The Accounting Professional and Ethical Standards Board (APESB) recently published a new and updated Independence Guide which incorporates changes to the restructured APES 110 Code of Ethics for Professional Accountants, which became effective on 1 January 2020.
The guide makes it clear that an SMSF auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for the SMSF unless it is a routine or mechanical service.
The ATO released some initial commentary about the guidance in June which stated they would be contacting audit firms where ATO data indicates an auditor is auditing financial statements prepared by the same firm to ensure they are aware of the new requirements.
ATO assistant commissioner, SMSF segment, Steve Keating said the position taken in the independence standards “represents a really significant change” to the traditionally accepted model where some organisations can provide accounting services to an SMSF and are also offering in-house SMSF auditing.
“Many firms who do prepare the auditing and accounting will cite that they have sufficient infrastructure and controls in place that provide them will the ability to separate the two functions and still be independent of each other. Well, the new standard is clear that that is not considered to be permissible any longer,” Mr Keating said in an online discussion with Smarter SMSF.
“These changes could mean that these accounting and audit firms may need to restructure their business or consider operating differently.”
Mr Keating said the ATO is currently taking an educative approach and will release further clarification on what constitutes a routine or mechanical audit.
“As the guidance currently reads, the view is that very few SMSF audits would be considered routine or mechanical. We’ll be looking into this further and we will provide the industry with further clarification of these two terms and what might be considered a routine or mechanical audit,” he said.
Until the end of next financial year, Mr Keating said there will be a transitional period for the SMSF industry, with the ATO recognising the changes as “a significant shift for many organisations”.
“We’ll look at what routine and mechanical audits can be done in that environment, but we don’t think that very many will actually meet that criteria. So, most organisations are going to need to figure out what their business model looks like and what they’re going to need to do differently,” he said.
ASF Audits executive general manager, technical services, Shelley Banton said there are some in the SMSF industry who believe that the concept of routine and mechanical is open to interpretation and that it throws up a new grey area for SMSF practitioners, when this could not be “further from the truth”.
“The new guidelines align with APES 110 section 601.4 A1, which provides a thorough explanation about how the concept of ‘routine or mechanical’ works,” she said.
Some SMSF professionals may argue that a recurring transaction is routine or mechanical by nature, she said.
“By way of example, SGC [money] coming into a fund’s bank account through SuperStream can be pre-approved and coded as a contribution by the SMSF trustee, but that represents only 12 transactions out of potentially hundreds throughout the year,” she explained.
“All other withdrawals and deposits have to be approved by the client, with the accounting firm keeping a record of the approval process for every single transaction.”
She also explained that the concept of routine or mechanical has nothing to do with the type of assets in a fund.
“It has everything to do with the trustee being responsible for coding all transactions so that the service provided by the firm becomes routine or mechanical,” she said.
“In real terms, it appears that meeting the criteria of a routine or mechanical service involves the trustee providing an Excel spreadsheet containing a trial balance to the SMSF firm, who uploads it into their SMSF administration software for processing.”
The losers in this are the SMSF members with higher costs with no benefit to them. The winners being Industry/Retail Funds and the specialist SMSF audit firms charging $450 fix price audits. Can someone please provide details on how a professional firm can complete a SMSF for $450?
SMSF’s don’t need auditors any more than discretionary trusts or Pty Ltd’s. The tax agent should have responsibility for identifying breaches and lodging ACR. As tax professionals we should be able to do this and have appropriate penalties for the very few who breach the reporting requirements.
I simply cannot see the benefit for the SMSF or the member. Its not that hard to “keep within the lines” and comply.
Agree 100%
a number of studies have found in house audits delivered higher cost audits and lower quality audits . in house auditors have let Trustees get away with to much
Not good enough from the ATO. The same firm preparing audit & accounts was dubious under the old standard. The new standard simply clarifies the position. Rather than taking an educative process the ATO should just straight out ban this practice.
Write to those & tell them no auditing of 2020 accounts unless you can prove to the regulators satisfaction that you comply with the independence standard.
It’s particularly concerning when an SMSF firm may act as tax agent, have no contact with the client, receive documents from an intermediary, send it overseas to be worked on, review it back here then get an audit done essentially by the same business owner but a different entity perhaps.
Such a hot topic and good to see attempts being made to clarify best industry practice on SMSF auditor independence. The ATO language is a little confusing however as surely the phrase “routine and mechanical service” is referring to the preparation of the financial statements, not the audit.
The APESB have jumped in to enforce Auditor independence, but why? Where is the evidence that show auditor independence has been a problem? It makes me question the reason behind this standard, apart from making themselves busy and important. Who are the grey men behind the APESB and who do they bow to? This is the biggest blow to SMSFs that I have seen (and there has been a few! Reg 146 anyone?). For trustees to have to deal with a separate accountant, and an Auditor, provide documentation to both, it will just be too hard for many. Who will be the big winners? The Retail and Industry funds.
Totally agree, have been looking after SMSF’s since the mid 90’s and 99% are fine with compliance. The SMSF audit requirement is a waste of money for the fund members for little or no benefit to them. The Tax Agent should have the knowledge and skills to be able to identify and report breaches through the ACR or similar for the small percentage of SMSF’s that do have problems.
the issue is most tax agents are not and let trustees get away with non compliance until the smsf auditor picks it at look at the big increase in terminated tax agents
Absolutely agree. Lack of knowledge + fear of clients. I am often called upon for opinions by both accountants and auditors, so I have seen these issues myself.
stupidity from the public sector again
About time.
Accountants need to pick which side of the fence they want to be on. Stop fighting it – choose either SMSF accounting or SMSF audit and focus on it. Become excellent at whichever you choose.
Your business, clients and the entire SMSF industry will be better for it.