The new Independence Guide clarifies that an auditor cannot audit an SMSF if they prepared the financial statements for the SMSF unless it is a “routine or mechanical service”, however the ATO has clarified that the “routine and mechanical” exception is very hard to meet and also may not exist in future years.
The ATO is encouraging SMSF firms to start restructuring their audit engagements now.
Trustees would need to take full responsibility for preparing accounts
The ATO has set very rigorous standards for proving that administration and financial reporting work is “routine and mechanical” making it very difficult, if not impossible, for a firm to do in-house audits, even via a Chinese Wall.
ATO SMSF Auditor Director Kellie Grant said that practitioners would need evidence “that the trustee took on full responsibility for the preparation and fair presentation of financial statements.”
Ms Grant also said that to meet this requirement, the ATO will be reviewing auditors’ files and ruled out the use of data feeds as valid proof the accounting and administration functions have been performed in a routine and mechanical fashion.
“The firm was responsible for setting up the accounting software which classifies the transactions from the data feeds, and of course, we all know that mistakes can be made with those data feeds which normally the firm takes responsibility for rather than the trustee,” she stated.
Proof of the trustee taking full responsibility for preparing the accounts goes beyond the trustee just signing the trustee declaration in the financial statements or saying in their trustee representation letter that they’ve prepared those financial statements.
“It really does mean the trustees being able to show they created all the fund transactions, basically provided a trial balance to their fund administrator to then upload it into their system, and any financial statements produced will be based on those trial balance figures prepared by the trustees.”
Ms Grant said the ATO is not expecting very many trustees to have the ability to take on the responsibility of maintaining the fund’s financial records in this way.
“Gone are days of in-house audits and Chinese walls” Ms Grant said.
“That’s why we expect quite a few accounting firms who conduct in-house audits will need to look at restructuring, I think, in order to avoid a breach of this independence standard.”
Setting up new audit arrangements with longevity
The ATO went on to say “Potentially, in five years’ time, there may no longer be a routine or mechanical exemption anymore. So, our advice is to get prepared now rather than later.”
Ms Grant previously warned that firms that enter reciprocal auditing arrangements with another firm may create another independence issue.
Firms grouping together to “pool” and redistribute of audits is also not likely to pass these stringent new Independence standards, as pooling arrangements clearly influence sourcing of work, creating dependence on one supplier… the “pool”.
Reciprocal arrangements can cause auditors “to rely on the one referral source. This kind of arrangement can inappropriately influence the auditor’s judgement and behaviour if the auditing firm is solely dependent on those fees,” Ms Grant explained.
If your firm needs to reconsider audit arrangements in light of the new Code, we’d be happy to talk with you.
Latest posts by David Saul (see all)
- “Routine and mechanical” is not a loophole - October 9, 2020
- Audit Independence and Reciprocal Arrangements - September 24, 2020
- Trustee responsibility, professional judgement and the new rules for SMSF audit - August 13, 2020