A staffing firm looks simple on the income statement: bill hours, pay wages, keep the spread. The audit is harder. Revenue is gross or net depending on the contract, and the largest liability is payroll and payroll tax, for which the firm that collects the money is not always the only party responsible.
Revenue recognition for temporary staffing
Temporary staffing is a service delivered over time, billed at an hourly rate. ManpowerGroup's Form 10-K for fiscal year 2018 states that staffing revenue is recognized over time at a fixed amount per hour of service, and that for certain over-time contracts the company recognizes the amount it has the right to invoice because that amount corresponds to the value delivered to date. That is the right-to-invoice practical expedient.
Auditors test whether the expedient fits the contract. It does not fit a tiered rate that falls after a volume threshold, or a fixed monthly fee for a variable number of workers. Those contracts need a transaction price and a progress measure.
Revenue cutoff is a timesheet question. Revenue belongs to the period in which the temporary employee worked, not the period of invoicing. Test unbilled receivables against timesheets approved after year end.
Gross or net: the principal versus agent conclusion
The principal versus agent question is made for each specified good or service. Under ASC 606-10-55-37, an entity is a principal if it controls the specified service before it transfers to the customer. When another party is involved, ASC 606-10-55-37A describes control as obtaining a service from the other party that the entity then combines with other services, or a right to a service performed by the other party that lets the entity direct that party. The indicators in ASC 606-10-55-39 are primary responsibility for fulfilment, inventory risk, and discretion in setting price. They support the control conclusion and do not replace it.
For staffing this produces a clear split:
- Direct temporary placements. The firm recruits, employs, pays and directs the worker, carries the risk of an unproductive worker, and sets the bill rate. Revenue is gross, and the wages are cost of services.
- Managed service programs (MSP) and vendor management. The firm manages a client's contingent workforce and earns a fee on the spend of other staffing suppliers. ManpowerGroup's filing treats its managed service provider programs as agent transactions because it does not control the third-party staffing services before they reach the client, so revenue is reported net.
- Subcontracted workers in a direct program. If the firm picks the worker, sets the price and answers to the client for performance, the facts point to gross. If the supplier bills the client directly, they point to net.
The audit file holds the contract, the control analysis and the pricing evidence for each program type. Pricing discretion shows up in rate cards and margin history, not in contract boilerplate.
Permanent placement and variable consideration
Permanent placement fees are a percentage of first-year salary in many contracts. In the ManpowerGroup filing, placement revenue is recognized at a point in time, when the qualified candidate is placed. Guarantee periods, where the firm refunds or replaces the candidate if the hire leaves early, create variable consideration that must be estimated using the variable consideration constraint. The firm needs historical fall-off data and a refund reserve, and the auditor tests the reserve against actual refunds and replacements after year end. See variable consideration and the constraint.
Staffing Industry Analysts notes that incremental costs to obtain a contract, such as sales commissions, are capitalized and amortized, with a practical expedient to expense them when the amortization period is one year or less.
Payroll liabilities: the larger risk
Accrued payroll is a major liability and a completeness risk. Test these items:
- Accrued wages for hours worked in the last pay period that falls after year end, including temporary workers paid weekly in arrears.
- Employer payroll taxes and workers' compensation premiums attached to that accrual.
- Payroll tax deposits. Agree withholding and employer tax liabilities to the filed quarterly returns and to deposit records.
- Accrued paid time off, bonuses and benefits for internal staff.
Withheld income tax and the employee share of social security and Medicare are trust fund taxes. The IRS states that a responsible person who willfully fails to collect, account for or pay them, including a corporate officer, partner, employee or an agent with authority over the business's funds, is personally liable for a penalty equal to the full unpaid trust fund tax plus interest. Unpaid payroll taxes are therefore a going concern and governance issue, not only a balance sheet error. Late deposits feed the fraud risk assessment and the going concern evaluation.
PEO and co-employment arrangements
Some staffing clients use a professional employer organization, and some staffing firms act as PEOs. The IRS states that the client company, called the common law employer, remains responsible for withholding and paying employment taxes even when it outsources payroll to a PEO. A PEO becomes the statutory employer under IRC 3401(d)(1) only where it has exclusive control over paying the wages, and the IRS advises clients that using a PEO does not relieve them of employment tax obligations. A certified PEO under IRC 3511 is treated as the employer of its worksite employees for the wages it remits.
The audit consequence: obtain the PEO agreement, certification status and quarterly reporting, and decide whether the client has a contingent liability if the PEO fails to remit.
Worked example
An illustrative example: a staffing firm has two programs. In its direct program it bills the client $48 per hour for 10,000 hours in December and pays the worker $34 per hour. Revenue is $480,000 gross and cost of services is $340,000. In its MSP program, suppliers bill $2,000,000 of hours through the firm's system and the firm earns a 3 percent fee.
If the control analysis shows the firm is an agent, MSP revenue is $60,000. Reporting $2,000,000 gross would overstate revenue by $1,940,000 with no effect on net income, which would still distort margins, covenant ratios and any revenue-based bonus. Separately, the last pay period ended Friday, December 25. If direct-program payroll is $85,000 for a 5-day week, that is $17,000 per working day. Four working days (December 28 to 31) are unpaid at year end, so the accrual is $17,000 × 4 = $68,000, plus employer taxes on it. A firm that books payroll on a cash-paid basis omits that $68,000. That is the cutoff error to look for.
Audit procedures
- Obtain contracts by program type and document the principal or agent conclusion for each.
- Reperform the gross to net split by comparing client billings to supplier invoices.
- Test timesheets around year end for revenue cutoff and for unbilled receivables.
- Recalculate accrued payroll, taxes and PTO, and trace to January payroll registers.
- Agree payroll tax liabilities to filed returns and deposits.
- Review PEO agreements and certification status.
- Test the placement fee refund reserve against post year end refunds.
PBC list
- Revenue by program with bill rate and pay rate detail
- Executed client and supplier contracts, including MSP agreements
- Timesheet approval reports for the last two weeks of the year and first two weeks after
- Payroll registers, quarterly payroll tax returns and deposit confirmations
- PEO agreement, PEO quarterly tax reporting and certification status
- Placement guarantee history and refund log
Red flags
- Net revenue treatment with no written control analysis
- Late or missing payroll tax deposits, or an outstanding IRS notice
- Receivables from a few clients growing faster than hours billed
- Accrued payroll that falls while headcount rises
Sources
- FASB ASC 606-10-55-36 through 55-40, as amended by ASU 2016-08, Principal versus Agent Considerations, text reproduced by PwC Viewpoint: https://viewpoint.pwc.com/dt/us/en/fasb_financial_accou/asus_fulltext/2016/asu_201608revenue_fr/asu_201608revenue_fr_US/asu_201608revenue_fr_US.html
- ManpowerGroup Form 10-K, revenue recognition note, SEC EDGAR: https://www.sec.gov/Archives/edgar/data/871763/000087176319000050/R12.htm
- Staffing Industry Analysts, Revenue Recognition Considerations for Staffing Firms in 2021: https://www.staffingindustry.com/editorial/staffing-stream/revenue-recognition-considerations-staffing-firms-2021
- IRS, Trust Fund Recovery Penalty: https://www.irs.gov/individuals/international-taxpayers/trust-fund-recovery-penalty
- IRS, Third Party Payer Arrangements, Professional Employer Organizations: https://www.irs.gov/government-entities/third-party-payer-arrangements-professional-employer-organizations
- IRS, Certified Professional Employer Organizations, What You Need to Know: https://www.irs.gov/tax-professionals/certified-professional-employer-organizations-what-you-need-to-know
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