Why controls and compliance internal audits are important

Today, the fate of MAdE Establishment became a bit clearer, as celebrity chef George Calombaris faced the media to report that his company will be entering voluntary administration. The move has the potential for 400 employees to lose their jobs, as reported by the Brisbane Times.

For those unaware, the company, which owns a series of restaurants throughout Melbourne, self-reported to the Fair Work Ombudsman in Australia an underpayment of employee's salaries and superannuation. It was announced in April 2017 that 162 workers had been underpaid $2.6 million because of "historically poor processes".Since then, this number has ballooned out $7.85m and has also incurred a $200,000 fine. The impact of this has result in the company now entering voluntary administration and staff potentially losing employment.

Before entering too far into discussion, it is clear to point out, that we only know what is being reported in the media, and that whilst I will reference the case with MAde Establishment, the outcomes could be applied to any business. It's also equally important to point out that the company self-reported this issue. Whether the issue was identified through payroll controls, an external or internal audit, or by an underpaid team member, is unclear, but nevertheless, it demonstrates why some of our standard audits, such as payroll, are so important.

I have long questioned the need for rolling audits (you can read about my previous post "Internal Audit frequency - how necessary is it" here). Considering the requirements of the Internal Audit Standards, Code of Practice and financial statement audit standards, there is a compelling case for why we shouldn't need a set of rolling audits. Ultimately, we should be developing a risk based plan and directing audit activity and resources which are considered most risky. I also get concerned that with rotational audits (i.e. a payroll audit which is performed every two years), becomes reliant on the prior period workpapers. Auditors can become complacent, rolling forward prior audit scope and workpapers, meaning any prior year audits are simply rolled forward, or not all components of the process are correctly picked up and audited. This case with MAdE Establishment highlights why we, as auditors, should be sore careful about rotational audits.

For arguments sake, lets say our organisation has a payroll audit scheduled for every two years. It would be expected, at a minimum, that the audit considers the end to end payroll process. The on-boarding of new team members, existence of supporting information (i.e. contracts), key controls around the monthly payroll process, payroll variance checks and finally, the off-boarding of team members and final pay calculations. Obviously, there is a million and one other tests which should be included in this review; one of which should relate to payroll laws and compliance with those laws. In Australia for instance, workers not covered through individual controls are covered by an 'Award'; a salary and set of conditions which is essentially applied to an entire group of workers. Additionally, there are some strict superannuation rules such as the regular payment of superannuation (either monthly or quarterly depending on your business). Failure to comply with this legislation can result in huge penalties for the company and individuals.

Clearly, MAdE Establishment had identified the issues themselves, but what if an audit was performed in this area which did not look at compliance with local laws, or outdated workpapers were rolled forward? Whilst you would hope that a review process was in place over the audit and identified where outdated workpapers being used, reality is that managers often place trust in their staff that they have done the job properly. The implications of blind trust, lack of proper planning and poor execution of the audit, could result in a similar fate with a business being closed and staff losing their jobs.

What if the audit didn't consider what controls or processes were in place for when payroll or superannuation legislation changes? Again, there is a risk that incorrect payments could have been made and the business fined as a consequence.

Ultimately, a situation such as this should be a strong reminder for all auditors that we need to be diligent with the work we perform, as the risks and consequences of poor performance can be detrimental.

So back to my point re rotational audits. Whilst there is benefit to having a payroll audit performed say every two years, we need to make sure that our work is just as detailed as if it was the first time we were ever performing a payroll audit.

Whilst we feel for all of those affected, this should be a reminder to all auditors about how important our jobs are, and the consequences which could happen should we not perform as expected.

#internalaudit #audit #payroll #compliance #performance #consequences

41 views0 comments

Recent Posts

See All