The ATO, ASIC and professional bodies have been banging on about auditor independence for years. Their independence is crucial for the integrity and success of business environments. Whether they are registered audits, trust accounts, or SMSFs.
People checking the work must be independent of those doing the work. Judges cannot be prosecutors or defence lawyers. They must be independent, or the legal system is compromised.
It is the same with SMSF auditors.
Old fears – understandable - but risky
It is risky if the same firm that prepares the accounts and administers the fund also does the audits. Accountants miss or overlook breaches.
Historically they feel uncomfortable raising the issues with clients. Fear of lost revenue if a client got the hump and went elsewhere. Or they don't want to be waving the big stick and avoid conflict.
That will now have to change.
New updates from professional bodies
The APES 110 code of ethics, released in May 2020, provides clear guidelines about auditor independence.
All three professional bodies endorse it. And the ATO has been providing clear rulings ever since.
What is outlawed?
✘“An SMSF auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for the SMSF unless it is routine or mechanical in nature”. However, the restrictions around this are so tight as not to be worth the risk.
✘ If ‘the books’ are prepared by the auditor.
✘ The accounting firm acts as the registered tax agent and/or auditor.
✘ Auditors who audit an SMSF where the auditor was previously a consultant/partner or employee of the firm.
✘ Relationships between auditors and referral sources, including:
- auditing multiple SMSF clients of an administration firm
- auditor doing SMSF audits for an accounting firm where the principal is related to the auditor
- reciprocal auditing arrangements relating to auditors who audit each other’s fund and auditors auditing each other’s SMSF clients
- the concentration of referral sources in regional areas
✘ Firms offering financial planning services.
✘ Auditors ‘contracting out’ accounting work for an SMSF client.
✘ Auditors who have a long association with SMSF clients.
And the ATO is cracking down
In a recent statement from the ATO:
“Out of the 21 high-risk auditors referred to ASIC, Ms Grant stated that 18 were identified as not meeting the independence requirements, due to either them or their staff preparing the financial statements and then doing the audit on those financial statements."
"The failure to obtain sufficient or appropriate audit evidence to support an auditor's opinion is the most common reason we refer an auditor to ASIC."
COVID is just an interruption. The ATO's data matching capabilities is growing exponentially. Conflicted firms will get found out.
Accountants have this financial year to their house in order. The professional bodies will start their review process from March 2021 onwards.
And if you think the ATO is challenging, professional body audits can have a fail rate of 85%. Which means a lot more rework for everyone involved. Independence will be high on their checklist.
The value of an independent audit
There are significant pluses to an independent audit:
✔Reduces financial risk
The penalties around non-compliance are significant. ATO audit scrutiny can be time-consuming, and PI insurance for auditors is rising, rapidly.
✔Develop value add services by working with an auditor
A good SMSF auditor is much more than a tick ‘n flick compliance officer. They will look at the fund overall and make recommendations about:
- how to improve fund performance (typically tax effective structure changes)
- how to improve compliance (and avoid the ATO black mark)
- different SMSF strategies that will help your client achieve their goals
Genuine independence gives the trustee peace of mind. That all is well with their financial future; their retirement is safeguarded.
✔You can still charge fees to assist with the audit
If the auditor recommends changes or wants additional information, then you will be doing the work. Billable.