Emerging risks to SMSF auditor independence
Auditors should revisit their understanding of and compliance with ethical requirements, including independence.
SMSF auditor independence has been a key focus of both the ATO and the accounting bodies. The landscape within which SMSF auditors operate has changed significantly, creating new hurdles to complying with ethical requirements such as independence.
Independence requirements now have force of law
An outcome of the overhaul of the SMSF industry has been the passage of the APES 110 auditor independence requirements into the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Regulations.
Whilst APES 110 has been mandatory for members of the three accounting bodies since inception in 2006, and mandatory for all auditors since 2010, until now it has been the responsibility of the auditor’s professional association to admonish non-compliance. Now the ATO is the regulator of the SIS Act and Regulations, and can take action against those found to have breached the auditor independence requirements.
Pressure to increase non-audit services to SMSF audit clients
One of the most significant changes to the industry has been the removal of the accountants’ exemption, which released certain members of the three accounting bodies from the requirement of holding an Australian Financial Services Licence (AFSL) when dealing with and providing advice in relation to SMSFs. From 1 July 2016, those wishing to continue providing such services will be required to hold either a limited or full AFSL, or be an authorised representative of an AFSL holder.
With this requirement comes additional costs. To recover these costs there has been an increase in the number of firms intending to provide non-audit services to their SMSF audit clients.
Whilst an auditor is not required to obtain a limited licence or become an authorised representative, many auditors also establish the occasional SMSF, or provide general advice for their clients, and will need to hold the appropriate licence to continue doing so.
Also, firms that historically limited their non-audit services to financial report and tax return preparation are now also advising and dealing in financial products such as shares, managed funds and insurance in order to recover the new costs.
The resulting impact on the auditor whose firm provides these additional services is the increased threat to independence. Firms now advising and dealing in financial products, or generally becoming more proactive in their SMSF client’s affairs, may find themselves exposed to a new range of threats such as advocacy or self-interest threats to independence.
Pressure on auditors to reduce fees
According to ATO statistics, over recent years the average and median SMSF audit fees have decreased by approximately 10 per cent. In contrast, over the same period the volume of auditing standards has increased by almost 50 per cent.
There are a number of possible reasons for this counter-intuitive trend. For a number of years the industry has seen the SMSF accounting, administrative and audit functions being sent offshore to countries with cheaper labour costs. We have also seen a number of firms using the accounting and audit function as a loss leader to attract the SMSF client and then make money through ‘up-selling’ the client to various financial products.
Finally, as a result of SMSF auditor registration, we are seeing a number of firms specialising in SMSF audit, performing thousands of audits, thereby using economies of scale and efficiency to reduce the audit fee.
Irrespective of the reason for the reduction in audit fees, the reduced audit fees give rise to, whether actual or perceived, a threat to the fundamental principle of professional competence and due care which auditors should evaluate and apply appropriate safeguards.
Not to mention, as the volume of audits undertaken by firms increases, auditors are reminded of the intimidation threat to independence that arises when a significant number of audits are undertaken for the one accountant or administrator.
The ATO informs us that auditor independence is improving. Despite this, auditors must now consider a number of new threats. Auditors must also start to consider not only compliance with the auditor independence requirements, but also the threats to compliance with the fundamental principles contained in APES 110.
Ashley Course, policy adviser at the Institute of Public Accountants