If you’re looking to partner with an outsourced payroll provider, there are countless vendors you can choose from. While we’ve previously written about key considerations when choosing the right provider for your business, one additional factor to think about are SOC 1 audits, which are third-party validation of a payroll company’s controls and daily operating processes.
Complete Payroll Solutions has been providing outsourced payroll services to companies for over 18 years. While we have over 10,000 clients, we know we’re not the right choice for every company. But we also know the factors companies should consider to select the best vendor for their particular needs. And a SOC 1 audit may be a key determinator.
To help you understand the importance of a SOC 1 audit when searching for the ideal payroll vendor, in this article, we’ll cover:
After reading this, you’ll understand why you should request a SOC 1 report from potential payroll providers.
SOC 1 audits are an examination by an independent CPA of a payroll company’s control objectives related to both business processes and information technology. A payroll vendor will specify its own control objectives. Specifically, the provider will identify those that its management believes are likely to be relevant to clients’ own financial reporting.
The CPA will then examine the controls in place to ensure they are suitably designed and operating effectively relative to their objectives. During the audit, a CPA will:
After a payroll company is audited, the CPA will produce a SOC 1 report.
The SOC 1 report will include the vendor’s description of its payroll processing system, including such topics as:
It will then provide the auditor’s tests of the controls and results of those tests.
According to the AICPA, a SOC for Service Organizations report is designed to help build trust and confidence in the services performed and controls related to the services by your payroll vendor.
Keep in mind that a SOC 1 report is intended to meet the common needs of a broad range of users and their auditors so many do not include every aspect of the system that you may consider important in your own unique environment.
However, when you review the report, you should find valuable information for determining if the vendor took adequate steps to help you comply with financial laws and regulations, adhere to corporate responsibilities, and prevent corporate and accounting fraud.
For payroll companies, there are two types of SOC 1 reports that a CPA can produce following an audit. While both types of SOC 1 reports will address whether a vendor has the right systems in place to help you feel more secure, the difference between them is the period of time they focus on.
The two types are:
At Complete Payroll Solutions, every year in December, we hire a CPA to conduct a 12-month audit and produce a Type II report for our clients.
In order to make sure your outsourced payroll provider is in compliance with legal requirements, you should require a SOC 1 report. This report tells you and your financial statement auditors that your payroll vendor has accurately described a system, the controls that they have in place, and that the controls should achieve your financial reporting control objectives. This is essential evidence for your own audit purposes.
By having a SOC 1 report from your provider, you can help ensure that any financial audit you undergo runs smoothly and minimizes your risk. To ensure continued compliance, you should proactively monitor your payroll vendor and request a SOC 1 report every time it is updated.
Some vendors don’t offer a SOC 1 report, and they’re not required by law. However, if a payroll provider does not provide one, this can be a big risk for you. So during your due diligence process when you’re evaluating potential payroll partners, you should request and review a SOC 1 report to validate that it addresses the services you’re receiving.
You’ll also want to find out how often they audit their processes and send reports to clients for monitoring compliance efforts and how they utilize the report results for enhancements since a third-party audit is useful for catching any potential areas for improvement.
To minimize your own risks during an audit, it’s a good idea to request a copy of a payroll company’s SOC 1 report during your assessment of vendors. Then be sure to analyze the document since it contains invaluable information to help you learn if the payroll provider has adequate controls in place and that the controls actually work effectively. In addition, the reports are very useful in ensuring that your compliance with regulatory expectations is adequate.
At Complete Payroll Solutions, we know how important it is to best position your company to avoid penalties when facing an audit. That’s why, in addition to providing reassurances to potential clients with a SOC 1 report, we help companies minimize financial consequences by helping them stay compliant with government rules and regulations.To learn more about our compliance services, visit our dedicated compliance page.