Audit firms across Australia will be reassessing their mix of self-managed superannuation fund clients following the issue of a revised guide to independence that is set to impact on accounting firms’ bottom lines.
It is expected the change will cost some practices thousands of dollars in fees as they come to terms with revisions to ethical rules.
A more stringent ethical code and resulting ethical guidance will mean accounting firms must decide whether to specialise in the audit of SMSFs or just provide advice related to the SMSF structure and investment strategies.
The Accountants’ Professional and Ethical Standards Board published a revised independence guide in May and the 112-page document sets down strict prohibitions on the circumstances in which an auditor can accept an audit of a self-managed superannuation fund.
It is a revised independence guide that is making waves within the SMSF auditor community while a parliamentary inquiry looking at audit regulation is still active and due to report in December this year.
The authors of the guide acknowledge the committee’s inquiry and state the ethical standards board is yet to action the following recommendations released in February:
• establish defined categories and associated fee disclosure requirements in relation to audit and non-audit services;
• establish a list of non-audit services that audit firms are explicitly prohibited from providing to an audited entity;
• expand the auditor’s independence declaration to require confirmation that no prohibited non-audit services have been provided; and
• consider revising the Code to include a safeguard that no audit partner can be incentivised, through remuneration, advancement or any other means or practice, for selling non-audit services to an audited entity.
Much of the controversy in the area of SMSFs will centre around whether firms have done financial advisory work and the audit in the past and to what extent they have provided services that might have been consistent with the previous version of the ethical code but are now deemed inappropriate.
Amongst the list of case studies published to illustrate the application of new independence provisions in the Code of Ethics – also known as APES 110 – is a reciprocal auditing arrangement that is of concern to both the Australian Securities and Investments Commission and the Australian Taxation Office.
Reciprocal auditing arrangements are when two auditors agree to audit each other’s SMSF or, alternatively, each other’s SMSF client portfolio. This kind of ‘buddy system’ of auditing has been on the regulators’ radar for some time.
The guide states that the familiarity between two auditors may lessen the degree of scepticism an auditor has when looking at their colleague’s SMSF, which is a threat difficult to mitigate.
“There is a threat that each auditor’s interest in their own SMSF will inappropriately influence their judgement or behaviour,” the guide also states: “For example, Member A may be less likely to issue adverse findings about Member B’s SMSF in fear that Member B may subsequently issue adverse findings on A’s SMSF.”
A further threat in this cosy arrangement pointed to by the ethical standard setter is possible intimidation.
“There is a threat that the auditors will be deterred from acting objectively due to actual or perceived pressures,” the guidance statement observes. “For example, one auditor may exercise undue influence on the other auditor not to issue an adverse finding.”
The ethical standard setter has concluded that this ‘buddy system’ audit of SMSFs should not exist because there is no way in which the auditors can be regarded as being independent.
The ATO has also announced its intention to crack down on any practices that breach independence rules. It has highlighted the new code of ethics’ provisions dealing with the provision of specific kinds of services that the ethical standard calls ‘routine or mechanical’ in nature.
Such a task might be ensuring the financial statements just audited are in the right template for lodgement. This does not involve the auditor in entering and classifying the numbers. All that work is done by management. It is ensuring the format is correct for presentation, sign off and lodgement purposes.
“When monitoring whether the preparation of accounts by the auditor’s firm is routine or mechanical under the new standard, the Commissioner will expect to see appropriate evidence on the auditor’s file that the SMSF trustees took responsibility for the financial statements and had sufficient knowledge, skills and experience to do so,” the ATO explains in its June 24 missive.
“For example, this evidence could consist of trustee coded transactions and approved trustee entries in the trial balance that the auditor’s firm then use to prepare proforma financial statements.”
The tax office teams looking at SMSFs are unlikely to take signed financial statements and trustee representation letters as sufficient and appropriate evidence.