Change in auditors exposing lingering compliance issues

With SMSF auditors restricted from performing in-house audits for SMSF clients from that date, many SMSFs were forced to switch to an independent, external auditor.

Speaking at a recent Heffron event, ASF Audits head of education Shelley Banton said this change in auditors has helped identify compliance issues across many funds that had previously been missed.

With many SMSFs having changed auditors, one of the main issues emerging with new audit clients is around documentation, said Ms Banton.

Ms Banton said ideally there should be a chain of trust deeds that starts from establishment and includes all the variations.

“Trying to get those on file is sometimes very difficult. You may only have the last one and so if there has been changes along the way it may be difficult to make sure that all those changes have been done effectively and legally,” she said speaking in a discussion at the Heffron Super Intensive Day. 

“We want to make sure that the trust deed is the correct trust deed and that there’s not still a principal employer sponsor sitting in the background somewhere.”

Investment strategies are another area where there tends to be issues with new audit clients, said Ms Banton.

“We’re seeing investment strategies that haven’t really complied, especially where there are complex investments in the fund,” she warned.

“Risks and returns and liquidity issues — especially where they’re in pension mode — may not have necessarily been considered effectively in line with the definitional elements that we want to see to comply with r4.09 SISR.”

Ms Banton has also found that Part A qualifications tend to be “thin on the ground” with some previous in house audits.

“So, where there’s a market valuation issue and we have seen a lot of issues with lack of documentation for market valuations, especially with unlisted assets we don’t necessarily see a corresponding part A qualification even though there may be something in the management letter and if you’re lucky then a regulation 8.02B compliance ACR as well but not very often,” she said.

She also noted that a lot of titles haven’t been checked for assets in previous in house audits.

“It’s difficult, I should imagine, if you’re doing it in house because if you’re sitting there with several hats on and you're assuming that the transaction has gone through but you may not necessarily be checking that title deed of the property, for example, because you've been involved with effecting that transaction,” she said.

“So not checking the title deed and those sorts of things is [what] makes the difference between a specialist independent audit firm and an in-house one.”

Ms Banton said she has come across titles that are in the name of the corporate trustee only and not held beneficially for the super fund.

“This is okay if its a sole purpose corporate trustee but without having a constitution, we don’t necessarily know whether that is or isn’t the case,” she said.

“We’re also seeing issues where the fund assets are still held only in the name of the individual trustees and once again not beneficially for the super fund. [This makes it difficult] to differentiate between assets held separately by the trustee personally as opposed to the fund and becomes a reportable contravention, especially when the asset is material.”

Ms Banton’s firm is also coming across issues with Reg 13.22C unit trusts where there has been outstanding distributions that haven’t been made to the super fund in more than 12 months.

“In an in-house audit that may not have necessarily been picked up as being an issue. Obviously once you’ve tripped up the requirements of a 13.22C unit trust it becomes an in-house asset so the only way to [resolve that] is to wind up that unit trust. So it becomes very problematic,” she cautioned.

Speaking in the same panel discussion, Evolv Super Audits senior client manager Blair Hornick said he has seen similar issues with Reg 13.22C trusts.

“There were a number of cases where the fixed entitlements were out and this can be seen as either financial assistance to another related party when there’s more than the super fund in there or borrowings in those situations where they’re using that to pay an unpaid present entitlement to the super fund or something along those lines,” said Mr Hornick.