SMSF firms should not try and ‘run the gauntlet’ on auditor independence

Speaking to SMSF Adviser, Mike McHenry, director of Seamless SMSF, said that some firms still do not believe that they have an independence problem and are “going to try and run the gauntlet”.

“At the moment, some accounting firms still don’t believe they have a problem and I don’t know if they truly understand how the code affects them,” he said.

“My answer to that is very simple. An accounting firm must remember its expertise is supporting clients with preparing their accounts and their tax, that’s why they are engaged.

“Those services are non-assurance services, and if you provide a non-assurance service, you are automatically assuming management responsibility for those services and therefore can’t do the audit, it’s really simple.

“In the context of an SMSF, accounting firms are engaged to prepare the financial statements, assist with taxation decisions, or provide financial planning assistance to the trustees, and it’s highlighted in the engagement between the firm and the trustees. This ‘role’ the accounting firm plays highlights the management responsibility undertaken by the accounting firm. 

“Because ‘management responsibility’ operates under the code as an absolute prohibition, the firm can’t audit the super fund.”

Where many accounting firms are currently getting trapped, Mr McHenry noted, is that they are trying to figure out the best approach to reduce and manage the deemed independence threat but fail to grasp the purpose set out in the code.    

“It’s not a question of, can they manage the threat? The reality is they can’t do the audit because that’s prohibited. They cannot do the audit if they assume managed responsibility for preparing the accounts,” he said.

Pivot instead of trying to control the threat

Yet despite the current clear ATO positions established around the guidance, Mr McHenry said there will still be firms that will be clear on these rules, but ultimately ignore them.

“There absolutely will be because they ultimately have a fear of losing revenue,” Mr McHenry said.

“But now is the time for them to pivot and review their business model and see how they can solve problems for their clients.

“Because when they identify business problems their clients encounter, they can start designing and building infrastructure, systems and processes to solve those problems, which replaces lost audit revenue very quickly.”         

Mr McHenry said the risks the firms run in flaunting the rules is that it’s not difficult at all for the ATO to try to match who the tax agent is and who the auditor is and ask some simple questions.

“If accounting firms think they can use these routine and mechanical tests as a way to prove that they’re not assuming management responsibility, they are unrealistically optimistic,” Mr McHenry said.

“Because the trustees have engaged them, the trustees don’t have the expertise to understand the tax laws around super, they don’t have the expertise to use the software to prepare the financial statements (for their single fund), plus they’ve ‘engaged’ the accountants to do the work.

“So, unless the trustees are an accountant who have their own software and they’ve provided a set of financials for the accountant just to lodge a tax return, that’ll be the only time that you could justify you’ve not assumed any management responsibility.”

Ultimately, when assessing how firms would continue to interact around the new standards and how difficult this would be for the ATO to govern, Mr McHenry said in his view, while the ATO is doing a fantastic job, there needs to be more understanding established between the firms and the Tax Office.

“The way they’ve detailed the independence explanatory memorandum that they released in March is pretty clear and the code itself captures the accounting firms to really remove this much-needed independence issue because it’s been too loose in the past,” he said.

Mr McHenry said the challenge the ATO will have is understanding how firms are interpreting the code.

“In a short period of time, the ATO is grasping the various ways to interpret the code, how accountants may navigate around the independence rules, and what should and shouldn’t be impacted by the code. With the role of governance comes the need to understand the lay of the land within the industry, and that requires collaboration,” he continued. 

“We as a business are collaborating with the ATO so they can understand how accountants and auditors operate so they can see where this actually all fits in.

“It’s not an easy task and it will get clearer as time goes on. They will take a kind of catch-all approach and then gradually wean back to try to find out where the best balance needs to be.

“The ATO is not on a mission to harm or stifle the businesses of accounting firms. They are first and foremost focused on maintaining the integrity of the SMSF industry and overall SMSF compliance. Independence is one of the stepping stones to achieving this.”