New guidance to clear the ‘murky waters’ of auditor independence

Ms Banton said the guide represents a significant change to the traditionally accepted model of in-house SMSF audits.

“Many SMSF firms currently prepare the accounting work and undertake the audit function citing Chinese walls, providing them with the ‘ability’ to separate the two services,” she said

“[However], the new guidelines dispel the myth that APES 110 Code of Ethics for Professional Accountants (including independence standards) does not apply to SMSF audit clients because they fall within the ‘small client’ category.”

Ms Banton said it is precisely this type of classification, according to the guidelines, that has “a direct impact on the type and significance of independence threats”.

The guidelines explicitly state, she said, that an “auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements unless it is a routine or mechanical service”. 

“There can be no misunderstanding as to the nature of the guideline’s intent about what constitutes a routine or mechanical service. Services provided by the SMSF firm that is ‘routine or mechanical’ require little or no professional judgement, such as preparing the accounts from a trustee-approved trial balance,” she explained.

Merely getting a trustee to approve and sign off a trial balance prepared by the firm, she said, would not be considered routine or mechanical.

“To this end, the firm must ensure the trustee has the suitable skills, knowledge and experience to remain responsible for their decisions. The trustee is also required to oversee the service and understand the objectives, nature and results of the firm’s services,” she explained.

“Where the firm is unable to demonstrate the trustee’s ability to take responsibility, the auditor, their staff or their firm would be unable to prepare the financial statements and audit them.”

SMSF auditor independence has long been a compliance focus for regulators. Both the ATO and ASIC have previously raised concerns about reciprocal arrangements whereby two SMSF auditors audit each other’s personal SMSF, or where two firms prepare the financials in-house and then enter into an agreement to audit each other’s SMSF clients representing a reciprocal arrangement.

Situations where the SMSF auditor is also involved in preparing accounts and statements for the SMSFs they audit have also been of significant concern to the ATO, she said.

“It will also be interesting to see how the ATO responds to the new guidelines and how they expect SMSF auditors to comply with the standard,” she said.

“Still, it must be apparent to even the most steadfast SMSF firm undertaking audits in-house that the rules have been rewritten given the renewed focus by the APESB on SMSF auditor independence.”