Furlough and internal audit

The Coronavirus Job Retention Scheme (known as furlough) is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. It is designed to support employers whose operations have been severely affected by coronavirus (COVID-19).

For detailed government guidance on the UK Government’s furlough rules, click here.

The Chartered Institute guidance looks at furlough from two perspectives – internal audit resource being furloughed and the role of internal audit in the furlough process.

Furlough of internal audit resource

Organisations will be facing harsh financial realities due to the measures in place to protect the country from the COVID-19 outbreak. For many organisations there will be issues of survival.

The Institute advises Chief Audit Executives (CAEs) to keep an open dialogue with the chair of the audit committee on the role of internal audit during the crisis, not only in its primary assurance capacity but equally important in these unprecedented times how internal audit can support the business.

Any decision to redeploy or furlough internal audit resource should be made in consultation with the audit committee or at the very least the chair of the audit committee. Where this is not possible, the Chief Executive Officer (CEO) should inform the audit committee of any and all action to reduce or curtail the work of internal audit and the consequences linked to such action as soon as it is practicable to do so.

The Internal Audit Code of Practice provides for this situation, as furloughing internal audit resource is in effect a temporary removal of the activity. Paragraph 23 of the Code states that ‘the audit committee should be responsible for appointing the chief internal auditor and removing him/her from post.

CAEs should articulate, to the CEO and/or audit committee, the risks to the organisation if internal audit resource is furloughed or co/outsourced contracts suspended while the organisation continues to operate in a reduced capacity, include but are not limited to:

  • absence of independent assurance at a time when the internal control environment is under intense pressure
  • inability to observe and offer advice to senior management on governance, risk management and internal control issues
  • failure to enable real time assurance by providing input to new processes, key controls and new and emerging risks as the organisation responds to challenges and opportunities
  • lack of objective capture of lessons learnt during the crisis to improve processes as the organisation returns to stability
  • non-compliance with the UK Corporate Governance Code 2018 and the potential reputational damage to the organisation in explaining the decision to stakeholders.

It is incumbent on CAEs to maintain relevance during any crisis situation. Continuing to progress the audit plan in its original format, may or may not be appropriate and should be discussed with the audit committee.

Internal audit’s role in the furlough process

The government expect the online system for organisations to use to be available by the end of April 2020. Internal audit has a finite window of opportunity to support their organisation in its preparations. Through the Institute’s Heads of Internal Audit COVID19 Virtual Forum, CAEs are sharing examples where without their input decisions may have been made to furlough a key worker that would have impacted significantly on the control environment in a key financial process.

The CAE and experienced members of the internal audit activity may be required to provide unplanned consultancy/advisory support during crisis meetings in respect of control design, risk management and governance arrangements.

Now is an opportunity for internal auditors to demonstrate commercial awareness, agility, relevance, as well as show that the profession is an intrinsic element of organisational sustainability.


Internal audit activity suggestions

Employers can opt to put some employees on furlough while others continue to work either normal or reduced hours.

In deciding who to offer furlough to, equality and discrimination laws will apply in the usual way.

Facilitate risk assessment of critical activities.  

Provide agile assurance over the decision-criteria when selecting employees for furlough.

Provide agile assurance/advice on the strategic decision process (including quality of information) for the tipping point between furlough and redundancy for employees.

Ensure controls are operating effectively that monitor and respond to social media to limit reputational damage (particularly disgruntled employees).

Employers should discuss with their staff and make any changes to the employment contract by agreement.

Independent assurance that the furlong process is being followed and appropriate communications and documentation being retained.

Monitor ongoing and future furlough decisions to ensure compliance and protect the reputation of the organisation moving forward.

To be eligible for the subsidy employers should write to their employee confirming that they have been furloughed and keep a record of this communication.

To qualify for payment, employees cannot undertake any work for or on behalf of the organisation including providing services or generating revenue

Identify and evaluate controls in place to ensure employees, particularly those in management positions or sales do not engage in work related activities.

Independent assurance that system access is restricted or access attempts are monitored for furloughed employees.

A furloughed employee can take part in volunteer work or training.

Review employee communications to ensure clarity and expectations regarding free training/time and training to be reimbursed by the organisation.

Identify and evaluate the controls in place to ensure training paid by the organisation (in advance or reimbursement) is appropriately authorised and any risks in respect of breaching furlough rules fully evaluated.

Employees may receive less than the National Living/Minimum Wage (NLW/NMW) under furlough rules.

Where employees are required to, for example, to complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.

The scheme is available for employees on the PAYE payroll on 28 February 2020 on any type of contract, including zero-hours.

Advising management on the effectiveness of the payroll process – audit opinion when last audited, status of any agreed actions, any subsequent system changes, known issues/weaknesses.

If appropriate, a quick health check of the payroll key controls to provide immediate assurance as to the accuracy of the payroll data.

Validation of source payroll data – use of data mining to double check for ghost employees, unusual data patterns, spikes in manipulation of source data etc.

The rules stipulate how 80% of salaried and non-salaried employees’ payments are calculated; fees, commission and bonuses are included.

Validation of calculations, formulae, spreadsheets etc to ensure scheme rules are being complied with and the organisation is not at risk of making fraudulent claims which would need to be repaid in the future.

Content reviewed: 8 April 2021