With extensive changes in the SMSF sector, the need for an auditor to be pedantic has never been greater.
There have been some complex changes to the rules and regulations associated with keeping an SMSF compliant in recent times, reflecting the regulator’s commitment in removing trustees and auditors who breach the rules.
The Australian Taxation Office (ATO) has recently released its compliance program for 2013/2014, in which it plans to continue to focus on funds that “misuse the concessional tax environment, deliberately or unintentionally”.
Some of the areas being targeted are the use of prohibited loans, related party transactions, funds with a history of non-compliance, incorrect reporting of exempt current pension income, tax losses and non-arm’s length transactions.
Further, with the new SMSF auditor registration regime, the ATO will no longer report SMSF auditors to their professional bodies; concerns will be referred to ASIC. They will continue to monitor SMSF auditor competence, which will also include reviewing auditor contravention reports (ACRs).
This may result in SMSF auditors who audit a significant number of funds but lodge less ACRs than average ATO ACR lodgement statistics, being targeted for ATO review.
Further, new regulations effective 7 August 2012 contain additional obligations for trustees. They now have to consider whether to hold a contract of insurance that provides life and total and permanent disablement (TPD) cover for members; value fund assets at market value (including property) and regularly review the investment strategy to take into account factors such as the changing circumstances of their fund and its members.
The end result is the additional administration and operational burden placed on trustees, which then have to be checked and audited even more stringently by SMSF auditors to ensure the fund complies with the law.
As the level of complexity in operating a fund increases, the SMSF auditor signing the audit report also takes on increased risk. It has therefore becoming increasingly important that the SMSF audit process is accurate - not simply ‘rubber stamped.’
To ensure that the SMSF auditor is up to date, they must regularly review the audit plan, audit workpapers, trustee letters and audit reports and incorporate any changes from the auditing standards, SIS legislation, case law and the ATO public rulings and determinations throughout the year.
In 2013, some of these changes include cosmetic ones such as the ATO referring to “each trustee” rather than “the trustee”; updating contribution requirements; inserting a new test to ensure that all assets are reported at market value and designing an exempt pension income calculator to check that the exempt pension income deductions and the exempt pension income expenses have been calculated correctly.
Ultimately, the role of approved SMSF auditors is to carry out a financial and compliance audit of an SMSF’s operation. It is recognised that a financial audit can vary in complexity and time, depending on the asset allocation of the fund.
Despite industry rhetoric, the compliance testing required for the audit of a large SMSF applies equally to a small SMSF, such as undertaking a review of the trust deed. Unless the auditor is auditing funds that use the same trust deed provider with the same establishment date, there are no shortcuts an auditor can take.
Admittedly, there are some technological developments that have made life easier for auditors. However, while the recent advancements in technology have enabled a more streamlined approach to the SMSF audit process, there is only so much benefit that technology can provide.
Similar to accounting, it is not the low level processing the client values, it is the expertise and experience of the partner in charge who provides the real added value. Technology adds processing value, not SMSF audit experience – no technological advancement can replace the experience and knowledge of a specialist SMSF auditor.
Of course, the SMSF auditor can choose to cut corners – but it comes at a cost. Nothing will save an SMSF auditor from a professional indemnity claim if their SMSF audit workpapers are inadequate and not in accordance with professional standards.
This is why auditors need to be pedantic – there is a lot at stake. Many view the SMSF audit as a grudge purchase and find the process tedious, but really it can be an opportunity to develop a relationship based on a mutual goal – to keep a fund compliant.
Hopefully, as the SMSF landscape continues to change, we will see a change in trustee attitudes to the audit process, with auditors ultimately becoming more proactive in the lifecycle of an SMSF.
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