On 1st July 2021, the ATO launched new SMSF Audit independence standards that included in-depth clarification on the complexities surrounding the provision of audit services alongside non-assurance services.
In the new standards, ATO guidance confirms that even where a firm is able to show that they do not assume any management responsibility for an SMSF audit client and any accounting or bookkeeping services provided to the trustees are “routine or mechanical”, they must still address any independence threats that are not at an acceptable level.
They must either eliminate the circumstances, including interests or relationships creating the threats or apply appropriate safeguards, where available and capable of being applied, to reduce the threats to an acceptable level.
Whether an appropriate safeguard is available and capable of being applied will depend on the circumstances. However, appropriate safeguards may consist of either using professionals who are not audit team members to perform the service or having an appropriate reviewer who was not involved in providing the service review the audit work or service performed.
New SMSF independent auditor’s report form identifies the issues
To assist firms in identifying independence risk, the ATO now has released a new version of the Self-managed super fund independent auditor’s report form, which must be used for all audits completed from 1st July 2021, regardless of what income year they apply to.
The report form emphasises the importance:
- of the auditor needing to ensure their firm or network firm are not providing any non-assurance services to an audit client that are prohibited under the Code and
- that where their firm or network firm is preparing financial statements for an audit client after 1 July 2021 that a management responsibility has not been assumed for the fund and the services provided are routine or mechanical and safeguards have been applied.
What should accounting firms be doing now?
Clearly, any firm that provides audit services directly to clients or directs clients to a third-party for audits must ensure that the new independence rules are being followed. Every firm providing SMSF audit services needs to review the potential for independence threat if they have not already done so.
Key areas of focus that should be considered are:
1. 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.
2. Reciprocal arrangements
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.
3. 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. Depending on how they are structured, the arrangements may give rise to self-interest, familiarity and intimidation threats to independence. Key questions to consider are (a) is the pool the size of which could be seen as a ‘network’? and (b) does the percentage of SMSF audit fees to total income give rise to perception of fee dependence i.e. 20% or more?. It’s likely that these types of arrangements will be subject to extra scrutiny by ATO as they are considered an extension of reciprocal arrangements.
4. Providing audit services to clients 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 must be aware of potential self-review and familiarity threats that may arise in taking on those clients.
5. 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.
Has the accounting industry addressed these issues?
For many accounting firms, the risks associated with managing SMSF audits, even with ‘arms-length’ arrangements, do not justify the return. A rule of thumb suggests that when audit fees account for less than 20% of total accounting revenue, divestment is the best option. In just one recent case, For example, CountPlus recently announced the sale of their audit and corporate finance business of Member firm Bentleys (WA) to Hall Chadwick (WA).
It’s clear from our discussions with industry leaders that some firms still don’t believe that they have an independence problem and are adopting a ‘wait and see’ approach. These firms run the risk of significant penalties when ASIC comes to visit.
What should accounting firms at risk be doing now?
Accounting firms with a potential conflict of interest should NOT be waiting to see what happens. These independence threats now mean that firms need to choose between providing accounting and audit services. If there is not a clear separation of responsibilities, the best approach is to pass on audit fees to someone who is truly independent.
This just one of many regulatory changes taking place and anticipated within the audit industry. The UK Brydon Review (2019) and subsequent Australian Parliamentary Inquiry into Audit Quality (2020) have reinforced the need for an independent regulatory body in relation to audits. This is the only way that the industry can continue to meet the needs of all stakeholders.
In recognising these challenges, the National Audit Group affirms its goal to continue to provide specialist audit services to Australian businesses.
Gansen Pappiah | National Audits Group | https://www.audits.com.au/
Email: gansen.pappiah@audits.com.au
Reference documents
Auditor independence for SMSF auditors – A guide from the ATO
Self-managed superannuation fund independent auditor’s report (IAR)
CountPlus sale of Bentleys WA audit business unit
