Charting a new course of independence for SMSF accounting and audit firms

Author: Josephine Haste, Policy Adviser Ethics and Professional Standards, and Claire Grayston, Policy Adviser Audit & Assurance, CPA Australia

The ATO has advised that accounting firms have until July 2021 to restructure their practice if they are providing accounting or compliance advisory services to SMSF audit clients.

The recent update to the Independence Guide (the Guide), jointly issued by the Accounting Professional and Ethical Standards Board (APESB) and Australia’s three professional accountancy organisations, places a spotlight on auditor independence, particularly for auditors of Self-Managed Superannuation Funds (SMSFs). In the past, it was considered acceptable for an accounting practice to offer both accounting and audit services to a SMSF, as long as “ethical walls” were in place to reduce self-review threats to an acceptable level. 

However, the wording of the Code of Ethics for Professional Accountants (the Code) has changed, as well as perceptions regarding auditor independence, and the impact that threats to independence have on the credibility and quality of an audit.

The Code and the Guide now make it very clear that safeguards to reduce self-review threats are no longer considered sufficient for most SMSF engagements. 

Recent commentary on this issue has focused on the concept of ‘routine or mechanical’ services in the Code. This paragraph allows a firm to conduct accounting and bookkeeping services under very limited circumstances for an audit client, where those services require little or no professional judgement. The concept of ‘routine or mechanical’, it has been argued by some, allows practitioners to continue offering both accounting and audit services to trustees of SMSFs. However to pass the ‘pub test’ (also known within the Code as the reasonable and informed third party test), the accountant needs to demonstrate that the SMSF trustee has taken full responsibility for managing the fund, including the selection of accounting policies, software, coding of the general ledger, preparing the accounts and compliance with Superannuation Industry (Supervision) Act and Regulations (SIS legislation).

Some SMSF accountants and auditors ask whether the types of assets in a fund or the automation of data feeds and accounting software have a bearing on whether the accounting service requires professional judgement. Is the professional accountant merely hitting the print button to produce the financial statements meaning that their preparation is merely ‘routine or mechanical’? However, looking for exceptions within the Code or contending that asset type has a bearing on professional judgement misses the point. The exceptions within the Code are just that – designed to be exceptions used in exceptional circumstances. They should not be seen as “loop-holes” to allow the continuance of multiple services which potentially impair auditor independence.  

The APESB, contends that many SMSFs may fall at a hurdle that needs to be cleared well before ‘routine or mechanical’ becomes a consideration. That is, the Code contains prohibitions relating to the provision of non-assurance services to audit clients – SMSF accounting and compliance falls within the category of a non-assurance service for a firm engaged to do the SMSF’s audit. The most important consideration is whether the accounting firm is assuming management responsibility for the client when preparing the accounts and advising on the compliance of the fund. The assumption of management responsibility for a client is strictly prohibited under the Code, regardless of the type or size of the audit engagement. Accountants need to demonstrate that the trustee is making all decisions—regarding accounting policies, software selection, coding transactions, preparing calculations and accounts, and managing the fund’s compliance with the SIS legislation—that are the proper responsibility of management to execute.  Typically, services provided by the accountant to an SMSF trustee are more akin to those of a financial controller or chief financial officer – which in most instances, clearly requires assumption of management responsibility.

Auditor independence is a clear regulator focus, now more than ever. For a number of accounting firms, the time has come to consider disengaging from either the accounting and compliance for, or the audit of, a SMSF client. Care needs to be taken when assisting SMSF trustees to identify another firm to provide accounting or audit services. Reciprocal auditing arrangements and reliance on referral sources may create further threats to independence; and such arrangements are already a focus for the ATO’s SMSF auditor compliance program.

Firms have been given window of time to make necessary changes; as the ATO has advised that it will adopt an educative approach during the 2020/21 financial year to enable firms time to restructure and implement the Code requirements.  

CPA Australia is committed to providing support for members to understand and implement the Code of Ethics for Professional Accountants. Please see CPA Australia’s podcast and webinar for further guidance.