Article:

Is your firm breaching new independence standards for SMSF audits?

14 July 2020

Geoff Rooney , Partner, Audit & Assurance |

With new independence standards now in place for SMSF Audits, smaller and regional firms are more exposed to the threat of self-assessment. Geoff Rooney, Partner at BDO gives a brief overview of the rules and highlights the key things you can be implementing to safe guard your firm.

If you’re an SMSF trustee, important changes to auditor independence standards which took effect on 1 January 2020, is mandatory for audits and reviews in Australia, with the ATO announcing it as a focus this financial year.

Under the changes - which also incorporates the restructured code of ethics - an SMSF auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for the SMSF unless it is, ‘routine or mechanical in nature.’ They must also address threats created by providing these services that aren’t at an acceptable level.

The aim of these measures is to maintain the integrity of SMSFs and minimise the implications of a self-review threat. These changes are a major shakeup for the SMSF industry, with many firms now coming to grips with the fact that they will need to restructure their business and find a new external auditor/firm, so they are compliant.

The ATO has announced that the Commissioners focus will be writing to firms during the 2020-21 year, where data implies they aren’t complying with the standards – it’s important you understand your obligations and implement strategies to safeguard your business now.

WATCH THE WEBINAR:

In an ever-changing landscape, Auditors must remain cognisant of the key issues and understand the SMSF ecosystem to deliver an effective and efficient audit. Geoff Rooney discusses key issues affecting SMSF Audits now.

Delivering an Audit in uncertain times

Putting the guidance into practice

Previously blurred lines around relationships are now clearly articulated in the guide, with scenarios outlining how to put it into practice. Below we outline the top three scenarios likely to be on the ATO’s radar, including the removal of traditionally accepted ‘Chinese Wall’ arrangements, long-term relationships and the use of referral sources and reciprocal arrangements to conduct business.

1.      Tearing down Chinese Walls

An Audit Partner who Audits the SMSF in the same firm where another partner prepares the Financial Statements would now be considered non-compliant.

Previously, an in-house SMSF auditor could reside in the same firm as those preparing accounts and statements as a separate function – what has been colloquially known as ‘Chinese Walls.’ This will no longer be allowed, unless it is accounting or bookkeeping that is ‘routine or mechanical in nature’. Under the restructured code, services that are ‘routine and mechanical in nature’ are those that require little or no professional judgement, such as preparing payroll calculations or reports based on client-originated data for approval and payment by the client, or posting client-approved entries to the trial balance.

The SMSF Trustees must also take responsibility to ensure there is sufficient proof that financial statements had adequate knowledge, skills and experience to carry out preparation of financial statements, which goes beyond signed financial statements. An example of evidence would be trustee-coded transactions.

2.      Long term relationships

It’s been common practice for an SMSF Auditor to retain a long-term client, however, this long-term association is now considered a threat to independence. Typically, an internal or external independent review of the audit should be undertaken every ten years.

3.      Referral sources and reciprocal arrangements

Reliance on a consolidated number of firms has been a commonly accepted way to ensure business continuity, however, it’s now considered a threat to independence. Firms who have certain reciprocal arrangements between firms – such as where one firm audits another's clients; or whereby another firm acts as a single referrer source; or where an ex-employee at a new firm previously audited the SMSF, should be assessing their independence under the new guidelines. It is clear that these style of artificial – ‘you scratch my back and I will scratch yours’ - arrangements are something that the ATO is increasingly going to target, scrutinise and challenge the substance of in terms of independence.

What you should be doing now

While the ATO has said they will be focussing on this as a key area, there is an understanding that these changes may require fundamental transformation to the way some firms do business. As you undertake a restructure, there are some things you can be doing immediately to prepare, which include:

  • Familiarising yourself with Chapter 8 of the Accounting Professional and Ethical Standards Board (APESB) updated Independence guide, which includes changes to the restructured APES 110 Code of Ethics for professional Accountants
  • Review your professional indemnity insurance to ensure your coverage is still valid even if you are considered to be in breach of the independence standards
  • Put in place solid plans to remove threats to independence. In some cases, it may mean implementing safeguards to minimise risk, however, in some cases, it may mean eliminating the threats altogether.

Implementing safeguards to overcome threat

Depending on the scenario, there are a number of ways you may be able safeguard you and your business. Overall, firms should be assessing where their firm may have self-interest, familiarity and intimidation issues.

We have highlighted some strategies below, however these strategies must be implemented on a case-by-case basis, as depending on the situation these safeguards may not be applicable.

Some of the strategies that your firm can put in place may include:

  • Engaging regularly with your external auditor to confirm the best way to overcome issues associated with these guidelines
  • Where long term relationships exist, this can poses self-interest and familiarity threats - you should be looking at ways you can mitigate the threats by implementing auditor rotation within your client base
  • As an auditor, take a look at your referral arrangements - look at ways you can increase your client base so that you aren’t reliant on a single referrer
  • As an administrator, look at spreading your referral arrangements across a number of different auditors, or at least assess that the auditor is not overly reliant on you - which could cause an actual or perceived independence treat.

Overall, at BDO, we are passionate about supporting changes that continue to drive trust and transparency in the superannuation sector. We welcome these changes because we believe it’s important for the SMSF industry to be constantly raising the bar and holding itself to the same standard as other parts of the superannuation industry. With SMSFs making up a significant portion (about 30%) of the $3 trillion held in retirement savings in Australia, it is essential that the SMSF sector is not seen as in any way operating at a lower standard to the rest of the retirement savings ecosystem. This guide is a reminder to the industry on the impact that independence and audit quality have in continuing to drive trust and transparency the sector.

If you would like more information on how BDO leverages the latest technology and best practice methodologies to bring your clients world class assurance quality, you can read more about our SMSF Audit services. Should you require further assistance in implementing a robust plan, or are looking for a trusted SMSF Auditor, contact your local Partner.