ATO targeting SMSF auditor independence

Shelley Banton, head of technical for ASF Audits, said that as part of its risk assessment program, the Australian Taxation Office (ATO) is reviewing high-risk auditors with independence issues involved in reciprocal audits and those who have single-source referral income.

Last month, three auditors were suspended by the Australian Securities and Investments Commission (ASIC) after a referral from the ATO over breaches of independence requirements after auditing thousands of funds from a single referral source.

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“The decision by ASIC highlights the risks associated with SMSF auditors relying on a single source for their referrals. Such dependency can compromise their objectivity and impartiality, leading to potential conflicts of interest,” Banton said.

“The suspension serves as a reminder to all SMSF auditors to diversify their referral sources and adhere to the highest standards of professional conduct.”

Banton said that in January 2020, the Accounting Professional & Ethical Standards Board revised the APES 110 code of ethics, which included independence standards referred to as “the code”.

“The code stipulates that if the total fees from an audit client represent more than 30 per cent of the total fees received by the audit firm for five years, there is a concern about the potential loss of fees, creating a self-interest and intimidation threat that may not be eliminated,” she said.

Furthermore, the ATO released guidance on the conceptual framework of audit independence, identifying that firms with a large proportion of fees coming from one referral source, such as under a reciprocal arrangement or where an SMSF auditor predominantly has one large client, may not be able to eliminate an independence threat.

“The ATO is also targeting reciprocal auditing arrangements between two firms, where each firm prepares the financials in-house and enters into an agreement to audit each other’s SMSF clients,” Banton said.

She said arrangements like this can lead to self-interest, intimidation, and familiarity threats, which include each auditor being sympathetic to the other’s interests or too accepting of the other’s work.

“The problem is that reciprocal auditing arrangements do not pass the pub test because a reasonable and informed third party would not consider the threats to independence in this situation to be at an acceptable level and would need to be addressed by the auditors,” she added.

Banton continued that to safeguard independence, SMSF auditors should spread the referral of clients to several different SMSF auditors, which would minimise the dependence on one source.

“Engaging external quality control reviews or external consultation on critical audit judgements can also help as does increasing the client base to mitigate self-interest and intimidation threats,” she said.

“The most significant issues from these types of threats are the total fees generated from one client or multiple clients referred from one source, representing a large proportion of the audit firm’s total fees, which the audit firm then depends on and becomes concerned about losing clients.

“If the threats cannot be eliminated and appropriate safeguards are unavailable, the auditor must decline the engagement and end the arrangement.”

Banton said the move by the ATO to refer auditors for this type of breach of the ethical standards sends a clear message it expects the industry to meet these auditor independence requirements.

“As the co-regulator, ASIC will continue to work with the ATO and act where SMSF auditors fail to evaluate and address threats to their independence,” she said.

“The move is expected to further strengthen the overall governance and transparency within the SMSF industry, ultimately protecting the interests of SMSF members.”