Time is running out for accounting firms to critically review the arrangement they have with the auditors of the SMSF funds for whom they prepare financial accounts. Firms have just 3 months to make necessary arrangements to engage independent SMSF auditors.
This week, the ATO released a detailed online guide on SMSF Audit independence standards that also provides in-depth guidance on the complexities surrounding non-assurance services. For further information, click here
The ATO’s approach to compliance with the new independence standards during the 2020–21 income year has been to provide support and guidance to assist auditors to comply with the requirements of the Code. This will give firms and network firms time to consider if a restructure of their firm or audit engagements is necessary.
However, for audits completed after 1 July 2021, firms will need to comply with the Code. This includes audits they have completed for 2020–21 and future financial years and any audits that need to be completed for earlier financial years.
Latest Update on SMSF Audit independence Standards
Key areas identified by the ATO for potential independence threats in relation to SMSF audits are outlined below:
1. Management responsibility – If a firm assumes any management responsibility for an SMSF audit client, they cannot audit the SMSF under any circumstances.
2. Routine or mechanical test – A firm or a network firm is prohibited from providing accounting or bookkeeping services to an SMSF audit client unless the services are ‘routine or mechanical’, and the firm addresses any independence threats created by providing the service which are not at an acceptable level. For accounting and bookkeeping services to be ‘routine or mechanical’, the services must involve little or no professional judgment by the firm. The only criteria for a ‘routine and mechanical’ service is having the client responsible for making decisions in the preparation of accounting records and financial statements.
3. Issues for restructuring firms – Firms who currently provide non-assurance services to an SMSF audit client will need to self-assess whether they currently meet the independence requirements. If a firm needs to restructure their arrangements to comply with the new independence requirements, they need to be careful they do not create other independence issues.
4. Reciprocal auditing arrangements and referral source issues – Reciprocal auditing arrangements pose a major risk to auditor independence and are of particular concern to the ATO. One type of reciprocal arrangement occurs where two auditors with their own SMSFs agree to audit each other’s funds. Another reciprocal arrangement of concern occurs where two professional accountants who are also approved SMSF auditors (a) prepare the accounts for a number of SMSFs and (b) enter into an arrangement to audit the SMSFs of each other’s clients.
5. Audit pooling arrangements and network firms – Audit pooling arrangements involve a group of firms entering into an arrangement to audit each other’s SMSF clients. However, depending on how they are structured, the arrangements may give rise to self-interest, familiarity and intimidation threats to independence. These threats will need to be evaluated and addressed if they are not at an acceptable level.
6. Providing audit services to a client of previous firm – After an auditor leaves a firm, they are sometimes asked to undertake the audit work for that firm’s SMSF clients. Some firms may regard this as outsourcing the audit work for their SMSF clients to a third party, therefore relieving themselves of any threats to independence.
However, auditors who look to take on clients of a previous firm that they used to provide non-assurance services to (such as accounting or advice services) whilst they were a partner, employee or consultant of that firm still need to be aware of potential self-review and familiarity threats that may arise in taking on those clients.
7. Engaging specialist SMSF firms to prepare financial statements and conduct audits – An ‘outsourcing’ accountant may engage a specialist SMSF firm to prepare the financial statements for a fund, but the accountant oversees the accounting services and takes responsibility for them. If the specialist firm conducts the fund’s audit, or the audit firm is a ‘network firm’ of the specialist firm, the specialist firm and/or the audit firm still need to comply with the independence requirements of the Code.
These independence threats now mean that firms need to choose between providing accounting and audit services. It’s no longer feasible for firms to provide both, even if they believe that ethical walls have been put in place to preserve independence. Where there is any doubt, the decision should be to engage a fully independent auditor. It’s just not worth the risk for the core business of accounting and tax compliance.
What should you do now to address these issues?
Accounting firms with a potential conflict of interest have 3 actions that they should consider:
- Withdraw from Audit services before 1 July 2021
- Check PI Insurance validity if the Independence Code is breached
- Avoid new independence threats posed by fee dependency or reciprocal arrangements outlined above
It’s no longer appropriate to consider delaying a decision. The ATO will be monitoring compliance in to SMSF audit independence from 1 July 2021.
In moving to a fully independent SMSF audit service, the following areas of focus should be investigated:
- How long has the SMSF audit business been operating? Do they outsource to individual SMSF auditors or provide the service in-house?
- How many SMSF audits do they do each year? Do they have the capacity to take on more?
- Do they have experienced auditors to perform the audit?
- What turnaround targets are in place for completion of SMSF audits?
- How is the process of communication in relation to requests managed?
- What processes are in place to ensure independence between the preparation of financial accounts, advisory work and audit services?
- Does the price charged reflect the work involved in completing the audits in a professional manner?
- How should the price be communicated to the client in a way that demonstrates value?
If you have not yet made a decision about your SMSF Audit provider, you need to get up to speed now!
On Tuesday 18 May 2021, Steven Watson, Director of the National Audits Group, will be presenting a webinar on the new SMSF Audit Independence requirements. Key areas of focus will be:
- How will these changes affect your firm from 1 July 2021?
- What options do you have in moving forward with your SMSF services?
- What steps should you take now to find a qualified, independent SMSF auditor?
You will have the opportunity to ask specific questions and even request a meeting with Steven and his team.