The verdict on SMSF auditor independence

The verdict on SMSF auditor independence

On the 16th of March, the Australian Taxation Office released its highly anticipated Auditor independence guidelines for SMSF auditors.

For firms currently performing in-house audits, the key questions of interest were:

1. Is there any avenue for the firm to continue with in-house audits?
2. If there isn’t, what options does the firm have to retain the revenue arising from those audits by entering other arrangements with like-minded firms?

I'll address each of those questions.

Is there any avenue for the firm to continue with in-house audits?

From my point of view, there were no surprises in the guidelines, and it remains quite clear that it is highly unlikely that the one firm will be able to both prepare the financial statements and audit the fund.  On this issue, the ATO specifically states that an auditor cannot audit an SMSF in any of the following circumstances:

• where the auditor's firm (or network firm) has assumed a management responsibility for the fund
• where the auditor, their staff, or their firm (or network firm) provides accounting or bookkeeping services to the fund (including preparing the financial statements). This is unless the service is 'routine or mechanical' and appropriate safeguards are applied

The meaning of a network firms is of importance in the above and therefore the ATO has clarified that a network firm is a firm that belongs to a network – being a larger structure that is both:

• aimed at cooperation
• clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources.

The guidelines confirm the ATO’s view that the administration of SMSFs would rarely meet the requirement of being ‘routine and mechanical’ because of the degree of professional judgement accountants and administrators exercise in carrying out the services.  Further, the ATO state that automating aspects of accounting services using data feeds, such as in the preparation of financial statements, is not of itself sufficient to make the services ‘routine or mechanical’'

Verdict - it is highly unlikely in-house audits are possible for more than a handful of a firm’s SMSFs.

What options does the firm have to retain the revenue arising from those audits?

The ATO's guidelines specifically address some of the solutions which have been floated by the industry in response to the changes in the APES independence guide.

1.     Reciprocal auditing arrangements

The ATO has been concerned about reciprocal auditing arrangements for a number of years now which has resulted in them undertaking a number of compliance projects in this area.  In the guidelines the ATO notes reciprocal auditing arrangements pose a major risk to auditor independence and go on to highlight an area of concern as being where two professional accountants who are also approved SMSF auditors:

• prepare the accounts for a number of SMSFs and
• enter into an arrangement to audit the SMSFs of each other’s clients.

Verdict - though not specifically ruled out and threats to independence could be overcome, the ATO doesn't like reciprocal auditing arrangements and will most likely review the SMSF audit component of your practice if you enter into them.

2.     Audit pooling arrangements and network firms

Audit pooling arrangements involve a group of firms entering an arrangement to audit each other’s SMSF clients to mitigate revenue loss.  Over the last six months our office has observed quite a few service providers in this space advertising their solutions.

In relation to these arrangements, the ATO states that SMSF auditors must watch out for the creation of networks and reciprocal arrangements.  They also mention some arrangements may give rise to partnerships or joint ventures.

Also, from a practical point of view, I can see pooling arrangements being problematic as accountants generally like to deal with just the one auditor and the one system.  There is nothing worse for accountants than having the same issue in two SMSFs, but different auditors have different approaches.

Verdict - nothing has been specifically ruled out but the ATO has raised several concerns and highlighted other things to look out for.  Anyone entering an auditing pooling arrangement needs to carefully consider the structure of the pool, including how the audits are distributed to ensure their own independence is maintained.

3.     Engaging specialist firms to prepare accounts and audit

Whilst not a solution which will ensure a firm replaces lost SMSF audit revenue, the ATO has provided guidance on this scenario as there are a number of specialist SMSF administration firms which provide both the administration and audit services "in-house". 

The ATO's guidelines note that whilst the accounting services may be provided by the specialist firm to the outsourcing accountant and not directly to the trustees, the ATO considers that the services are still being provided to the SMSF audit client.

The ATO states they do not think specialist firms which provide both the administration and audit to the same SMSF are within the spirit of the Code so they will be closely scrutinising these types of arrangements because of the independence threats involved, and the significant risk of non-compliance.  However, they do acknowledge that each firm will be structured differently, and they will only be able to provide clarity after engaging in a compliance review of the specialist firm.

Verdict - accountants who use the services of a specialist administration provider for their SMSFs where both accounting and audit services are provided, do not have an independence problem.  It is the service provider which must demonstrate compliance with the independence requirements of APES 110.

Therefore, if you wish to engage a specialist firm to perform both functions then you will have no independence exposure in doing so.  However, if you wish to engage the specialist firm but have a concern about their independence, you may wish to have them perform the administration only and find another audit solution.

The final word

A failure to comply with the independence requirements as set out in the Code is a breach of the SISA and SISR and is therefore an important issue for SMSF auditors.  Despite some requests from industry participants for the ATO to extend the "transitional period" beyond 30 June 2021, it appears the ATO will not extend the date by which they expect compliance.  Where the ATO finds auditors are not complying with the requirements action they will take compliance action and may refer auditors to ASIC for further action. 

If you are wanting a truly independent auditor, please give us a call on 1300 04 SMSF (1300 047 673) to learn more about our service.