4. Deduction of overpaid salary due to calculation error

The term “calculation error” remains unexplained in Article 137 of the Russian Labor Code. A calculation error is, as a rule, understood as an arithmetic error (multiplication, addition, subtraction, division) (Rostrud Letter No. 1286-6-1 dated October 01, 2012 about deductions from wages of amounts overpaid to employees as a result of a calculation error).

It should be noted that a software failure is not deemed to be a calculation error. This means that, in such case, any overpaid amounts may be returned only if the employee voluntarily agrees to such return.

To sum up

When payroll is well and professionally organized, the risk of conflicts decreases. This also promotes a better atmosphere and motivates employees. A work unit shapes the team, which, in turn, determines whether the enterprise will be successful or not. It is therefore important to pay attention to the interests of each employee, minimize misunderstandings, and put in place a good and understandable payroll system as well as a transparent bonus policy.

Payroll auditing covers a large number of business operations and a large volume of accounting documents for these operations, but the result is worth the cost.