Auditors cautioned on distorted asset valuations
One SMSF auditor has already encountered a number of SMSF clients attempting to manipulate their balances and has stressed the importance of auditors having sufficient evidence to protect themselves.
Super Sphere director Belinda Aisbett said while distorted asset valuations may come “as no surprise” to practitioners, they pose risks to auditors where no independent valuation is sought.
Ms Aisbett says she has seen a number of clients try to manipulate their balances, both up and down, with some extreme cases popping up.
“This is a live example where we had an SMSF that at 30 June 2016 had a property worth $17 million, but come 30 June 2017, it was magically worth $6.4 million and it doesn't take a calculator to figure out that four pension members multiplied by 1.6 you come up with $6.4 million,” said Ms Aisbett.
“That should ring alarm bells and I know this is an extreme example but this is the sort of thing that clients are going to be looking at.”
Ms Aisbett said auditors needed to ensure they had the appropriate audit evidence on file to avoid putting themselves in the firing line.
“You get a real estate agent who said it was worth $17 million last year and $6.4 million this year, I don't think it matters how many notes I take as to what the explanation is, it is still very questionable,” Ms Aisbett added.
“Let's face it, the ATO is going to look at that super fund and say we might select that fund for review.
“If it was my client I would be saying you should get a sworn independent valuation because that is your rock solid evidence as to what you've done with your fund and if the ATO does select your fund for review, and the odds are they will, you've really got that irrefutable audit evidence there.”
Other auditors have also previously noted how some funds who have not sought formal valuations could attract scrutiny from the ATO.
Conversely, Ms Aisbett said she has also seen cases of clients trying to manipulate their balances up to make the most out of cost base adjustments and cost base relief.
“[The client] had shares at 30 June 2017 that were worth $1.60, those shares were connected with an IPO and they predicted that the investment shortly after was going to reach $2.60,” she explained.
“The accountant actually contacted me and said, 'You don't mind do you, Belinda, if we put it in at $2.60 at 30 June?'
“You will have clients trying to push the envelope and you might think well there's no harm, no foul, it doesn't bother me that they get a bit of cost base relief and save a bit of tax, where's the risk to me there?,” she added.
“As the auditor, you are signing off that the financials are fairly stated though, you're signing off that the investment is worth $2.60. Not only are you distorting those numbers but your member account balances, your minimum pensions, all of that has a bit of a consequence.”
Last year, ATO assistant commissioner Kasey Macfarlane said an independent valuation by a professional valuer is one of the strongest pieces of objective evidence to support a value that an SMSF trustee can use.