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Pulling the trigger: audits as a responsive mechanism

21 December 2018


Pulling the trigger: audits as a responsive mechanism

Kathryn Dent, Director and Rohan Burn, Associate

Processes that audit or review organisational systems and practices can provide an organisation with prudent information about compliance, risk and culture. However, organisations may be hesitant or lack the motivation to proactively undertake such processes. Often, they are a response to a particular event or circumstance or are instituted by the need to gather certain information. In this article, we explore three situations which may trigger an audit process, what the audit process may look like, and how an organisation may seek to change as a result of the outcomes of such a process.

What might trigger an audit?

Conduct and/or organisational culture concerns

It is important for an organisation to have an awareness of its cultural health and to be responsive to any situations that jeopardise this. Organisations that ignore their workplace culture may be more exposed to greater risks of poor employee satisfaction, non-compliance with workplace policies, and claims of workplace discrimination, bullying or harassment. If these risks materialise then an organisation may respond by conducting a culture audit and/or an investigation into any alleged misconduct. Depending on the circumstances, an organisation may need to conduct an audit or review process in response to a particular complaint, general concerns expressed by the workforce as a whole, or to satisfy a regulatory agency such as a work health and safety authority. In the case of allegations of inappropriate workplace behaviour, organisations may be subject to additional pressure due to the speed at which information is exchanged in the social media environment, which can expose an organisation to significant reputational risks that may have ramifications in terms of an organisation’s bottom line. Thoroughly investigating and managing an employee’s complaint and the wider cultural issues of a workplace can also be a powerful symbol to both internal and external stakeholders that the organisation takes such matters seriously.

Financial and/or compliance issues

External financial or compliance audits may be instigated by bodies such as the Australian Taxation Office (“ATO”) or the Fair Work Ombudsman (“FWO”). To avoid being “caught out”, organisations may proactively instigate an internal review in preparation, for example, for a FWO or ATO announced compliance campaign targeting their particular industry. A related scenario is where an individual employee notifies their employer of their intention to contact an agency such as the FWO to make a complaint, for example about wages or related entitlements. Subject to operational requirements and an organisation’s perception of risk, an internal review into that specific employee’s payments or the wider payment practices of the organisation may be appropriate, as it can shed light on whether there are any systemic problems of this nature within the organisation.

Due diligence

Audits are not only conducted in response to existing liabilities but may also be performed to assess the future liabilities of an organisation. In particular, when an organisation is considering the acquisition of a new business, an audit is a vital step in assessing the value of that target business. This type of audit forms part of the “due diligence” process that an organisation performs. It can inform the terms on which an acquisition is negotiated and can help to avoid unexpected problems and additional costs associated with the potential liabilities of the target business.

What form do these audits take?

Conduct and/or organisational culture concerns

There is no “one-size fits all” method for responding to allegations of misconduct or poor cultural health within an organisation. The first step for an organisation is often to conduct an investigation to determine whether there is any factual basis for the complaint or concerns and to identify the best way for the organisation to respond. In investigating a particular complaint of misconduct, an organisation needs to be mindful of whether the problem is more widespread and whether a broader cultural audit is required. An organisation’s response will usually be predicated on a close consideration of the legislative obligations, relevant workplace policies and any relevant industrial instruments. In terms of the wider cultural implications, an organisation may need to have regard to how it communicates its behavioural expectations, its approach to training, and what its employee engagement surveys and analysis of employee leave patterns might say about the organisation’s culture.

Financial and/or compliance issues

A basic financial audit of employee entitlements involves the reviewing of wages, pay slips, leave entitlements, incentive schemes, rosters, contracts, and indicators of actual hours worked. An employer should take into account the type of work the employee is performing and the terms of any applicable industrial instrument, including those that provide for minimum rates of pay, overtimes, loadings and other allowances.

Due diligence

Subject to time pressures, budgets, and any agreed parameters for the process, a due diligence audit can involve considering the target business’ governance structures, as well as any applicable industrial instruments and employment contracts to ascertain any risks that may be associated with, for example, confidential information and intellectual property clauses, or the incorrect characterisation of an employment relationship. It is important to know the source of the employees’ terms and conditions of employment, and whether the employees are covered by a modern award or enterprise agreement, particularly because there are circumstances where the terms and conditions under an award or enterprise agreement will follow the employees when there is a transfer of business. The due diligence process may also reveal the extent to which employee benefits, such as accrued leave entitlements and other liabilities may affect the sale price of a business.

What might an organisation change as a result?

Conduct and/or organisational culture concerns

The starting point in achieving acceptable workplace behaviour and fostering the desired workplace culture is ensuring that all levels of an organisation are aligned and also aware of their legal obligations and they monitor and enforce compliance. If an investigation into misconduct substantiates findings of inappropriate or even unlawful behaviours it may be appropriate for an employer to take disciplinary action. Where conduct is revealed, a failure to act can cause problems when the organisation is confronted with similar behaviours in the future that it seeks to address. If cultural problems have been identified, then it is important for an organisation to enhance the capability of its managers to become effective leaders. A healthy workplace culture can reduce an employer’s financial costs, increase employee health, well-being and productivity, increase attraction and retention of employees, and reduce an employer’s risk profile in terms of its exposure to bullying, discrimination and harassment type claims.

Financial and/or compliance issues

The first response to an audit, for example, on employee entitlements may be to rectify any underpayments and to inform any affected parties. In situations where there has been an overpayment to employees, we recommend seeking advice because of prescriptive provisions in the Fair Work Act 2009 (Cth) that prohibit an employer from simply deducting such an overpayment from subsequent wages. In circumstances where underpayments or overpayments have not occurred, the audit may nevertheless reveal potential risks of future non-compliance that necessitate changes to an organisation’s systems and structures, as well as its human resources processes. Organisations may also take the opportunity to address any inconsistencies between employees’ entitlements by overhauling its remuneration structure.

Due diligence

If risks are identified through the due diligence process then, depending on the seriousness of these risks, the potential buyer may seek to renegotiate the price of the transaction, or seek specific warranties or indemnities in relation to those risks. If these risks cannot be resolved, then the potential buyer may seek to withdraw from the transaction altogether. The audit may also identify a target organisation’s need to rectify its practices before a sale and its reliance on key employees that the potential buyer may seek to retain through more generous terms of employment in order to capitalise on their skills and to maintain consistency during the change period.

The takeaways

In all cases, any audit should not be regarded as presenting a complete and objective picture of an organisation. As mentioned, the scope of the audit can be limited and any reliance on the audit should be similarly qualified. Audits themselves are not completely free from risk and the audit process should be monitored to ensure it is free from bias and those being audited are afforded a fair process. Notwithstanding this, audits provide useful insights into an organisation and communicate positive messages to stakeholders about a company’s diligence and concerns around compliance and culture. The process of responding to these “triggers” with an audit is valuable in itself, again in terms of the messages that conducting an audit conveys. Rather than ignoring these trigger events and their wider implications, responding with an audit is an action that is likely to be of substantial benefit to organisations and is strongly recommended.

 

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