As previously announced, the ATO said while its approach to compliance with the restructured APES 110 Code of Ethics for Professional Accountants for the 2020–21 income year will be to provide support and guidance to auditors, for audits completed after 1 July 2021, firms will need to comply for any audits completed after 1 July 2021.
The ATO clarified that this will also apply for audits that are completed after 1 July 2021 but are completed for earlier financial years.
“For audits completed after 1 July 2021, firms will need to comply with the new code. This includes audits they have completed for 2020–21 and future financial years and any audits that need to be completed for earlier financial years,” it said.
“If we find firms are breaching this independence standard after 1 July 2021, we may refer the auditor to the Australian Securities and Investments Commission (ASIC) for further action.”
Addressing the independence hurdles
In an online update, the ATO said that based on the restructured APES 110 Code of Ethics for Professional Accountants, there are three main hurdles that need to be overcome before a firm can perform audit and assurance services as well as non-assurance services such as preparation of the fund’s accounts for the same client.
The first hurdle is that a firm cannot assume a management responsibility for an audit client, it said.
“There are examples of management responsibilities at paragraph 600.7A3 of the code. These include preparation of the financial statements, as well as other advice or decisions that might be made with respect to the fund’s compliance with the super laws,” the ATO said.
“They are typically activities or decisions which involve the exercise of professional judgement.”
To avoid assuming a management responsibility when providing non-assurance services to an audit client, the ATO stressed that the firm must be satisfied that the SMSF trustee makes all judgements and decisions that are the proper responsibility of management.
“The second hurdle is a firm or network firm who is looking to provide an audit to a client that is not a public interest entity such as an SMSF, accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion, cannot do so unless the services are routine or mechanical,” it said.
“The third hurdle is, even where the firm can demonstrate they did not take on management responsibilities for the audit client and the preparation of the financial statements were routine or mechanical in nature, the firm must address any threats that are not at an acceptable level.”
The ATO noted that since trustees generally hand over the management of their fund to their administrator or accountant rather than make all judgements and decisions themselves, most firms will find it difficult to get over the first hurdle.
“Trustees cannot simply approve everything after the fact,” it said.
“Therefore, regardless of how simple the fund’s investments may be, or whether those investments are on data feeds, the auditor will not be able to conduct the audit for a client of the same firm if they have assumed management responsibilities for the trustee.”
Evidence requirements
In order to demonstrate that a firm has not assumed management responsibilities for the trustee, the firm must document and provide sufficient appropriate evidence on the audit file showing the trustee has the suitable skills, knowledge and experience to remain responsible at all times, for the accounting and compliance decisions of the SMSF.
“We will want to confirm the trustee’s ability to do so, and ensure they have a clear understanding of their responsibilities compared to those of the firm,” the ATO warned.
“If the firm can demonstrate the trustee’s ability to take responsibility — for example, the trustee has an accounting or similar qualification — then the auditor needs to have evidence on the file that the second hurdle has been overcome — that is, the preparation of the financial statements was routine or mechanical and the firm has addressed any threats that aren’t at an acceptable level.”
The ATO explained that evidence of the preparation of the financial statements being routine or mechanical must demonstrate the trustee approved the records and entries in the trial balance that the auditor’s firm then used to prepare pro-forma financial statements.
“We may contact trustees to confirm their understanding of their fund’s transactions and compliance with Superannuation Industry (Supervision) Act 1993 (SISA) legislation,” it said.
SMSF trustees do hand over the management of the annual compliance issues to accountants – but in the main the investment decisions are managed by the trustees (some with assistance of financial planners).
The regulators concern is not with the accountants. It is with auditors who undertake audits of SMSFs that their firms, associated firms or related entities that have provided advice to, or prepared accounts for. This has in my opinion always breached the independence standards and the recent update to APES110 is simply a clarification of the independence standard. Recent audit reviews by the ATO into high risk audit firms has identified 20 (of 61) audits where audit standards are poor. The inference being that in-house audits are less likely to qualify audit reports where breaches have occur when the advice was given by a related entity or the accounts have been prepared by a related entity.
In the coming months we will see stories about increased audit fees as a result of this new standard – but the ATO has indicated that fees are more expensive when audits are conducted in-house. My opinion is shop around – there is plenty of competition in the SMSF audit space. Look for a specialist SMSF audit firm.
There are many SMSF accounting companies that have built a profitable businesses around in-house auditing and it is these businesses that are now being threatened and are now calling foul.
The regulator is only doing their job, they are enforcing the law & this is a small cost to pay to protect the integrity of superannuation and retirement incomes.
The most common sense I’ve seen on this issue – me coding an electricity bill to electricity expense is not management
I have no problem with tightening the SMSF auditor independence requirements. In my opinion, they have been breached for far too long; most particularly by multi-partner firms who hide behind the “false wall”.
BUT, when did the ATO become the author and regulator of Australian auditing standards? The ATO is most certainly charged with monitoring, regulating, and enforcing requirements for SMSF’s, but auditors?
Doesn’t this mean that auditors are having standards imposed on them for taxation purposes or, at least, most certainly with a taxation bias?
Shouldn’t the ATO be going through the AUASB?
Where is this leading, with government bodies issuing and regulating Australian auditing standards?
Which government body is the next to do so?
Where is the AUASB on all of this?
My understanding is that ASIC is the regulator of SMSF auditors. The ATO regulates SMSFs & undertakes reviews of funds. The ethical code is a produced, reviewed and amended by the Accounting Professional & Ethical Standards Board (APESB). Established as an independent body in February 2006, as an initiative of CPA Australia and the Institute of Chartered Accountants Australia (now Chartered Accountants Australia & New Zealand).
When the ATO identifies what it considers to be deficiencies or non compliance with the auditing standards and ethical codes of conduct he ATO will refer its concerns to ASIC. The ATO & ASIC have been very open about the poor quality of audits and have often expressed concerns around independence.
I am surprised the professional accounting bodies have been silent on this matter. Perhaps they are embarrassed as the evidence presented by the ATO suggests that internal reviews & self regulation has failed. The professional bodies appear unable to enforce their own standards upon their own members.
“The ATO noted that trustees generally hand over the management of their fund to their administrator or accountant rather than make all judgements and decisions themselves”
The ATO really thinks that? So the board of directors of a public company is really run by their accountants is it?
“Management” of an SMSF principally includes investing, as well as ancillary activities like paying benefits and expenses.
The preparation of financial statements and associated documentation are at best secretarial functions, done after the fact. They document the “management” of the fund, they are not THE management of the fund.
Like ASIC, the ATO harbours this attitude that an SMSF trustee is no more than a baby playing with a gun, and needs to be protected from themselves.
Most trustees would and should be offended if told they don’t “manage” their fund, but that their accountant does.
Just because the ATO have to deal with accountants for their information requirements, does not mean that the trustees have abrogated their responsibilities.