Audit Strategy for Sales Commissions

Salaries, commissions and bonuses form the most common types of compensation offered to salespeople and account executives. Because commissions represent percentages of some form of sales achievement -- gross sales, new-product revenue or new-territory prospecting, for example -- they rely on potentially complex calculations to derive individual amounts. Auditing the accuracy and honesty with which a company pays its commissions requires a grasp of the means and methods that underlie these rewards.

To comprehend and verify commissions paid to a sales workforce, you must start with a full understanding of the basis on which the employer pays its employees. Some companies apply a flat percentage across all completed sales to determine commission amounts. Other firms implement progressive or regressive tiered rates that rise or fall along with increases in sales totals. Still other compensation plans apply different commission rates to specific product lines. Unless you know how the formula works, you can't distinguish correct from incorrect application.

Validating commission payments requires an investigation of the formulas and methods that calculate them. Companies can rely on everything from spreadsheets to specialized software to handle the requisite math. You can check simple commission formulas more readily than complex ones, but sales commissions should make sense when you begin to examine them in relation to revenues and salesperson performance. Calculation errors may not point to deliberate fraud, but they can signal deeper problems that require additional scrutiny.

Sales commissions paid to the employees of cash-centered businesses can require more work to verify than those remitted in businesses that rely on transactions that leave a paper trail. Determining the gross receipts attributed to an individual employee holds a key to the process of checking his commissions. In a cash business that relies on manual recordkeeping instead of a computerized cash register, the verification process can become more complicated. Dramatic changes in commissions from year to year or a lifestyle that doesn't match documented earnings may point to problems that deserve closer attention.

Fraudulent commissions may highlight active collusion among employees and the prospect of kickbacks paid to a manager in exchange for bogus compensation. The same kinds of schemes can spring up when a customer colludes with an employee to facilitate commissions on imaginary sales. Because records and profits close at the end of a calendar year, falsified sales may show up just before the close of the period, only to vanish shortly after a new year begins. You may need to examine the next month's or quarter's records to trace these kinds of commission frauds.