Issue: December 2006/ January 2007
Edutorials
KPMG
TAKE A
‘HEALTH CHECK’

Getting ready for first-time audits is only one way that these checks can help boards of trustees. There are other benefits too.

The withdrawal by the Financial Services Board (FSB) of audit exemption for all financial year-ends from 2006 means that certain underwritten retirement funds (those classified as ‘large’ and ‘small’) will be subject to audit for the first time.

Large funds will be subject to a full audit while small funds – those with annual contributions of less than R350 000 and total assets not exceeding R6m – will be subject to a limited assurance audit.

As part of good governance and in the preparation for the 2006 audit requirements, boards of trustees may wish to have their funds subject to an independent ‘health check’ now that the FSB’s deadline for submission of the 2005 annual financial statements, in the new format, has passed. Such a ‘health check’ can provide the trustees with an independent assessment as to the status of the fund and its readiness for the 2006 audit requirement.

The report can also be used to assess whether your fund is being effectively administered. Components of a ‘health check’ can vary, depending on the circumstances of a fund or the trustees’ specific requirements. The board of trustees could be provided with independent feedback based on agreed procedures for such areas as:

  • Fund accounts – evaluate the financial reporting processes with regard to the 2005 financial statements submitted to the FSB and compared against financial statements reported to trustees for consistency, completeness and accuracy of transaction presentation;
     
  • Benefits – establish, on a sample basis, whether benefits have been calculated and paid or accrued in terms of fund rules and that, where relevant, reinsurance recoveries have been received. Ensure also, on a sample basis, that bonus rates have been applied correctly to member records and that benefits have incorporated these bonus rates;
     
  • Contributions – ensure, on a sample basis, that contributions have been received on time, as well as matched and allocated correctly to member records;
     
  • Section 14 transfers – ensure that all member transfer values on joining and exiting the fund, and the relevant asset transfers, are accurate. Establish whether the payments made compensate the fund for growth between effective and payment transfer date. Further, for a sample of transfers, ensure that member records have been correctly updated on the system for transfers into and out of the fund;
     
  • Housing loans – for a sample of members, verify that the loan is appropriately flagged on the member administration system;
     
  • Retirement fund taxation – verify that the tax has been correctly calculated and timeously paid to the South African Revenue Service;
     
  • General expenses – verify that these expenses are correctly charged;
     
  • Bonuses – verify the reasonableness of the bonus declared for the year and ensure that any reconciling items have been correctly processed and the bonus thereon correctly calculated; and
     
  • Pensioners – verify pensioner contact details and suspended pensioner liability amounts.

On completion of the ‘health check’, a formal report on findings will be presented to the board of trustees. Format and content of the report would be prepared around the terms of reference as agreed with the board.

While there is cost to the fund associated with carrying out an independent ‘health check’, this cost needs to be weighed against the benefits which the board of trustees would obtain by having a clear view on how its fund will shape against the requirement of a full audit for the 2006 financial year.

It can serve to highlight at an early stage whether there are likely to be any potential issues -- for example, accuracy of underlying member records -- and to afford the administrator the opportunity to take remedial action.

For more information contact:
Edward Belstead, Director:
Telephone: (021) 408-7246
edward.belstead@kpmg.co.za

Robin Lydall, Director:
Telephone: (011) 647-7290
robin.lydall@kpmg.co.za