Is It Legal to Temporarily Add Workers to Payroll for an Audit? Seeking Advice

Dear all, as there is an audit, my boss is asking me to add some workers to temporary payroll. I want to know if it is possible to show somebody on temporary payroll. Is there any law or act that mentions this? If I show someone on payroll temporarily, how should I communicate this to that person? Please guide me as soon as possible.

Thanking you in advance.

Regards,
AARTI

Hi Aarti,

No, you should not. If it is a quality audit, they will ask for personal files, training records, etc. Sometimes, they want to interact on a one-to-one basis with the employee. They will also verify the gate in and out registers. Hence, it is better not to.

- Kamesh

Dear Kraos,

My boss said it is possible as big companies like Mahindra & Mahindra, Bajaj Auto put their temporary employees on payroll, pay their ESIC, PF, etc. for a few months, and then give them a break. Is it true or what is the case?

It depends on what type of audit you are going to face. If you proceed as per your boss's advice, obtain approval via email to carry out this activity. This way, you will be safe in case anything goes wrong.

A professional statutory auditor can immediately give a negative opinion upon reviewing your records if they are astute. Drawing from my extensive experience in day-to-day statutory audit activities, we have encountered challenges with many organizations.

Hi, I have been following the thread and I have some things to add. You don't need to worry about approval from your boss because, in the case of qualifications in an audit report, it's the Head of the department who is responsible, not the process owner. Are you the head of the department? If not, then...

Secondly, in the auditor's report, there is nowhere that mentions the number of employees.

Warm Regards,
Ca Vikas Goel

I can understand your position, as sometimes, confident employees of the management have to engage in illegal and unethical acts to please the management in any organization. Of course, everything is possible in an illegal and unethical way at your own risk and responsibility if you want to please the management and save your position. However, while you will be directly responsible to the management, Directors will be responsible to the auditors and shareholders for all such illegal and unethical acts.

The question arises, who will receive the payment on behalf of that temporary establishment? Further, will that amount go to the pockets of the Directors or to grease the palm of the audit?

However, it will be:

1. Wrong ethically for you and the management;
2. Against Corporate Governance;
3. Illegal from a tax point of view;
4. Illegal under company law;
5. A dishonest move from the point of view of shareholders and other stakeholders.

Regards,
PS Dhingra
Vigilance & Transformation Management Consultant
Dhingra Group of Management & Educational Consultants
New Delhi

Dear Vikas, Your views, of course, are quite right as far as the responsibility of directors is concerned, but they do not seem to reflect the legal aspects. The member has also asked whether that type of act is provided for in any law. I hope you may like to see my views just after yours, and being a CA, would you like to give your views about my comments, as to what extent I am wrong or right?

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[LIST][*]Your query is not clear, and you will get the right advice provided you give all information.[*]What Kind of Audit is This? Statutory A/c Audit, Internal Audit, Quality Audit, Process Audit, ISO Audit, Vendor Audit? Who is going to be the auditors?[*]Reason for Adding People to Payroll Why does your boss want to add some people to the payroll? Is it just to show more employees on the rolls, or is it to fictitiously inflate employee costs?[*]Technically and legally, adding any number of employees to the payroll and then removing them, stating that they left or resigned, is not a problem. However, keep in mind that you are creating a fictitious record, which is illegal and unethical.[*]You mentioned examples of Bajaj and M&M; yes, they do hire temporary workers. However, these workers are real temporaries. They are recruited for a specific period, issued appointment and relieving letters, paid regular salaries, and all legal compliances are strictly followed. In contrast, in your case, they are not genuine temporaries.[*]If you respond, you will receive a better and more complete reply.

Thanks & regards

I agree with what you said. However, I feel that the temporary staff discussed above is on a Fixed-Term Contract (FTC), in which case they must be included in the number of employees. Furthermore, I believe one should understand the purpose of the information requested by the auditors.

Also, the number of employees is used for determining the salary for statutory auditors. If the company or employee provides incorrect details, it can be easily identified by auditors through reviewing PF, ESCI, and Gratuity calculations. Some companies don't make the staff permanent but instead keep extending the contract for one year (FTC), which should be considered in the employee count.

Warm Regards,
CA Vikas Goel

No, it's wrong. You can't do this. If the auditor asks to see the personal files of these employees, what will you do? On non-availability of these files, your company's certification may be canceled.

Dear all, I have another query. If I add these workers to the payroll temporarily, do I have to pay them PF, ESIC, Gratuity, etc.? And after 3-4 months, if I give them a break, am I responsible for paying all these contributions? (As some part of the contribution will be deducted from these workers' payments as well). If somebody claims all these contributions, do I have to be responsible for paying them?

Dear Vikas,

Thanks for your clarification. It seems that the information provided by the poser of the problem was quite inadequate. From this, a clear inference can be made that some fictitious recruitment has been asked to be shown as malpractice by the management to siphon out funds of the company for illegal purposes. If this were not the case, the author of the thread would not have any cause for worry. There is a significant difference between showing and actually making the recruitment of temporary staff. I presume that she feared showing artificial staff temporarily without actually recruiting for those positions.

To be frank, I have observed in some companies/corporations that the management adopts such tactics, either to illegally fill their own coffers or to bribe auditors. This may be due to inadequate auditor compensation, a desire for more than approved compensation, tax evasion, showing fictitious profits, or negating losses in loss-making companies. I have also seen management employing auditors' own staff or their relatives to assist, sometimes through associated audit companies, to justify needs and avoid complex situations in audit reports to prevent shareholder backlash.

I apologize for my candid discussion. As a CA, I trust you are familiar with such situations and appreciate my input on the matter.

Regards,
PS Dhingra
Vigilance & Transformation Management Consultant
Dhingra Group of Management & Educational Consultants
New Delhi

Dear Arti,

If these workers are so important, then pay the amount of contribution from both sides from your own pocket. You cannot add this amount to their wages or salaries.

Regards, R N KHOLA