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Upholding audit quality: what risks lie ahead?

By Sharon Hope
September 30 2016
5 minute read
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Upholding audit quality: what risks lie ahead?
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This is a time of opportunity and change for the SMSF audit sector. However, there are risks on the horizon that could significant hamper the quality of audits across the industry, writes Sharon Hope, director, SMSF Auditor Online.

The SMSF auditor

With more than half a million SMSFs in operation today, the Australian Tax Office is responsible for the security and preservation of retirement incomes held in SMSFs and, therefore, oversees the management and investment of SMSFs.

The Australian Securities and Investments Commission, meanwhile, ensures the integrity and competency standards of practicing SMSF auditors by enforcing registration and adherence to a strict criteria of requirements.

The SMSF auditor’s role is to deliver a quality audit that is accurate, independent and reliable. The audit examines whether the rules and regulations governing SMSFs are being adhered to correctly as set out by the Superannuation Industry (Supervision) Act 1993.

The SMSF audit industry

As with every industry, new developments in software automation, communications technology, data analytics and data sharing – as well as the perceived need to reduce cost-for-service fees by outsourcing or time-saving measures – are impacting the SMSF audit industry.

Furthermore, the requirement for independent SMSF audits is in place. However, vagueness about what true independence means is allowing reciprocal audit and accounting arrangements to continue, potentially undermining the integrity of SMSF audits.

The ATO relies heavily on the careful work of SMSF auditors, and as adjustments occur within the industry due to innovation and service refinements, the tax office will be monitoring decreases in the integrity of audits to ensure the quality of audits maintain their reliability.

Fast feeds

Software programs – that rapidly extract third-party data feeds from a super fund’s banking transaction information and digitally manage record keeping – save SMSF auditors a great deal of time previously spent collating paperwork and entering data manually. Advanced systems have the power to deliver fast, clever and economical audits.

Yet, relying heavily on this level of automation must also be treated with caution. Who is guaranteeing the accuracy of third-party supplied financial information that the auditor is accepting? Software programs are not immune to the occasional problem or glitch. Some errors will be obvious and detected, but other anomalies may slip by an auditor who increasingly relies on automation for support and lets their guard down.

In general, the move to harness technology and automation is important and necessary for the SMSF audit industry. Streamlining routine tasks, secure cloud-based storage of digital documents, centralised data feeds, digital signature authorisation and other innovations will, no doubt, improve the industry. But the responsibility to maintain quality audits in the face of all types of automation is vital. The trap for auditors will be over-relying on this data and not cross-checking or giving the data the level of inspection required.

Cost cuts

Large auditing firms, with the necessary resources, will move to powerful automated software systems for auditing well before small firms or individual auditors. But will this competitive advantage lead to improvements in the quality of SMSF audits? Will effective systems and controls be in place to produce accurate, independent, high-quality audits that the ATO can rely on?

Reliable automation may provide auditing firms with more time to focus on SMSF compliance. However, they should be giving compliance the appropriate degree of time and attention anyway.

Outsourcing audit work to low-cost overseas labour or junior staff in a bid to reduce audit costs is occurring in the SMSF audit industry. Outsourced, inexperienced auditing and fast automation opens the door to errors in the audit process, thus diminishing the quality and accuracy of the audits performed.

If the quality of SMSF audits decreases, the ATO may take action to ensure auditors lift their game, particularly if the auditor leverages automation or offshore labour. The ATO expects a guarantee of the accuracy of any third-party data or other parties used in producing the SMSF audits.

There’s no denying that automation will be part of the future of SMSF auditing. Over time, the software programs will read data feeds accurately and in real time, and an automated audit that identifies all possible risks will become a reality. For now, however, the right amount of human time and attention to the audit is essential.

Being human counts

We’re many years off developing technology that replicates the human ‘gut feeling’ that causes prudent SMSF auditors to delve deeper into, or ask more questions about, an aspect of an SMSF under review that doesn’t seem quite right. When an SMSF auditor is not 100 per cent convinced, it’s the auditor’s natural decision making, instinct and curiosity that enhances the quality of the audit.

Identifying problem areas or possible risks to an SMSF requires the experience, skill and judgment of the auditor. The auditor may recommend a secondary source of evidence to give more weight to a weak audit result, to help it meet compliance requirements. Automated machines won’t do that.

Being human allows an auditor to provide assistance to an SMSF’s managing accountant through strategies to correct any issues arising.

True independence

Another issue the ATO is seeking to remove is reciprocal audits. ‘Chinese walls’ in firms that separate a fund’s auditor from its accountant, on paper, are not truly independent from each other.

The problem with reciprocal non-independent SMSF audits is that any issues arising may not be dealt with appropriately or effectively in the fund’s interest. On the other hand, an independent audit identifies issues of non-compliance to be fixed or reports the issues to the ATO for review.

To safeguard the integrity of the superannuation system, the independence of each SMSF audit is crucial. When the parties involved are in a questionable or inappropriate relationship, the audit is weakened. Audits need to be truly independent, so the ATO can rely on the judgments made.

Reciprocal audit arrangements are still quite common and need to be addressed by the regulatory authorities with clearer rules or disincentives for both auditors and accountants.

Due diligence

Ultimately, the ATO will make the overriding decisions regarding changes in the audit process, thus driving the future direction of the SMSF audit industry. Reported ATO ‘crackdowns’, ‘clampdowns’ or similar headlines, in reality, indicate that the tax office is performing due diligence to uphold the SMSF audit quality and integrity required in the face of new or evolving issues. Possible threats that appear to undermine the effectiveness of the SMSF audit process, we expect, will be monitored by the ATO.

The ATO is increasingly wary of accepting audits when specific alarm bells indicate that the quality and integrity of the audit is questionable, such as low auditor fees, fast turnarounds, high levels of automation and audits lacking an appropriate degree of independence. If a low fixed fee price war puts pressure on the SMSF audit industry and the quality of audits deteriorate – potentially causing losses for SMSFs under the protection of the ATO – then the ATO, we expect, will put stringent safeguards in place to prevent this.

In closing, the fundamental role of the SMSF auditor has not changed, but the tools auditors employ are changing and at a rapid pace. The ATO, in collaboration with ASIC, requires high quality, independent, accurate SMSF audits and will do everything in its power to ensure the reliability and integrity of the audits they depend on are upheld.