The appointment of fund auditors is one of the key governance tasks that a board of trustees will need to undertake. In many instances (in fact, most) this process is handed over to the fund’s administrator or consultant to manage, who tend to favour certain firms and the reasons for this are not always clear.

It is interesting that a fund’s trustees have chosen their way to discharge this governance obligation, as in most cases the majority of transactions to be audited and compliance to be monitored, is actually performed by the administrator.

It would be difficult for an administrator or consultant to access the professional requirements of the auditing firm selected, because the results of audits are not as widely communicated or published as, for example, asset managers’ performances. Also, the approaches that each individual firm takes in auditing a pension fund are not widely known.

There is a risk that an administrator or consultant, may tend to promote a firm that they perceive to be more lenient towards them and their administration, over a firm that often highlights shortcomings in the administrator’s processes.

There have been many cases where a firm is notified by the administrator that its services have been terminated by a fund, without the board of trustees communicating with the existing firm.  These decisions in some cases are based on the recommendation of the administrator or consultant.

Audit fees are often used as a reason to change auditors, with administrators warning audit firms that they will get other tenders if the fees are not maintained or lowered. Administrators often cite that other firms’ fees are lower for what they perceive to be comparable funds.

Trustees need to make sure that they have selected the fund’s auditors on a sound basis. Fees are an important factor but one would hope that they are not the most important determinant when selecting an auditor.

The following are some of the factors that trustees should consider when selecting an audit firm:

  • The competence of the audit team that will perform the audit.
  • The audit approach used by the firm. The trustees should be comfortable that this will address the fund’s, risks and any concerns they may have.
  • The independence of the firm from the administrator, consultant or other large service providers to the fund.
  • The scope of the audit.
  • The fees to be charged for the work performed.
  • The firm’s ability to perform the work
    when required.
  • BEE credentials.

(The above is not a comprehensive list of considerations that should be taken into account)

The value of an audit to a fund should not be underestimated. The audit is a key part of the overall fund governance, and trustees should take this responsibility to heart. Trustees should most certainly be actively involved in the processes and can consider a weighted score card on what aspects of the firm of auditors are important to them as a fund. This can and will differ for each fund. The trustees would then be able to score the tenders against these criteria and select the firm that will best meet the fund’s needs. Trustees should question administrators and consultants when they appear overly keen to select or use a particular firm.

Finally, too few trustees actually engage with the audit firm, and leave this to the administrator. It is important to meet with the auditor and discuss the audit and the audit findings with him/her. While this comes at a cost, it must surely be better to discuss matters with the auditor, rather than getting such information from the administrator?

Tim Rutherford CA(SA), BCompt (Hons), BCom, Ndip, is a Director at Ernst & Young and Sector Leader for retirement funds.