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Getting internal audit funtions into gear
Around one-third of Australian superannuation funds do not have an internal audit function, according to a new survey conducted by major accounting firm Ernst & Young.
The inaugural Ernst & Young Superannuation Funds Internal Audit Survey, released late last month, found that while one-third of funds did not have an internal audit function, it was not clear whether this was a result of the structure of the industry, where many funds outsource their key operations, or because there was no legal requirement to have an internal audit.
It said approximately half of the respondents stated they did not plan to establish an internal audit function in the next two years, something that prompted Ernst & Young to warn that this might ultimately backfire on funds.
“APRA [Australian Prudential Regulation Authority] requires banks and life insurers to have internal audit arrangements,” it said. “Also, the draft prudential standards for general insurers require the establishment of an internal audit function. How long will it be before APRA requires the same for superannuation funds?”
The survey said of the organisations surveyed that had an internal audit function, 42 per cent had fully outsourced the activity.
It said this finding differed substantially from the wider industry, which showed only 6 per cent of organisations had fully outsourced their internal audit function.
“Again, this is likely to be a result of the structure of superannuation funds that generally outsource most operations,” the Ernst & Young assessment said.
The survey said the primary focus of an internal audit was to provide assurance and support to the board and trustee, and that it had a much lesser role in reporting on the efficiency of operations or providing assistance to the external auditor.
It said this result reflected the current environment in which trustees operated and their response to the increasing focus on compliance by the regulators.
“As the role of internal audit is significant in providing assurance, we sought further information on how it fits into the entity’s risk management framework,” the survey analysis said.
“Internal audit in superannuation businesses plays a lesser role in developing the risk management framework than in the wider industry, but a greater role in providing assurance around operations. This is a welcome result and in line with best practice for internal audit,” it said.
The survey said that in superannuation funds internal audit had a much smaller role in assisting in fraud investment and in ethical and environmental issues, and a much greater role in compliance compared with the wider industry survey.
“Just over 50 per cent of respondents indicated that internal audit is seen as an advisory or consultant business,” it said. “Around 20 per cent indicated that an internal audit is seen as the policeman and checker.”
Interestingly, the Ernst & Young Survey found almost all participants did not see the role of an internal audit changing over the next one or two years and that, where change was planned, it was expected to involve more work in respect of risk management frameworks.
When it came to establishing internal audit procedures, the Ernst & Young survey found the superannuation industry was largely on the right track, describing the results as “encouraging” and indicating, “where internal audit operates, it is highly independent”.
It found superannuation funds were implementing best practice in recruiting the head of internal audit, with the survey suggesting that line management did not recruit the head of internal audit — something that strengthened independence.
However, the survey suggested that while the fund’s audit committee might select the internal audit head, the chief executive officer usually set their remuneration.
“This response is consistent with the wider industry survey results and we expect that this reflects the commercial and business reality and time demands on board committees,” the survey report said.
Looking at who was involved in managing the performance of an internal audit, the survey said responsibility for managing internal audits was generally shared between the audit committee and the chief executive of superannuation funds.
“All three areas of hiring, remuneration and managing performance reflect a highly independent internal audit function in the superannuation business,” it said.
AUTHOR
Mike Taylor
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