ATO runs the ruler over SMSF audits

This article was current at the time of publication.

Safeguarding auditor independence has always necessitated the separation of auditing from other services to self-managed super funds (SMSFs).

However, revised requirements make it clear that firms that do both accounting and auditing work for an SMSF client – which the Australian Taxation Office (ATO) has dubbed “in-house audits” – can only continue doing so in extremely limited circumstances. 

Any practitioners providing accounting or compliance advisory services to SMSF audit clients have a limited window within which to restructure their practices before attracting ATO scrutiny.

Although the ATO compliance program was suspended due to COVD-19, Justin Micale, the ATO assistant commissioner responsible for SMSF risk and strategy, says the regulator will resume compliance action concerning in-house audit independence issues from 1 July 2021.  

Impacts on firms

Changes to the restructured Code of Ethics for professional accountants, effective 1 January 2020, are reflected within the updated Independence Guide (fifth edition) which provides implementation guidance, released May 2020. 

While the restructured code is mandatory for all SMSF auditors, it will not necessitate changes for all firms. For those that specialise exclusively in SMSF audits, which do not provide other non-audit services, there will be no conflicts of interest arising from such services. 

Similarly, firms that do not take on any management responsibility for their SMSF audit clients and conduct only what are called “routine or mechanical” SMSF financial accounting may be able to continue to conduct the audit with safeguards such as having a separate audit team in place. 

Examples of these services are listed in paragraph 601.4 A1 of the restructured code.

One example cited is that if a firm is required to make little or no professional judgement and is simply entering items into a software package for a trustee who is making their own management decisions, it is business as usual. 

The assumption is that such firms can jump through all necessary hoops to prove “ethical walls” separating accounting from audit.

In practice, an SMSF auditors report covers both the financial statements and the SMSF’s compliance, which provides the ATO with confidence that the entity qualifies for tax concessions. The auditor needs to be independent from both the financial statement preparation and compliance advice.

As a result, Claire Grayston FCPA, CPA Australia’s policy advisor, audit and assurance, notes that it is difficult to avoid management responsibility when advising an SMSF trustee on accounting, compliance or taxation matters, or for accounting work to be solely “routine or mechanical”. 

Given this, Grayston suspects most SMSF auditors will need to make some changes to the services they offer each SMSF.

Most firms already know what is in store. However, says Grayston, many have sought greater clarification over exactly what the ATO considers appropriate when assisting trustees to find another auditor or practitioner for other services – without creating fresh threats to independence going forward. 

While most firms are steadily manoeuvring their business towards compliance, Grayson warns those yet to start that they have only a few months to left to do so. 

What you need to do

When it comes to assessing your independence as an auditor, Grayston recommends looking at the range of services provided to each SMSF client and realistically assessing whether they involve management responsibilities. 

“If SMSF trustees rely on you to take on management responsibilities, whether by providing accounting, compliance, taxation or financial advice services, you’ll need to withdraw from either the audit or those other services to meet the independence requirements,” she advises. 

“If you assist a trustee to find an alternative auditor or practitioner for other services, you will need to avoid entering into any arrangements – like reciprocal or pooling – which could create future conflicts of interest.”

While the restructured code is mandatory for all SMSF auditors, it will not necessitate changes for all firms. For those that specialise exclusively in SMSF audits, there will be no conflicts of interest arising from providing other non-audit services. 

If, after 1 July 2021, the ATO becomes aware during auditor compliance reviews that an in-house audit is taking place alongside services involving management responsibility, it may refer the auditor to the Australian Securities and Investments Commission (ASIC). 

However, exceptions may apply where a firm can demonstrate it made genuine attempts to restructure by 1 July 2021. 

“If due to exceptional circumstances, they were unable to complete the restructure on time, we’ll grant an extension and will complete a follow-up review,” says Micale.

Accounting or audit?

In light of the likely impact the restructured code will have on future earnings, Grayston expects most practitioners will choose to retain accounting and advisory services, where there is a stronger revenue upside. 

Provided the profession is transitioning to the revised code simultaneously, no firms should be significantly disadvantaged, she says.

If they need to refer SMSF audits to other firms, Grayston says practitioners should be able to do so without fear of other services to those clients being poached, which would only see them fall foul of independence requirements.

In deciding how to respond, she suggests members consider the reputational and professional indemnity risks they could face. 

“Instead of looking for loopholes, be upfront by addressing the spirit of the revised code,” she emphasises. “Make sure auditors are truly independent, which is so critical to providing confidence to the ATO and others in the value of the audit.”

CPA Australia has released a fact sheet and a FAQ covering this issue. ATO guidance is also available. A webinar, Independence issues for SMSF auditors, featuring ATO director Kellie Grant, will be held for members on 29 June. Further information will follow.