Assessing if the SMSF audit industry is fit for purpose
The superannuation system’s audit ground rules were put in place in 1993, long before the creation of the SMSF industry as we know it today. The SMSF industry is structured in a fundamentally different way from the traditional superannuation industry that SIS was designed to regulate.
Given these significant differences in industry structure, it is reasonable to ask if the superannuation audit ground rules that were originally established for a different type of superannuation industry should remain in place for the SMSF industry behemoth that now exists.
Should SMSFs be audited?
The argument that because trustees and members are the same people, SMSFs do not need an annual audit is made on a fairly regular basis. I disagree with this argument for the following reasons:
• The community at large is a stakeholder in the success of our superannuation system and therefore has an interest in the competent and compliant running of SMSFs; and
• Many consumers who become trustees of SMSFs do not have the skills to assess the competence of their service providers.
We need a strong SMSF audit industry that protects the community’s interest in SMSFs and assists in raising the standards of governance and competency within the sector. If this is an objective of the SMSF audit industry, how can we assess its fulfilment?
In the SMSF industry, a single firm might provide a very wide range of services to trustees in addition to carrying out the audit, which can make independence challenging. This is supported by the ATO’s compliance work which has identified that where the same firm prepares the tax return and carries out the audit, the risk of a compliance breach not being identified or reported increases. The professional accounting bodies have paid particular attention to SMSF audit in their independence guidelines but I am not yet convinced that enough has been done to ensure the independence of the SMSF audit function.
Last calendar year saw the commencement of a method for the statutory regulation of SMSF auditor competency with the introduction of ASIC’s SMSF audit registration process. It is early days and we are yet to see what impact this development will have on SMSF audit competency. I am optimistic the development means we are heading in a direction where SMSF auditors will be a more significant influence on raising competency within the SMSF industry.
Most SMSF audits are still carried out by small generalist accounting firms and the SMSF audit industry remains a somewhat immature, cottage industry dominated by small owner-operated businesses. However, over the past few years, a number of firms have started to specialise solely in SMSF audit or established specialist audit divisions. This development should be welcomed by anyone who believes in raising standards.
One of the unfortunate consequences of seeing SMSF audit as an unnecessary form over substance activity is the risk of commoditisation. This view results in audit price becoming the dominant demand driver and the average price of an SMSF audit has fallen significantly. The scale of price reduction occurring across the board must be resulting in smaller margins and less work being done.
It is important for those of us in our industry who want to raise standards to educate all SMSF stakeholders in the value that a quality SMSF auditor can add and why we should be focusing on competence as well as price.
The philosophical rationale supporting the requirement for SMSF audits and the industry that delivers those services is completely different from the rationale and industry supporting larger superannuation funds. It is not therefore surprising that a different approach from the professional bodies, the regulator and government is required.
SMSFs and the industry supporting them are an important asset to our country and a strong, competent SMSF audit industry is necessary in order to secure its long-term future.
Martin Heffron, managing director at Heffron