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Who is choosing your pension fund auditors

20 August 2007 Tim Rutherford, Ernst & Young

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 funds 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 funds trustees have chosen this way to discharge this governance obligation, as in most cases the majority of transaction to be audited and compliance to be monitored, is actually performed by the administrator.

It would be difficult, for an administrator or consultant to be able to access the professional requirements of the auditing firm selected, as the results of audits are not widely communicated or published, as say asset managers performance, nor are the approaches that each individual firm takes in auditing a pension fund, widely known.

In many instances an administrator, who often deals with most of the larger firms, may tend to promote a firm, they perceive to be more lenient on them and their administration, than a firm which often highlights short comings in the administrators processes.

There have been many cases where a firm is notified by the administrator that their 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, often citing that other firms fees are lower on what they perceive to be comparable funds.

Trustees need to make sure that they have selected the funds auditors on a sound basis, fees are important but one would hope that it is not the most important determinant when selecting an auditor.

Trustees should consider the following when selecting an audit firm:

* The competency of the audit team who will perform the audit.
* The audit approach used by the firm, the trustees should be comfortable that this will address the funds risks and any  concerns they may have
* The Independence of the firm from the administrator or other large service providers to the Fund
* The scope of the audit
* The fees to be charged for the work performed
* The firms ability to perform the work when required
* BEE credentials

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

The value of an audit to a fund should not be underestimated by trustees, it 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, and 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 its 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 them.  While this comes at a cost, it must surely be better to discuss this with the auditor, rather than getting this information from the administrator?

By Tim Rutherford, Audit Director at Ernst & Young

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