New details of three-year audits slammed as ‘naïve and messy’
The SMSF industry has identified various holes in the newly proposed framework for the three-year audit cycle with some professionals concerned it will increase risks for accountants and undermine the approach of regulators.
On Friday, Treasury released a discussion paper on the three-year audit cycle measure for SMSFs which made proposals around the eligibility and transitional arrangements for the audit industry.
Hayes Knight director of SMSF services Ray Itaoui said while for some SMSFs the three-year audit cycle could be positive and result in a fee reduction where software is used correctly, for other SMSFs it could actually increase costs.
“My expectation overall is that there will not be a fee reduction, and it may even go the other way. Auditors will still need to audit three separate periods, not one larger period,” said Mr Itaoui.
“The same amount of work will need to be completed as if the three years were audited individually, although you would expect there to be some administrative efficiencies.”
However, any increased efficiency with administration may be offset by increased operating costs due to the requirement for practices to manage the adjusted SMSF audit workflows, even if there is a staggered introduction, he warned.
Joel Curry from TriSuper Auditors said Treasury’s view that a three-year audit cycle will reduce compliance burden, reduce audit and compliance costs and be an incentive for trustees to lodge returns in a timelier manner is “naïve”.
“Our experience is that nothing could be further than the truth,” said Mr Curry.
Mr Curry said Treasury hopes to mitigate concerns of increased non-compliance risks by having complex eligibility criteria, which trustees must use to self-assess, and transitional arrangements to the new three-year cycle.
“This rings of more cost, less compliance, more confusion and more complexity,” he said.
“Overall, this paper sends a confusing message that flies in the face of ASIC and the ATO’s current approach to cracking down on bad trustee behaviour within the SMSF sector.”
The fact that trustees will need to self-assess their eligibility for the three-year cycle based on good record keeping and compliance and also need to determine whether a “key event” has occurred also raises concerns, he said.
“In reality we know that the Trustee relies on the accountant in making this decision which in turns places greater pressure and risk on the accountant to make a judgement call,” he said.
“In effect the accountant will now have to audit the eligibility criteria each year. What a mess.”
SuperSphere director Belinda Aisbett also agreed that the assessment process may end up increasing the risks for accountants.
Trustees, she said, may not understand a particular compliance issue and why that excludes them for being eligible for a three-year audit.
“I think there will be a lot of people who innocently make a mistake with the self-assessment and they’re going to have a situation where they should have been audited and they weren't and then obviously there will be penalties at some point as a result of that,” she said.
“Accountants will have to step up and do more of the compliance review to make sure that the client is eligible to defer their audit. There’s some extra compliance cost right there.”
She said the transitional arrangements were generally positive and essential for ensuring the audit industry can cope with the changes.
“Logically there has to be a transition or otherwise there would be an exodus of auditors from the space and you need a sufficient number of funds maintained in the system to actually get through all of the funds that will need auditing during the peak season and even in the low season,” said Ms Aisbett.
Generally, the industry was pleased with the length of the consultation period that Treasury has allowed.
SMSF Association head of policy Jordan George said the fact that Treasury has agreed to have extended consultations on the policy detail instead of moving straight to consultation on draft legislation is very pleasing.
“This eight-week consultation period will provide an excellent opportunity for the SMSF sector to provide Treasury with detailed feedback on this important policy shift,” said Mr George.