Why Payroll Companies are Subject to a SSAE 16 Examination
By: Scott Price, Managing Partner of A-LIGN
First, lets get down to the basics. Payroll companies are classified as “classic” service organizations. This is due to the fact that payroll companies typically use the same processes, procedures, controls, and systems to process payroll for a variety of companies.
What Financial Auditors Look for
When a financial auditor goes out to audit their client, lets call them ABC Company, they are going to perform certain audit tests on account balances (both income statement and balance sheet). As an example, with regards to salaries, the auditor will need to understand how the salary expense was calculated, how the time was reported, and how certain taxes were filed and paid.
How Payroll Companies Come into Play
Typically, the processes mentioned above are outsourced by ABC Company to a service organization, lets call them LMNO Payroll, to be performed on their behalf. Therefore, the financial auditor will notify ABC Company that they will need to understand LNMO Payroll’s operational controls and how they affect their financial statements.
LMNO Payroll’s operation controls produce financial statement entries for ABC Company and as a result, ABC Company will book salary expense or wage expense items, accrued vacation, payroll taxes (state and federal) that they need to pay as a liability item. Those items are then calculated, recorded, and processed by LMNO Payroll.
What SSAE 16 Accomplishes
A SSAE 16 review will cover the operational controls of both business process and IT areas of LMNO Payroll that affect the financial statements of ABC Company. Once, the SSAE 16 report is completed and provided to ABC Company and, ultimately, their financial auditors. The financial auditors can review the report and understand what those operational controls are and how they affect ABC Company. The report provides reasonable assurance that the payroll expense numbers that go into the financial statements are calculated correctly and that any related and associated taxes or vacation balances are also correct.
What Financial Auditors Look for in a SSAE 16
Financial auditors may wish to do their own flux analysis or analysis of the payroll expenses in comparison to the previous audit (i.e. how the wages compare to the number of employees from last year to this year or what the average raise in payroll expense was and does it makes sense given the workforce change that took place). However, the financial auditors may still want to do some additional analytics to get comfort over the data, but, in all reality, the ultimate processing is up to the payroll company that provides this data that goes into the financial statements of the client.
Many payroll companies process payroll for larger organizations and these larger companies are typically the ones that are undergoing an audit, review, or a compilation that their financial auditors will want to understand the controls involved in the payroll process. The process by which the payroll company came up with the payroll expense on behalf of a larger organization is where the SSAE 16 report has the most value and comes into play.