The answer depends on the trust. This article examines the costs and benefits of 100% testing versus using sample methods when testing employer contributions to trust funds.
Testing contributions for every employee for every month during the testing period (100% testing) is the most effective approach. It provides the greatest assurance that all contributions due and owing to the trust have been collected. The primary drawback to 100% testing is cost, due to the length of time required to complete the testing. Lindquist LLP recommends that 100% testing should only be used to document discrepancies for issues already identified by the trust or as the result of sample testing.
An alternative to 100% testing is testing all of the employer’s contributions during the most current year only. This method is a form of sample testing that presumes the results from the current year are indicative of the entire testing period. If errors are found in the current year, then the auditor expands testing into the rest of the testing period. Employers prefer this method because they only need to provide one year of documentation. The weakness of this method is that changes or issues in the employer’s reporting in prior years will not be identified.
Sample testing is the most efficient method of testing contributions to a trust. Using this approach, the auditor randomly tests a sample of transactions. If no issues are found in the test sample, no further work is performed. If the sample test uncovers errors, additional testing is performed (up to 100% testing of contributions) to identify all issues. The advantage of sample testing is that costs are lower and additional testing is performed for only identified issues, rather than testing 100% of transactions. For example, additional testing can be performed for a specific time period or classification of employee. The sample period(s) and number of contributions tested can vary based on the characteristics of the trust. As a best practice, Lindquist recommends testing of at least three quarters throughout the period. By selecting quarters throughout the testing period, employer events (employee turnover, plant closings, etc.) can be identified and the impact on the contributions to the trust tested.
Trustees are responsible for the collection of employer contributions; however, they are also accountable for managing expenses and the overall health of the trust. An effective and efficient payroll compliance program is an important tool for trustees to ensure they are meeting their fiduciary responsibilities. Trustees should work with the administrative office and payroll compliance auditor to determine the best method for testing of employer contributions for their particular trust.
Andrew D. Walker is payroll compliance manager in the Seattle office with responsibility for approximately 20 payroll compliance testing programs. Andy also trains and supervises the team of Seattle compliance staff auditors. He earned a bachelor of arts degree from the University of Minnesota-Morris and an MBA in corporate financial management from Upper Iowa University.