Restructured code of ethics clarifies SMSF audit independence issues

This article was current at the time of publication.

Changes have been made to the restructured APES 110 Code of Ethics for Professional Accountants (the restructured code), which clarifies requirements for firms that prepare accounts and conduct audits for clients with self-managed superannuation funds (SMSF).

In the past, preparing accounts and conducting an audit by a firm with two or more partners was accepted based on a segregation of duties and ethical walls. However, the restructured code clarifies that this is only possible where the account preparation is “routine or mechanical”.

Where account preparation is not routine or mechanical, accountants must disengage from one of the services provided.

The Australian Taxation Office (ATO) reaffirms the restructured code which states “services that are ‘routine or mechanical’ in nature require little or no professional judgement”." Examples of these services are listed in paragraph 601.4 A1 of the restructured code.

In monitoring the preparation of accounts by the auditor’s firm under the clarified guidance, appropriate evidence must be provided on the auditor’s file that the SMSF trustees took responsibility for the financial statements and had the sufficient knowledge, skills and experience to do so (R600.8).

For example, this evidence could consist of trustee-coded transactions and approved trustee entries in the trial balance that the auditor’s firm then uses to prepare the financial statements.

Auditors shouldn’t assume that copies of signed financial statements and trustee representation letters are enough evidence for this requirement.

Guidance on changes to the restructured code

The Accounting Professional & Ethical Standards Board Limited (APESB), in collaboration with the three professional accounting bodies: Chartered Accountants Australia and New Zealand, CPA Australia, and the Institute of Public Accountants, recently published an updated Independence Guide – Fifth Edition, May 2020 (the Guide), which incorporates the changes to the code.

Steve Keating, assistant commissioner of the ATO, says the ATO advises audit firms to familiarise themselves with the definition of “routine or mechanical”.

“While the ATO welcomes the clarity provided by the updated Guide, we recognise there are significant changes that may be required to be made by some auditing firms, plus there is a need for guidance on what constitutes ‘routine or mechanical’ SMSF financial accounts,” says Keating.

While the restructured code became effective on 1 January 2020 and is mandatory for all members of the Australian professional accounting bodies, the ATO won’t immediately enforce compliance.

“We will not be taking compliance action in the 2020-2021 financial year; instead the commissioner will write to auditing firms where our data indicates that the auditor could also be auditing financial statements prepared by the same firm, to assist those auditors to comply with the requirements under the restructured Code,” says Keating.

Increased accountability for auditors

Josephine Haste CPA, policy adviser – ethics and professional standards at CPA Australia, says the changes call for increased accountability and transparency, and reflect a global focus on the independence of auditors.

“In an accounting practice, it was generally accepted in the past that one partner could manage the accounting work and another partner could do the audit of the same client. The restructured code has clarified that this position creates threats to the fundamental principles, in particular, independence as a subset of objectivity,” Haste says.

“Now is the time to conduct a stocktake of your SMSF clients to establish whether you may need to disengage from either the account preparation or audit."

“If your firm is completing both the accounting and audit of a SMSF, you will need to objectively consider whether the accounting function is ‘routine or mechanical’ as per the requirements in the code at paragraph 601.4 A1.”

Channa Wijesinghe FCPA, CEO at APESB, says the Guide provides substantial guidance on how to navigate the restructured code, including several scenarios. These include posting transactions coded by the client, posting client-approved entries and preparing financial statements based on a client-approved trial balance.

“The routine or mechanical provisions in the restructured code should be viewed as a limited exemption, as generally, an auditor must not be undertaking accounting and bookkeeping services for an audit client,” says Wijesinghe.

Even in situations where the services are routine or mechanical, the code the auditor must use safeguards to reduce the self-review threat to an acceptable level (Section 4.3 and 8.4 of the Guide). These safeguards could consist of using professionals who are not audit team members to prepare the financial statements or having someone review the audit work who was not involved in preparing the financial statements (paragraph 601.5 A1), says Wijesinghe.

“Where professional accountants require further guidance, they should consult with their respective professional bodies [such as CPA Australia],” he says.

Haste says CPA Australia will assist and educate members through a variety of mechanisms, including the quality review program, to make sure members understand the new requirements.
“CPA Australia will be taking an educative approach like the ATO for the next 12 months. The Quality Review Program will give us the opportunity to bring this to members’ attention to help them understand what’s required and how to go about managing that process,” says Haste.

“We encourage members to take advantage of CPA Australia’s planned education opportunities through webinars, podcasts, interviews and articles, which will coincide with when our members will be conducting SMSF engagements over the next few months.”