Last year, auditors focused on the accounting in finance departments, but the large costs associated with salaries and benefits are now causing them to look deeper into these numbers, says Roxanne Gilbertsen, senior consultant at Hewitt Associates.
“The audits last year were too formulaic and didn’t dig deep enough,” she says. “When you look at the financial statements, there is this big number for salary and benefits, and that is causing auditors to say ‘Whoa.’ ”
The public attention on the costs and accounting issues involved in defined- benefit plans is another reason that auditors are homing in on human resources expenses. Specifically, auditors will want to make sure that companies can explain what their expenses are, what accounting they use to determine their defined-benefit plan expenses and why they chose those accounting methods.
This means that human resources executives, who often defer to their finance departments to answer such questions, are going to have to take a crash course in their accounting practices. Sarbanes-Oxley is about financial statement accountability, and benefits are often the lion’s share of the costs, says Barry Peters, principal in the Seattle office of Mercer Human Resource Consulting. “This will be a central area where human resources and finance will have to work together,” he says.
Human resources should make sure that it is documenting everything and can explain how the company practices and procedures contribute to the bottom line. If a company exceeded its budget in certain areas, they will have to explain why that happened. “All of these people costs like staffing, benefits and retention are huge, and it’s just now gaining the attention of the auditors,” Gilbertsen says.
Simple administrative tasks now take on a new meaning. For example, if there is a pay increase, it has to be included in the budget. Even such market adjustments as cost-of-living increases need to be documented. “If everything isn’t documented, then auditors will start asking questions,” Gilbertsen says.
For companies with defined-benefit plans, this may require some extra hours of going back and making sure that human resources and finance executives both understand and can explain every aspect of the accounting of the plans. This may even include why certain investments were chosen for the plans, Peters says.
“Auditors are going to ask, ‘What was the procedure you used to come up with that number?’ ” says Allen Jackson, managing principal at Towers Perrin HR Services. Executives can’t pass the buck by explaining it away as an accounting issue or a compensation committee issue, he says.