The new ATO investment strategy guidelines will require SMSFs to be increasingly compliant, requiring future SMSF investment strategies to place a greater emphasis on tailoring the strategy to a fund’s circumstances.
ASF Audits head of education Shelley Banton had said this was leading to a change in the auditor perspective when looking at the set-up of a compliant investment strategy.
Speaking at the Smarter SMSF Virtual Day 2021, Smarter SMSF CEO Aaron Dunn said that what is being observed is that arrangements from the ATO are clearly being made for trustees to update their existing investment strategies that either didn’t exist or were deficient.
“So, if it’s an existing fund, you can create a brand-new investment strategy report and it is prospective in the way it is being formulated because it needs to reflect the way in which the fund is moving into the future,” he said.
“Does it need to recognise the previous investment strategy? No, you are simply adopting an investment strategy for the benefit of the fund as it currently stands and where it is moving ahead to in the future.
“Now, there are circumstances in particular where we think about heavy asset concentration in the fund, we are going to need to articulate additional information around why that requirement of diversification isn’t necessarily going to be met. So, think about why the trustees of the fund have decided to have 80–90 per cent or more invested in a single asset or single asset class.
“Now, this may be articulated in the investment strategy itself, it may also form part of some additional trustee minutes that resolve that the trustees are satisfied to continue down this path and evidence the reasons why it actually meets the retirement objectives.”
Mr Dunn said these new focuses are one of the reasons why auditors are going to ask more questions to satisfy themselves and that increased level of activity will mean there will be more issues being raised in management letters.
“Ultimately, this is all leading to the auditors saying we need to better manage our own risk, so in terms of what we’re required to report to the ATO,” Mr Dunn explained.
“You know auditors have their own audit, the auditor program, so the ATO spends a lot more time in their jurisdiction looking at the quality of work that is being done by auditors, let alone the fact that there is trustee recovery risk that was seen in the McGoldrick and Baumgartner cases.
“So, auditors here certainly heightened the amount of work that they’re doing to be satisfied in their own right around that the fund has an investment strategy in place, whether it has considered all the requirements within SIS regulation 4.09 and is obviously maintaining the necessary asset allocations or investments in accordance with that SMSF investment strategy.”
The other factor is that the auditor will look more closely at the fund’s investment strategy during that relevant financial year in accordance with the set strategy, according to Mr Dunn.
This would mean looking at the ranges in place by percentage or dollar amount and that they are not operating outside of those ranges or that if there was heavy asset concentration, that the investment strategy has listed those material assets inside that report.
The final requirement that will be closely looked at, Mr Dunn noted, is to ensure that the strategy has been reviewed and this concept of regularly reviewed sits within reg 4.09, so the review concept needs to ensure that it’s been done at some stage during that relevant financial year.
“So, it’s not necessarily once a year, but it needs to have been done, so in the context of the last 12 months where there may have been a multiple number of times where the strategy has been reviewed,” Mr Dunn said.
“If we go back to March 2020 when COVID hit, you may have had a number of clients that have then been impacted by cash flow in the fund, whether there was any review that needed to be considered there around the pensions along with the contributions that may have come in subject to the levels of income that may have been generated.
“There are a number of things that should trigger in that regard a review of the investment strategy at that point in time. In addition, there may then be, as part of the annual compliance requirements, a review that occurs there as well.”
Mr Dunn said this is the shift that he is beginning to see happening in the future where there will be changes in review processes.
“At the moment, in our annual trustee minutes that might get produced out of our BGL or Class software is that, ‘yes, the trustees reviewed the investment strategy and they’re satisfied that there’s no changes,” he explained.
“Well, the reality is during the year, there may have been a number of circumstances that have resulted in the fact that the trustees did need to reconsider cash flow and reconsider how that they were investing in the funds.
“So, there’s going to be a greater focus as the auditors are going to need to understand and be requesting this information on how that review process has actually been undertaken by the trustees.
“When we were setting up these investment strategies previously, we had this single, one-page document that may have had ranges of 0–100; we are going to see a shift around the review process as well because the quality of document not only has to be in the initial strategy but the evidence that we need to show that it’s been regularly reviewed and appropriately to satisfy that auditor.
“So, in my view, I think it is going to only be heightened over the next couple of years as well, so making sure you’ve got all that information and your ducks lined up is critically important.”
For the past 2 years, I have been making comments in my audit management letters concerning fund’s investment strategies (where necessary). I have now advised my accountant clients that if, in my opinion, the investment strategy is not compliant with the SISA or if the fund has not given effect to it’s strategy, then the audit will be qualified and most likely contravention reports lodged. With regard to the comment by Ralph, he is correct in saying that it is not the auditor’s role to judge whether the strategy is appropriate for the fund (and I do highlight this in my management letter), but it is our role to form an opinion as to whether the strategy complies with r.4.09 and whether the SMSF has given effect to the strategy. The SISA requires the strategy to be reviewed regularly and at least annually. It may not be our role to state how many times it must be reviewed (except at least annually), but if there appears to be a change in investments, then I will look for a review of the strategy at that time.
It is not up to the Auditor to decide if the investment strategy is appropriate for the Fund. I think you are crossing into the realm of financial planning.
Similarly if a strategy has to be regularly reviewed, it is not the Auditors role to demand how many times it is done and what is included in it in relation to specific events. Unless it is specifically mention in the regulations it is not the place of Auditors to demand what is in the strategy.
Once again the auditor is left to carry the can. Its time that all involved with the SMSF take some legal responsibility for any shortcomings (with the SMSF) from the accountant, financial advisers and lawyers. Its a totally absurd situation that any poor work can be dished up to the auditor (and you wouldn’t believe some of the rubbish that I see from allegedly trained accountants) who is then lumbered with the final responsibility.
Re: “…the auditor … is then lumbered with the final responsibility.”
Isn’t that why you get the big bucks?