Does Australia have a controls problem?.

Last week I wrote a post about George Calombaris’ restaurants (MAdE Establishment) and how a failure in controls resulting in the underpayment of its staff, has consequently resulted in his restaurant empire now being closed. He’s not alone. Late last year, Woolworths admitted up underpaying its staff tho the tune of $300 million, and now recently, Coles has also admitted to underpaying staff for the past 6 years to the tune of $20 million. There is more tho, with the Sydney Morning Herald reporting that Super Retail Group, Michael Hill Jewellers, Domino’s and Bunnings have also been found to be underpaying staff in recent times. This is appalling, because ultimately, it’s the employee who loses out, and whilst for Woolworths and Coles employees will be back paid and keep their job (with Coles even paying interest to the affected team members), the same can’t be said for George’s team who have all been let go due to the restaurant’s closure. So who is to blame here? Whilst I acknowledge that a lot of what I’m about to say is speculation (we never know what’s happened in the background), and that we only know parts of the story, it’s still good to consider where this may have gone wrong, and what role each person could have had in preventing these issues.

The external auditors

I feel guilty starting here and throwing these guys into the mix given how much they have been in the media already. External Auditors work to a concept of materiality, and, if what Coles is saying, 1% of employees and $20 million over 6 years, is hardly likely to trigger any flags when performing substantive analytical procedures. However, as per the auditing standards, where there is a significant risk, then analytical procedures are not enough and either controls testing or tests of detail should be performed.

Is it the external auditors responsibility to ensure the payroll rule book agrees to the award wages prior to performing any analytical procedures? Without checking the rule book and other system controls, the external auditor is placing reliance that the numbers presented are correct, which in the case of Coles, is wrong. If the external auditor is to use the data for any analytical procedures, they must first ensure the data they are using is correct.

The internal auditors

I have previously wrote about rotational audits and whether items sch as payroll need to be reviewed on a cyclical basis (i.e. every two years). My argument is that the annual plan should be risk based and therefore if the risk is minimal, then there is probably no need to audit payroll if nothing has changed since the last review which may have only been done two years ago.

However in this instance, Coles have stated that a change in the award wage was not correctly updated, resulting in the underpayment. Obviously, even if internal audit was aware of this change to the aware wage and the risks to payroll associated with the change, in the scheme of things, it may not have been a big enough risk and audit may have directed their resources to more high risk activities in the business. Although it could be questioned, for such a material account, it would be assumed that payroll would have been looked at by Internal Audit at least once over the 6 year period. If this topic was looked at, did audit correctly reference back to payroll system rule books to ensure they agreed to the award? Was there a sufficient sample size selected?

Again, as the Coles issue has reportedly only affected 1% of their employees, there must clearly be a nuance here which may not have been picked up through any systems or sample testing. Was the internal audit sufficient enough, or has a stock standard high level review been performed?

Management

As called out by Attorney-General Christian Porter, companies will soon be “absolutely and utterly compelled” to pay staff correctly; but they already should be; afterall, isn’t this the point of the Fair Work Act?

Management has a level of responsibility here, and whilst we can assume checks and balances were done when pushing through any payroll changes, it needs to be asked if the review processes were adequate and sufficient before making the change ‘go live’. Although new legislation is being drafted to hold companies more accountable, companies should already have well embedded first and second lines of defence purely to prevent situations like this from occurring.

So where to from here?

As mentioned already, we only know parts of the story, so it’s hard to provide a solution to a problem we only know snippets about, but regardless, there is a lot of room for improvement here.

Fair Work Australia provides instructions for those who have been underpaying staff, but this isn’t going to prevent the issue from reoccurring. This new legislation may not solve the issue either. Whilst big penalties may encourage businesses to ensure adequate processes are in place, there is still a real risk of the problem occurring. My thought, is everyone needs to play a role.

Australia does not currently have any SOX like controls requirement and implementing a similar program may prompt management to take payroll controls (and other key controls), more seriously.

With this though, it would be very important to ensure management, external auditors, and the regulator all ensure that ‘external audit expectation gap’ is defined.

For the auditors and accountants however, the CPA ‘In the Black’ magazine have provided a great article on the 7 mistakes that lead to staff underpayments. These 7 mistakes are:

1. Incorrect calculations in overtime provisions
2. Underpayment on termination
3. Failing to pay overtime penalty rates to part-time employees
4. Superannuation underpayments
5. Only paying the base rate on annual leave payments
6. Excluding commissions and bonuses from long service leave
7. Lack of payroll reviews and outdated systems

You can read their great article in full here.

Whilst a lot of what has been spoken about here is speculation and assumptions, there is no doubting that Australian companies seem to struggle with correctly paying staff and that there is significant room for improvement.