Given these significant differences in industry structure, it is reasonable to ask if the superannuation audit ground rules that were originally established for a different type of superannuation industry should remain in place for the SMSF industry behemoth that now exists.
Should SMSFs be audited?
The argument that because trustees and members are the same people, SMSFs do not need an annual audit is made on a fairly regular basis. I disagree with this argument for the following reasons:
• The community at large is a stakeholder in the success of our superannuation system and therefore has an interest in the competent and compliant running of SMSFs; and
• Many consumers who become trustees of SMSFs do not have the skills to assess the competence of their service providers.
We need a strong SMSF audit industry that protects the community’s interest in SMSFs and assists in raising the standards of governance and competency within the sector. If this is an objective of the SMSF audit industry, how can we assess its fulfilment?
Independence
In the SMSF industry, a single firm might provide a very wide range of services to trustees in addition to carrying out the audit, which can make independence challenging. This is supported by the ATO’s compliance work which has identified that where the same firm prepares the tax return and carries out the audit, the risk of a compliance breach not being identified or reported increases. The professional accounting bodies have paid particular attention to SMSF audit in their independence guidelines but I am not yet convinced that enough has been done to ensure the independence of the SMSF audit function.
Competence
Last calendar year saw the commencement of a method for the statutory regulation of SMSF auditor competency with the introduction of ASIC’s SMSF audit registration process. It is early days and we are yet to see what impact this development will have on SMSF audit competency. I am optimistic the development means we are heading in a direction where SMSF auditors will be a more significant influence on raising competency within the SMSF industry.
Specialisation
Most SMSF audits are still carried out by small generalist accounting firms and the SMSF audit industry remains a somewhat immature, cottage industry dominated by small owner-operated businesses. However, over the past few years, a number of firms have started to specialise solely in SMSF audit or established specialist audit divisions. This development should be welcomed by anyone who believes in raising standards.
Commoditisation
One of the unfortunate consequences of seeing SMSF audit as an unnecessary form over substance activity is the risk of commoditisation. This view results in audit price becoming the dominant demand driver and the average price of an SMSF audit has fallen significantly. The scale of price reduction occurring across the board must be resulting in smaller margins and less work being done.
It is important for those of us in our industry who want to raise standards to educate all SMSF stakeholders in the value that a quality SMSF auditor can add and why we should be focusing on competence as well as price.
Conclusion
The philosophical rationale supporting the requirement for SMSF audits and the industry that delivers those services is completely different from the rationale and industry supporting larger superannuation funds. It is not therefore surprising that a different approach from the professional bodies, the regulator and government is required.
SMSFs and the industry supporting them are an important asset to our country and a strong, competent SMSF audit industry is necessary in order to secure its long-term future.
Martin Heffron, managing director at Heffron
The new SMSF statutory penalties from 1 July 2014 will make the SMSF audit space all the more interesting. It has been quite evident that some auditors dont have the expertise or resources to solve complex SMSF compliance issues and/or have a “one fee fits all” which doesnt allow the time for necessary research. Typically they will lodge an ACR and let the ATO “sort it out” as it were. I have been consulted often to negotiate with the ATO to have incorrect audit qualifications reversed.. In almost all cases the compliance qualification occurred because of poor investigation and documentation by the auditor and/or understanding of the law, particularly where related party investments are involved. With penalties of up to $10,200 for breaches from 1 July 14, auditors will need to be sure of their opinion as they will be creating considerable angst for all concerned if they get it wrong,, and perhaps even liability for themselves if you listen to smsf industry lawyers.
I do not mind a cheaper audit for my smsf – i do not care if the auditor uses staff who is overseas – i do not do anything wrong – break any rules and do everything according to law.
If i get a cheaper auditor for my fund – the better it is for for me. I have been assured by the auditor that every precaution is taken overseas to protect my data which resides in Australia at all times.
100 % Agree – how anyone can undertake an audit of a SMSF for less than $600 is impossible – the bottom line is the audit is not being undertaken as it should be – If it is outsourced overseas then buyer beware
I think auditor need to address independence issue clearly before they sign an audit report
a firm i worked for Brother in Law of the accountant was signing for years before i stepped in – and – i am not offered all the funds of the firm to audit….
so i suspect some funds are still going to the BIL – i have never seen his audit files from last years … so are the other funds being audied… your guess is as good as mine.
I wonder whether a more detailed tax return that can’t be completed and lodged until all questions answered could achieve the same result for less cost and back and forthing?
Interesting article. The comment regarding commoditisation and pricing is of particular interest. One could ask how one financial service firm can offer audits at $180 for their clients. Clearly a convenient price to push clients to their preferred audit supplier. Independent?
There are 3 clear issues in relation to audit.Trustees do not see any value in the audit function it is simply a cost of having an SMSF. Trustees either comply (and cannot see the need for an audit) or do not comply (and therefore do not want an audit).
Competence – the statutory regulation of auditors is far too late and the grandfathering of existing auditors is a joke. All SMSF auditors should have been required to sit the exam within 12 months of registration.
Independence – professional bodies guidelines have effectively eliminated in-house audits for smaller practices there is a lot of work to be done around larger networked practices and vertically integrated business. In far too many instances I have seen basic & serious breaches not reported.
As a registered SMSF Auditor who has been involved in all aspects of SMSFs for 20 years, I stand by my position that a financial statement audit is too much for a SMSF and, if the audit is done properly, is where the real time is spent. From what I have seen, the cost pressures on SMSF audit fees are relieved at this margin with reliance placed on the accountants work. At the end of the day, in order to provide community confidence that SMSFs are within the rules, the audit needs to be focused on the compliance issues. The accounting work should reveal any financial statement issues and the onus should be on the accountant to liaise with the trustee to correct. True SMSF auditing expertise should concentrate on the unique compliance position which is beyond the scope of account preparation.
I disagree. As an SMSF administrator and tax agent, most “breaches” are picked up and dealt with by me long before the auditor does a tick and flick up to 21 months or more after the event! I fail to see what value he adds to the process. I also fail to see how a trustee could choose a competent auditor if they can’t judge the competence of their other advisors. In my 14 years experience, most trustees go with the auditor chosen by their administrator anyway. But my opinion is besides the point. SMSF Auditors won’t be going anywhere as they are doing the ATO’s job for them.
I do agree that the regulations need to be looked and SMSF’s need to be differentiated from larger funds. Not just for audits but in all aspects of the legislation.
I agree & disagree,& think there needs to be a cheapish audit fee for special cases (like mine!) Retired, totally in pension mode with only say Comsec Australian shares chosen & traded by me & a bank account that pays a pension a few times per year. I complete the fund’s (paper) tax return but would love ATO to make an E tax alternative available. (Mine is truly SELF MANAGED!!)
Hi Martin,
Could not agree with you more. As an auditor I am concerned that trustees do not know the possible risk of cheap audits and do not appreciate the value that an auditor can deliver for the end result of a happy retirement. More should be emphasised about the auditors role of being a compliance advisor which is as integral an advising role as are the other advisory roles. There needs to be more education for trustees in relation to their role and responsibilities.