ATO’s reciprocal auditing benchmark not a ‘get-out-of-jail-free card’

Last week, the ATO published its auditor independence guidance on the independence standards impacting in-house audits and its compliance approach ahead of the upcoming major changes for the SMSF industry.

A key part of the independence threats in non-assurance services are the issues around reciprocal auditing arrangements which can pose a major risk to auditor independence and are of particular concern, according to the ATO.

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The ATO said factors relevant in evaluating the significance of threats include the operating structure and services offered by the firm, whether the firm is well established or new, and the significance of the client or referral source to the firm, both qualitatively and quantitatively.

ASF head of education Shelley Banton said that while the APES110 Code is silent on the number of referral sources or a set percentage of fees from one or more referral sources required to reduce independence threats to an acceptable level, the ATO has been more vocal.

“In its new guidelines, the ATO considers that well-established firms in operation for more than two years would not have an independence threat if the fees generated from one referral source are less than 20 per cent of the firm’s total fees,” Ms Banton said.

“However, SMSF auditors who rely on the ATO’s 20 per cent benchmark, as a rule, to enter into a reciprocal arrangement will be sadly disappointed. It is not a get-out-of-jail-free card, and they will quickly discover that it refers to just one of the many independence threats that need to be reduced to an acceptable level.

“I guess there’s a very big caveat with this because if you’re an SMSF auditor who’s relying on the ATO’s 20 per cent benchmark as a blanket rule to enter into a reciprocal arrangement, you’re going to be sadly disappointed.

“It’s not a get-out-of-jail-free card and they will quickly discover it not only refers to all independence threats, but it just refers to only one of the many independence threats that need to be reduced to an acceptable level and the 20 per cent refers to fee dependency issues only.

“So, each firm in that arrangement will be required to evaluate the many qualitative and quantitative factors that are relevant in assessing the significance of independence threats, and what needs to be remembered is that the reasonable and informed third-party test must be passed at each step of the way.”

Ms Banton said there’s also a lot of other threats that need to be considered; for example, the firm’s operating structure and the services they provide and issues around how the firms communicate with each other.

“For example, if you’ve got an email trail going back and forth between the two firms, if an independent party looked at that, would they be able to conclude that that communication was actually independent?” she said.

“Things like audit integrity, technical competence and the level of audit fees, there’s a myriad of issues that need to be addressed.

“But, once again, it is critical to ensure there are no circumstances that are going to compromise your professional judgement and that the perception of independence in mind and appearance is present at all times.

“So, in order to avoid any confusion, the ATO is going to be amending their online independence guidance statement to clarify that that 20 per cent benchmark refers to only fee dependency issues and one of the reasons for that is that there’s been some questions and queries from the industry already as to how that 20 per cent benchmark does apply.”