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Focus on Auditor Reliability as ATO deregisters 7 SMSF auditors

What does this mean for the future of SMSF Audits?

While I watched in anticipation of an exciting Budget Night on Tuesday 9th April, it was a bit of a fizzer for SMSF news. The three-year audit cycle proposal was notably absent, so it would appear the idea has been dropped (which I’m pleased about). And the six-member SMSF proposal was not passed by parliament at this time.

But what has been interesting to watch in recent news is a huge shake up for SMSF auditors. The ATO has deregistered or suspended 7 auditors for failing to act independently, among other issues.

This news, on top of two 2018 court cases where auditors were found liable for trustees’ losses, has got me thinking a lot about auditor reliability, and what these cases mean for the future of SMSF audits.

ATO deregisters 7 SMSF auditors

In early March, SMSF Adviser released an article reporting on the recent deregistration and suspension of SMSF auditors. With these decisions, ASIC has sent a shockwave through the SMSF auditing profession.

The important points are:

  • Two auditors misused their auditor numbers to lodge incorrect annual returns
  • One auditor falsely claimed their personal SMSF had been audited when in fact it had not
  • Several auditors were deregistered for auditing their own personal SMSFs
  • One auditor was suspended for doing in-house audits
  • One auditor failed to obtain evidence for property valuations

You can read more about these recent deregistrations and suspensions in our article here or the very detailed SMSF Adviser article.

ASIC and the ATO are sending a strong message that they take superannuation very seriously, and they expect accountants and auditors to follow the rules.

What do the deregistrations mean for SMSF Audits?

With these recent deregistrations, the ATO declares it is focusing on auditor reliability and independence.

The ATO is cracking down on two main issues:

  • Audits being conducted in-house
  • Reciprocal audits or swap audits

For auditors who operate under completely independent practices, it’ll be business as usual. But for auditors who are doing in-house or reciprocal audits, it’s time to stop.

From now on, auditors will need to pay attention to:

  • Reviewing investment strategies in more detail
  • Looking for conflicts of interest
  • Requesting more Part A qualifications

For auditors with 5-20 super funds in their practice who’ve been doing in-house audits or swaps, it’s not worth the risk any more. They need to change their process to act completely independently.

Plus there’s competition from low cost audits that are either offshoring a lot of the basic check work or using automated systems to conduct initial checks. The trap with these methods is that unskilled people and computer programs won’t always pick up issues in an SMSF. It takes a lot of experience and critical thinking to discover some of the risks and issues in an SMSF, and that takes time and expertise.

In addition to other big news in SMSF audits, auditors face even more pressure:

SMSF Auditors found liable for trustees’ losses

Two 2018 court cases found that SMSF auditors were responsible for losses because they failed to advise trustees that SMSF investments were unsuitable.

Rather than go into the details of the cases here, you can read two very detailed articles by SMSF Adviser in the links below, and instead we’ll focus on what these cases mean for auditors:

Ryan Wealth Holdings Pty Ltd v Baumgartner (News article on SMSF Adviser here and the judgement here.)

Cam & Bear Pty Ltd v McGoldrick (News article on SMSF Adviser here)

The cases set a precedent for auditors to be held liable for their SMSF clients’ losses, and this opens up a new area of attack for compensation lawyers.

As a result, it’s possible that auditors’ professional indemnity insurance premiums could skyrocket (and they’re pretty high already).

Auditors will need to take more time to check every tiny detail of SMSF annual audits, because:

The burden of responsibility lies with the auditor

The client says “I just followed the directions of the financial advisor and now I’ve lost my money” and if the financial advisor has gone bust, the next person down the line is the auditor.

The court says the auditor has a larger role to play, and that the auditor should have identified that the investment was not appropriate, or not properly documented, or not at arm’s length.

With this result, the court has set a precedent that the auditor can bear financial responsibility for the client’s losses.

As auditors, it’s not really our role to comment on whether a particular investment is financially suitable for the trustee’s situation. But the court says auditors must confirm that the investment exists and is appropriately valued in the statement of financial position.

This responsibility becomes tricky with certain investments where prices fluctuate, such as shares, which could halve in value overnight following a catastrophe, or with property investments.

Here’s an example of how that might look in practice:

Drop in the property market: how can this affect SMSF audits?

As a result of the recent court cases, auditors must now consider issues such as independent valuations with more care than before. If an auditor can be found liable for an SMSF trustee’s losses, what does that mean in terms of the recent drop in housing prices, as one example?

Our role as auditors is to make an informed opinion on the financial statements we’re presented.

At present, a formal property valuation has traditionally been accepted to last for 3 years as part of the SMSF audit. With the recent (and probably continuing) drop in the property market, an investment property valued at $1M in early 2018 may now be valued at $900K. If some experts’ forecasts of a 30% drop from the peak turn out to be correct, in two years’ time, that property may be worth $700K.

In such a rapidly changing property market, this means auditors may need to recommend updating professional valuations for investment properties more often than every 3 years.

This is especially important if a trustee wants to retire, leave the fund, and be paid out a lump sum including their share of the value of an investment property. In a time of rapid decline, a 3-year-old valuation simply might not be correct and could significantly affect the total value of their superannuation and their payout amount.

This situation places significant pressure on auditors to remind trustees and accountants to confirm formal valuations, especially before making a payout to members.

We’re always happy to offer advice

The world of SMSF audits is increasingly complex. If this article raises concerns about any of your clients and their funds, please don’t hesitate to call. Contact TriSuper Auditors on 1300 TRISUP or visit our website for further info.