Question

--An organization has just received a Qualified Auditor report. Auditors have reported the contravention about the director’s superannuation not being paid for the past 2 years. Prepare a list of suggestions to management to rectify this contravention; your answer should focus on the rectification to the internal control system to prevent this contravention in future.

Answer 1

Wages and salaries paid to an employed director are subject to the same superannuation guarantee law as any other employee.

Directors fees, paid to a company director, are considered to be ordinary time earnings and therefore superannuation is applicable.

However, payment for the performance of responsibilities as a member of an executive body, such as a body corporate, may be deemed wages or salary which may not be “ordinary time earnings”, and therefore superannuation is not applicable to these payments.

If a director is engaged as a contractor principally for their labour then the ATO would deem them an employee for superannuation purposes. A director may legitimately be engaged as a contractor and yet superannuation may still be applicable.

Dividends paid to a director of a company are not subject to superannuation.

According to the ATO Superannuation Guarantee Eligibility Tool, a contracted director who directly invoices the business, and who receives director fees is eligible for superannuation. However, a director invoicing through a company is not eligible for superannuation to be paid by the business, because the director is deemed to be an employee of the entity invoicing the business.

If a director is employed, then they can enter into an effective salary sacrifice arrangement, (see below for more detail on sacrificing to superannuation). However, if a director is paid, for example, an annual fee which is not defined as wages or salary, they might not be allowed to sacrifice into superannuation.

A company may have an agreement with their director/s to pay a half-yearly and/or annual bonus. Often this will be sacrificed to superannuation. The same rules apply as for any other employee, that there should be an agreement in place ahead of time that relates to future earnings. The agreement may state something in general terms, for example, “agreed director's fee or end of year salary bonus” even if the exact amount is not determined until the end of the year.

There is the potential for fraudulent activity to occur every time a transaction takes place within a superannuation fund. The following diagram shows the flow of transactions within a superannuation fund. Any of the transactions below could be subject to fraud and it is the responsibility of the trustees of a superannuation fund to ensure that assets:

• • flowing into the fund reach their destination intact
• • residing within the fund are safeguarded
• • flowing out of the fund relate to valid transactions.

In addition, certain assets and certain transactions are inherently more susceptible to fraud. The larger the asset balances, and the more frequently the transactions occur, the greater the risk of fraud within the fund.

he signals that should alert trustees to potential fraud in a fund are:

• • dominant trustees/senior management
• • deterioration of earnings
• • dispersed business — inadequate reporting
• • long staff hours
• • high staff turnover in key positions
• • frequent changes of solicitors/auditors
• • uncorrected control weaknesses
• • conflicts of interest
• • premature reporting
• • variances in analytical reviews
• • large year-end transactions
• • unusual payments
• • unexpected audit difficulties and/or difficulty in obtaining audit evidence
• • poor staff morale
• • large commissions
• • defensive responses to queries
• • member complaints
• • unnecessary complexity.

Should any of these signals be present, trustees should obtain full explanations from relevant personnel in the fund. An unsatisfactory response could indicate that fraud is evident and a full review of the fund and its internal control structure may be warranted.

Internal control refers to the processes, methods and procedures established by trustees to provide reasonable assurances that the procedures adopted by the trustees to meet the fund’s objectives are being properly and appropriately met. An effective internal control structure provides reasonable assurances to trustees that:

• • the fund’s business is being conducted in an orderly and efficient manner
• • irregularities are being prevented as far as is possible, and promptly detected and dealt with when they occur
• • assets are safeguarded from unauthorised use or disposal
• • records completely and accurately reflect the entire operational activities of the fund and permit the timely preparation of financial information.

• Segregation of duties

  Trustees should ensure that the same person does not execute transactions and record transactions anywhere within the organisation.

  Focus should be directed towards more vulnerable assets or transactions to ensure that duties are adequately segregated, particularly dealing with cash, investments, contributions and benefits.

  In a small fund where resources are limited, close supervision by trustees can often be as effective as the complete segregation of duties.

So, by following and implementing the above internal controls effectively the frauds or errors can be minimised and slowly it can be eradicated in the business.