ATO commits to educative approach around in-house audits
The ATO has reaffirmed its compliance approach for new auditor independence standards as firms adapt to changes over the next six months.
Speaking at the SMSF Association National Conference 2021, ATO SMSF auditors portfolio director Kellie Grant said the ATO will be taking an educative approach to compliance as the industry grapples with the restructured APES 110 Code of Ethics for Professional Accountants.
For funds completing audits after July 2021, the independence standard will apply strictly as affirmed in new guidance released by the ATO on the APESB Independence Guide.
“The ATO’s compliance focus for 2021 is that we’re taking a transitional approach to compliance with the standards around in-house audits because we know it will be a big shift for the industry,” Ms Grant said.
“We don’t have the exact data on how many funds are engaging in those audits, but we have heard that there could be around 200,000 to 300,000 funds that might be receiving those.
“So, this year will be one where we take an educative approach to compliance and supporting auditors to help them meet their obligations. Auditors also need to reach out to their professional associations for further guidance and support in relation to compliance with the code.”
But Ms Grant said for any audits completing on or after 1 July 2021 regardless of which income year they relate to, “the ATO will be looking to enforce compliance with the new requirement and we will take compliance action if we find audits are not complying with the new rules and may refer auditors to ASIC for further action”.
“It might only be in situations where firms can demonstrate to us that they haven’t been able to restructure before the 1st of July 2021 due to certain exceptional circumstances beyond their control,” she said.
“That will then cause us to have a look at whether we might be able to allow an extension, but firms should reach out to us and let us know if that’s the case.”
Ms Grant said that on 1 July, what the ATO will want to see most is the proof that the amended auditor independence standards have not been breached and there is clear evidence the auditor was satisfied that the firm did not assume any management responsibilities for the SMSF.
“So, that means we’ll even go to the accountant in the firm, for instance, that’s managing the fund and we will ask them what sort of decisions did you make on behalf of the fund this year, can we see your file so we can be satisfied that there weren’t any sort of decisions that were made on that fund that might amount to a management responsibility where you’ve exercised professional judgement, which means when the auditor goes to review that work, there’s a self-review threat,” Ms Grant said.
“We’ll also be looking at whether the trustee had the relevant skills, experience and knowledge to take responsibility for the preparation of those financial statements, so we’ll be looking for copies of trustee-coded transactions which the firm used to post in the general ledger or will be looking for client-approved entries to the trial balance, something to demonstrate to us the trustee took on those management decisions.”
For many who are thinking about possibly restructuring at the moment, Ms Grant said the ATO’s view on best practice going forward would be to use a completely independent panel of auditors because that would definitely avoid any self-review threats.
“Obviously, avoid reciprocal auditing arrangements which, of course, can create fee dependency issues where the total fees referred from one source might represent a large portion of the total fees of the firm,” she said.
“We get a lot of questions asked about the ATO’s view on what is a large proportion of fees from one source, how many referral sources can the firm have that doesn’t produce a significant independence threat.
“It’s not that easy to answer because if you looked at that rule in the code that was specifically inserted for SMSFs a few years back in 410.3, it also says you’ve got to take into account whether that firm’s total fees generated from an audit client by the firm expressing the audit opinion represent a large proportion of the total fees of that firm. There would also be a need to assess the dependence on that client and concern about losing the client create a self-interest or intimidation threat.”
For audit pooling arrangements, Ms Grant said a lot of firms are talking about entering those arrangements at the moment, but there needed to be certainty around the risks in reciprocal auditing.
“Obviously, they can have risks such as creating fee dependency issues if there’s some reciprocal auditing involved,” she said.
“I understand with a lot of those, the firms are looking to just exchange audits so that there’s no reciprocal audit involved, but then they’ve got to really make sure that they aren’t creating an overall network firm or partnerships within those firms that might remain ongoing where, if there’s an ongoing contractual obligation in place for firms to keep on auditing certain clients, that can create self-review threats.
“We can’t definitively say at the moment whether those arrangements are going to work or not, but we do have some concerns about those that you need to be aware of.”