Role of Internal Auditors in Actuarial Valuations

OBJECTIVE OF THE VALUATION Liability To determine the liability of the municipality/Entity that has accrued up to the valuation date in relation to the sponsored scheme GRAP To provide the Entity with sufficient information to comply with the accounting standards

THE ROLE PLAYERS Internal audit Actuaries Management

Management’s role Designing and implementing internal controls over maintenance, safekeeping and generation of information Generation and submission of information to the actuaries Generation and submission of information Present valuations in the financial statements, in line with GRAP Financial Reporting Management It is management’s responsibility to implement internal controls over the generation of information. Examples of controls including: Reviewing information prior to submission to the actuaries; Reconciling the information to source documents. Internal Audit

Role of internal audit and reliance on the work of actuarial expert Internal audit is required to develop a risk based plan and this is done through development of an audit universe that is holistic and takes into account all auditable activities “risky” of an organization One of the core principles of Internal Auditing is Competency. This requires Internal Auditors to possess the knowledge, skills and experience needed in the performance of internal audit services. Actuarial work is one key area that is so significant, however the internal auditors may not possess the necessary competent to provide assurance on Internal audit can interact with the work of Actuaries in one of the two ways, broadly: Where Actuaries have been appointed as part of Management’s risk management processes and Internal Audit relies on their work as part of the combined assurance process; or Where Internal Audit contracts own expert to assist in the assurance process due to the nature and complexity of such work.

Specific Considerations Whether Actuaries are appointed by Management or by the Chief Audit Executive: They should form part of the combined assurance plan. If appointed by Management, Internal Audit should identify which aspects of their work they intend relying on. The chief audit executive should consider the competency, objectivity, and due professional care of the Actuaries Detailed scope, objectives and desired output should be clearly documented and agreed to by signing the terms of reference contained in the engagement letter. Implementation guidance for standard 2050 provides specific guidance on how coordination and reliance can be achieved when the Internal Auditor relies on or uses the work of other internal or external assurance providers in providing governance, risk management, and control assurance to the organization, provided that certain safeguards are in place.

Role of internal auditor Before submission of information Reviewing the design and implementation of internal controls over generation of information Establish if the actuaries have necessary skills and experience After receipt of Valuation Report Review assumptions applied by Specialist for consistency with submitted information and also source thereof (i.e. mortality tables, discount rates, active employees, etc.) The years in between engagement of Specialist Review assumptions if they are still relevant and correct Management It is management’s responsibility to implement internal controls over the generation of information. Examples of controls including: Reviewing information prior to submission to the actuaries; Reconciling the information to source documents.

Actuarial valuation process Identify a reputable valuator with the necessary qualifications (not required by standard); Provide the valuator with the required information to enable them to perform the valuation; Obtain the valuation report from the valuators; Check that the information used by the valuator agrees to the information provided to the valuator; and Use the valuation report to recognize the obligation (or surplus) and expenses and revenue as required by GRAP Disclose all the relevant information as required by the standard

Actuarial valuation (GRAP 25) Using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. Discounting that benefit using the recognized Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost; Determining the fair value of any plan assets; Determining the total amount of actuarial gains and losses to be recognized; Where a plan has been introduced or changed, determining the resulting past service cost; and Where a plan has been curtailed or settled, determining the resulting gain or loss

Actuarial valuation (GRAP 25)-Disclosure The following information should be disclosed: Accounting policy Description of defined benefit plans Movement in present value of obligation Movement in fair value of plan asset Amounts recognised in statement of financial position and performance Effect of changes in medical cost trends Actuarial assumptions Summary of benefit plans for current and previous 4 periods

Some critical assumptions Discount rates used Current and Projected future inflation rate Retirement age (63 vs 65) and withdrawal rate Mortality rate Projects future salary increases. Other important factors Average age of employees Average retirement subsidy rate Number of employees/pensioners

Audit consideration How management determines the completeness, relevance and accuracy of the data used to develop accounting estimates. The review and approval of accounting assumptions and consistent application of those assumptions. The review and approval of accounting estimates

Audit approach (What, when, why, how??) What? Reviewing the accounting policy adopted by management and/or council for actuarial valuations. Confirming the method used and assessing if the method used in making accounting estimate complies with GRAP 25 requirements. Reviewing the controls in place to ensure that the appropriate assumptions, data, are used Reviewing the assumptions underlying the accounting estimates and whether they are consistency with prior years. Data analytics for completeness and accuracy validations Validating the data used against the records to ensure that accurate date has been used.

Audit approach (What, when, why, how??) When? The testing of actuarial valuation should be done at least twice a year as follows: Reviewing the efficiency and effectiveness of the controls over the preparation of the AFS during the review of interim FS Reviewing the AFS during the month of July/August or April/May

Audit approach (What , when, why, ??) Why? The following are some of the risks that should be responded to: Overstatement of actuarial gains or understanding of actuarial losses Inadequate controls to ensure that the amounts disclosed are accurate. Misstatement of opening balances Understatement of post employment obligation. Changing of assumptions to reflect positive results

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References International Standards for the Professional Practice of Internal Auditing (Standards) IIA Position Paper: The three lines of defence in effective Risk Management and Control GRAP 25/IAS19 MFMA Circular 65