TriSuper What an SMSF audit is not
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What an SMSF audit is not

4 Oct 2018, 4:18 pm

Are your clients getting value from their SMSF audit?

There has been a lot of noise in the industry about new technology and low-cost SMSF audits. It’s possible that your clients are questioning the cost of their SMSF audit and asking about cheaper options.

To help you explain the difference between low-cost and high-quality audits, here are four areas that demonstrate the value of a TriSuper audit.

An SMSF audit is not a checklist

How do you make a loaf of bread? It’s not just about combining the flour, water, salt and yeast. The dough takes just the right amount of kneading and rising, plus the right temperature and time in the oven. Making bread (well, making tasty bread) relies on experience; the ability to analyse and apply human thought and judgement to produce a high quality outcome.

An SMSF audit is not just a sum of its parts.

During the audit we have to think about “What do humans do?” and “How do they behave?” to gauge risk to the fund.

Recently, I audited a Fund that owned an investment property in another state that was rented to tenants. A repair invoice for the property was signed off as completed by a person with the same family name as the trustees. This was a big red flag because it suggested a non-arm’s length transaction, and as you know, relatives of trustees can’t reside in an SMSF’s investment property.

But the lease was under a different name, so I did some digging.

I asked the trustees what was going on. Their daughter lived in the area, so she had agreed to arrange the repairs and make payment on behalf of her parents. It turned out that everything was above board, but it pays to check. A tick against a checklist wouldn’t have raised this as a red flag or taken the extra step to make sure everything was in order.

An SMSF audit is not a “tick and flick”

Funds that look simple at first glance might actually be high risk. An SMSF with $50K sitting in cash could be one of the most high-risk funds out there.

Who’s checking what the trustee is doing with that money? Are trustees using their SMSF cash stash as a bank account to fund their business, holidays, or putting money in and out to fix personal cash flow problems?

An SMSF audit is not just a case of checking that the money is in the fund at audit time and ticking it off.

An inexperienced auditor would just tick off that the money is there. They might not look at the trend of what’s going on in the bank account. An experienced SMSF auditor would pick up on it and raise a warning about the trustee’s behaviour.

A good SMSF audit is not cheap

There are a lot of low-cost audits available. We’re seeing the development of web-based systems that automate routine financial audit processes, making super audits faster. The technology allows audits to be priced as low as $300. Meanwhile the ATO annual statistics say that the median audit fee is $500, so $300 is very cheap. Too cheap. As in life, so in audits: you get what you pay for.

First of all, you want a human doing your audit, not a machine. Secondly, that human needs to have appropriate qualifications and experience to do a proper audit. SMSF auditors must be registered, undertake certain education courses and meet ongoing CPD. Trustees can check that their auditors are registered and of the required standard.

Plus, as we saw in the example above, auditors should care enough to check facts and make sure everything is done right.

A tech platform simply can’t compete against a human when it comes to quality. The auditor’s qualifications, experience and care take a lot of time, and therefore a good SMSF audit is not cheap.

An SMSF audit is not a tech platform checking data feeds

An SMSF’s investment strategy says the fund will invest in 50% Australian shares. If the data shows that the SMSF indeed has 50% Australian shares, the tech platform would give it a tick.

An experienced human auditor looks beyond that data:

  • Which Australian companies does the SMSF invest in?
  • Does each company really exist (or is it a fake company, or a mate’s venture)?
  • Is it a normal type of investment?
  • Is it high risk?

It’s the auditor’s duty to say that what’s reported is true and correct. But beyond that, the auditor puts themselves in the trustee’s shoes. It’s our duty to consider whether certain investments are appropriate for the long term.

Automated audits won’t pick up the nuances of such issues because data feeds don’t consider market perception of certain types of investments in terms of risk. It takes a human to look at what the trustees are doing and have a gut feel for what’s reasonable. That’s something an arm’s length trustee would do, and an automated system simply can’t think to that level.

Computers can do a lot, but they simply aren’t that intelligent yet; they’re black and white, and they can’t make value or moral judgements.

The ATO and the Courts want the auditor to spend time and care considering outcomes for members’ super balances; not just matching bank statement lines.

Recent court decisions highlight that the auditor has a greater duty than once understood to provide assurance to the Trustees that their investments exist, are valued at realisable value and identify areas of concern.

Can an IT system make the necessary judgement calls that often rely on experience, intuition and understanding of human nature? Maybe one day, but we are not there yet.

The auditor is protecting the trustees to make sure their Super Fund is right and proper. From the ATO and ASIC’s point of view, the integrity of the SMSF system is held up by the auditors, not by a computer matching data feeds.

Need help?

I hope this gives you enough information to convince your clients of the value of a detailed and high-quality SMSF audit.

As always, if you need help with your clients’ funds, don’t hesitate to contact Joel Curry at TriSuper Auditors on 1300 TRISUP for further info.

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