Referral sources of audits and discrepancies in the valuation of assets are in the ATO’s sights

In a recent update, the ATO has reminded us about its continued focus on SMSF auditor independence.

ATO assistant commissioner Kasey Macfarlane said “SMSF auditors need to apply their judgement to [all] situations where there could be a perceived threat to independence such as self-interest, familiarity and potential intimidation.”

Auditor independence tests are expanded and deepened each year. This year the ATO is aiming its targets at:

• Referral source of audits including the proximity of and dependence upon relationship
• Discrepancies in valuation of assets

In addition to the existing hot list:

• Reciprocal audits
• Auditor relationships
• Two partner practices
• Low Cost audits 

Why is this important?

The ATO is once again reminding us that it takes Superannuation very seriously. Superannuation funds, both industry and self-managed, are for the sole purpose of providing a comfortable retirement for Australians.

An independent SMSF auditor is the protector of your clients’ SMSFs, making sure they are both compliant and fulfilling their purpose to trustees. We’re the back up, the extra set of eyes and the final tick of approval. In many cases we can notify you of an error in time for it to be fixed before the ATO slaps down a costly penalty to the trustees.

Here it is explained: what do you need to pay special attention to this year?

• Referral source of audits

The ATO is watching SMSF auditors who do a large volume of audits from just one or two sources. If an auditor’s business relies heavily on a couple of firms for their referrals, there could be a risk of intimidation. If an auditor has a close personal or business relationship with a referral source, there could be a risk of coercion.

• Discrepancies in valuation of assets

The ATO is looking for red flags where a different value has been used for an asset in different areas of the SMSF accounts. Auditors will be checking that the same value has been attributed to the item across all its entries. ATO assistant commissioner Kasey Macfarlane said “The ATO will be concerned if we see instances where a different valuation is used for transfer balance cap purposes for example, compared with one used for the purposes of claiming CGT relief.”

Auditors will also ask to view documented evidence that demonstrates that a fund’s assets have been valued at market value. An auditor might request an independent valuation if the asset represents a significant proportion of the fund’s value.

• Relationship with a trustee

This regulation ensures that there is no connection between the auditor and the fund. An auditor is in breach of independence rules if the auditor or their partners:

1. are a trustee or director of a corporate trustee or a member of the fund, or
2. are a relative or close associate of a trustee or director of a corporate trustee or a member of the fund

Auditing one’s own SMSF, or the fund of a relative, close friend or associate can lead to severe penalties.

• Risk of auditor bias in small accounting firms

This point is particularly relevant to small accounting practices where one partner is an accountant for an SMSF and the other partner is an authorised auditor. The auditor is at risk of bias because they are auditing their colleague’s work. It’s also possible that the auditor has met the trustee during their visits to the firm. The ATO considers this a lack of meaningful separation between the auditor and trustee.

You can’t audit an SMSF if you or your partners:

1. have prepared the accounts and the statements for the fund being audited (if you are a sole practitioner, this includes instances where an employee has prepared the accounts and statements)
2. provide advice (such as tax, financial or investment advice) to the fund being audited

• Reciprocal audits

As many auditors have their own SMSF, it’s also worth noting that you also can’t do a reciprocal audit; that’s when you audit a fund for someone who audited your fund.

• Penalties

The problem with compliance breaches for accountants is that their clients, the trustees, are the ones that are exposed to any potential ATO penalties and fines. However, there may come a day when a trustee sues their accountant for failing to notice a breach or a non-independent audit.

As accountants you must be vigilant about the independence of SMSF audits in order to protect your trustees and yourselves.

• Other benefits of independence

When an independent SMSF auditor is involved, you get a fresh set of eyes over the accounts. Just as it’s difficult to proofread your own writing, you might miss errors in accounts that you have prepared.

As part of our audits, we include free advice on ways that a fund’s structure could be improved or tax could be reduced. This advice could make a huge difference to your client’s retirement income.

• Choosing an independent SMSF auditor

At TriSuper we pride ourselves on our independence. If there are any reasons why we can’t audit your client’s SMSF ourselves (like they happen to be our best mate’s brother), we will refer you on to another registered SMSF auditor.

Contact TriSuper Auditors on 1300 TRISUP or visit our website for further info.