Virtas Partners was engaged by a Private Equity firm to investigate irregularity in balance sheet accounts related Payroll & Benefits at one if its portfolio companies.
Client Background
Our Private Equity firm client had a portfolio company where the CFO brought to the Board’s attention that he believed the Payroll and Benefits had been improperly accounted for leading to annual understatement in expenses of ~$1.5M (resulting in 20% lower EBITDA). The portfolio company had recently issued audited financial statements to their lender and believed that those financial statements were likely material misstated. The portfolio company utilized a Professional Employment Organization (PEO) to process payroll and benefits and the accounting was made through manual journal entries calculated and booked by the controller with little detailed oversight from the CFO who joined the company shortly before year-end, was focusing on operational issues, and relied on the controller and the external auditor for assurance that the financial statements were not materially misstated.
The PE firm needed an advisor familiar with setting up payroll accounting in a PEO setting to confirm the CFO findings and to design process and controls to prevent/detect an accounting error in payroll and benefits in the future.
Scope of Services
- Investigated the source of the known accounting irregularities in Payroll and Benefits and calculated the amount of the misstatement through detailed review of accounting records and supporting documentation
- Document the current accounting process used by the controller and make recommendations for changes
- Assist management to design controls to prevent and/or detect errors in the future
- Prepared a training document for internal accounting staff on how to account for payroll and benefits
- Supported communication with external auditors
Significant Milestones
- Identified source of the misstatement and attributed it to underlying reasons
- Identified historical error in PEO billing and corrected
- Delivered new Chart of Accounts and Mapping document for use in automated journal entry prepared by the PEO
- Reviewed and provided feedback on memo to auditors documenting finding
Value to the Client
- Resolution and correction of accounting misstatement
- Clear understanding of drivers for misstatement and control failures
- Identification of improvements to control design to prevent/detect similar