Regular assessments of your payroll structure, employment policies and overall employee cost profile can be hugely beneficial, but are often overlooked. This is especially true of energy and mining companies active in Africa, where operational considerations take priority.
Cost cutting potential
During this period of economic uncertainty, companies are under increasing pressure to seek out means of cutting costs to maintain stability and ensure that operations can continue largely unaffected.
Employee and associated employment costs are a substantial part of business expenses but many organisations remain focused on the bigger picture. The devil is in the detail - payroll health checks are often an undervalued tool in identifying areas where a company is overspending or where financial penalties may be incurred, as well as mitigating fraud risk or potential non-compliance.
Checks and balances
There are a number of areas in a companies' employee cost profile that lend themselves to overspending, as well as components that affect tax compliance status and can leave the door open for fraudulent activity. Regular checks need to be undertaken to ensure that payroll systems are robust and that payments are subject to the necessary approvals.
This is particularly the case for oil and gas companies in Africa, where payroll and payment systems tend not to be as regimented as they ought to be. For example, the use of petty cash to cover ad hoc operational expenses, or even wages, can be particularly risky from an auditing and compliance point of view, but is still commonplace in this sector.
Similarly, unchecked electronic fund transfers (EFTs) present a serious fraud risk. Without regular audits or procedures in place to oversee the authorisation of payments, not only can companies find themselves in a position where it is difficult to determine true employment costs but they can also open themselves up to corrupt practices.
Payroll management systems and bookkeeping procedures are also typical areas that can be improved, but can go unchecked for long periods. Despite the presence of major international outfits in oil and gas in Africa, many subsidiaries operating here do not adhere to the same payroll or accounting standards as their parent companies. This is often due to a lack of infrastructure and global systems, with local compliance frequently using spreadsheets which eliminates auditability and accountability.
Controlling employment policies
The nature of the work in the energy sector in Africa, and the ownership of the companies operating there, means that a lot of expats or foreign workers are often employed in the field.
On top of the additional HR complications presented by hiring foreign workers, employment policies and contracts can often include open-ended benefits agreements that can see payroll costs escalate. Provisions for medical insurance, private security and flights home need to be regularly assessed, and potentially capped, to ensure that companies have a firmer grip on the total expenditure on their workforce.
Other costs that benefit employees, which are often considered ‘business expenses', can also have tax implications that companies need to be aware of. Social security and income tax payments can be particularly complex in Africa and these need to be carefully monitored to ensure compliance and to guarantee that any reimbursements are correctly allocated.
These areas are often earmarked for assessment, however because they do not affect day-to-day operations reviews are postponed, or are done poorly, resulting in ineffective controls and policies.
Africa remains a challenging business environment, and a large proportion of companies operating in the energy sector are foreign-owned entities. The compliance landscape can be a difficult one to navigate, and foreign businesses can be subject to greater scrutiny on the part of governments, regulators and tax authorities.
These bodies are keen to ensure that not all proceeds of activities are immediately taken offshore before any relevant fees are paid and profits are appropriately taxed. Poor HR and payroll housekeeping can lead to a failure to meet these obligations, which can result in the loss of licences or retraction of permits, as well as financial penalties, impairing energy companies' ability to continue to operate effectively in this region. Prevention is better than cure, and payroll health checks can help to mitigate risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.