CRA remittances: Opportunity for fraud

Employers in financial trouble, or staff looking to commit fraud, could treat CRA like a bank — ‘borrowing’ money for personal gain

Employers who run into financial difficulty often use the Canada Revenue Agency (CRA) like a bank, as a source of financing, by failing to remit employee source deductions or employer contributions.

But failing to remit source deductions can also be a form of payroll fraud, in which CRA remittances are diverted for personal benefit.

One reason this is possible is that, until year-end, there is no accounting to the CRA of amounts owing, broken down by employee.

Whatever the CRA remittance frequency, employers may have as long as 14 months to account for employee source deduction amounts by person, from the first pay date in January until the last day of February in the year following. During this time, anyone in control of an employer's source deduction accounts would find it relatively easy to “borrow” money out of these accounts for personal gain.

How can employers protect them- selves against this type of fraud?

Vendors who sell payroll software for in-house use might not like the most obvious answer. The simplest way for an employer to protect itself against this type of fraud is to have a third-party process its payrolls and remit its source deductions. Service bureaus aren't themselves a guarantee against payroll fraud, but they do ensure no one on the employer's own staff has fraudulent access to payroll amounts owing to the CRA.

However, before employers rush off to outsource their payrolls, the situation is not quite as simple as that. A third-party service bureau does not relieve the employer of responsibility for CRA remittances. The CRA will still hold the employer ultimately responsible, even if payroll processing is outsourced. 

And, if payroll is outsourced, potential remittance failures are outsourced as well. These failures might be of two different types. First, the third party might run into its own financial difficulties and try to solve these by dipping into client funds earmarked for CRA remittances. Second, there is always the possibility of fraud within the service bureau, by its own internal staff.

How can employers, whose CRA remittances are processed through a third party, protect themselves against these type of problems.

The first and most important step is to ensure the employer has access to the monthly payroll account statements issued by the CRA.

Each remittance shown on these statements corresponds to a remittance period, for which there may be one or more payroll registers. Each such remittance should be reconciled, by the employer, against the similar amounts shown on the corresponding payroll registers.

Any irregularities should be immediately examined. Such reconciliations should be performed at least monthly.

Similarly, the employer should see at year-end, even if this is prepared by the service bureau, a three- way reconciliation between year-to- date (YTD) remittance amounts shown on the last CRA statement for the year, the YTD remittance amounts from the final payroll register for the year and the sum of the remittance amounts reported on employee T4s.

This reconciliation should show the detail of any adjustments made between the final register and the T4s filed with the CRA, particularly if there are any adjustments to remittance amounts.

Finally, employers who use a third party to process payrolls should ensure the service bureau makes available audited trust account statements on at least an annual basis.

These statements, which should show any payments owing from already processed payrolls, are fully funded in the trust account, as of the statement date.

As an alternative, the service bureau should be able to show it has sufficient insurance to cover any losses, should there be payroll fraud, within the service bureau, that might affect employer payrolls, either amounts owing to employees or for source deductions.

Many of these same steps can help prevent payroll fraud against employers who process their own payrolls in-house.

In this situation, there should be a clear separation of duties between those responsible for CRA remittances and those who reconcile the monthly CRA payroll account statements.

Similarly, someone other than a signing officer on the payroll accounts should have responsibility for a monthly analysis of any payroll liability or suspense accounts.

When payrolls are journalized into the general ledger, the gross payroll and any employer contributions are debited into expense accounts, while the net pay and any remittance amounts owing may be credited to suspense or liability accounts.

When employees are paid or CRA remittances are made, these accounts are credited, which should clear their balances to zero.

Each month end, someone with no signing authority on the payroll accounts should prepare a formal analysis of any balances remaining.

Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at arm- cewen@cogeco.ca, (905) 401-4052 or visit www.alanrmcewen.com for more information.

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