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Maintaining scepticism as an SMSF auditor

By Chris Malkin
September 22 2017
5 minute read
Maintaining scepticism as an SMSF auditor
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With SMSF auditors facing increasing pressures from changes in superannuation law, having a thick skin, resilience and exercising a healthy scepticism have never been more important.

We are continuously reminded by all manner of financial advisers, the media, our accountant and the government regardless of political persuasion that we will need more and more income-generating assets to retire off and that we probably won’t have enough to sustain us in the ways we hoped to be accustomed for the remainder of our ever-increasing life span in our retirement. Of course, we will find it just as difficult to reserve our place in our nursing home when the time comes because of increasing competition and entry costs. Our success will be just as challenging as if we were first entering the housing market.

Most of us have also thought that the only way that we can ever hope to achieve our retirement aspirations is to use a SMSF to help us get there.

We all know how SMSF numbers have increased exponentially over recent years due in part to the perception of investment control and flexibility they offer their members but also because the working population is ageing and more people are nearing or have entered retirement.

Members’ balances within their SMSF have also increased exponentially, as has the national pool of superannuation assets, which is well over $2 trillion. The average SMSF balance is now over $1 million.

Despite the necessity for us all to save for our retirement, and the fact that we seemed to be progressing well through our SMSF, the current government, generally supported by the opposition, has significantly dampened the previously encouraged enthusiasm for SMSF by restricting the ability to accelerate super savings by reducing taxation concessions and limiting the amount that we can contribute to our funds.

Many SMSF members have become very frustrated at now not being able to do what they once could via their fund to achieve their retirement income dreams. Many had legitimately put into place investment strategies involving collectables, LRBAs with related party arrangements, and significant salary sacrifice and non-concessional contribution plans when now many of these strategies have been significantly curtailed.

However, the need to accumulate an increasingly more valuable retirement portfolio remains.

I thought that I may be drawing a long bow when I hypothesised that there may be a tangible correlation between the quest by SMSF trustee members to increase, if not maintain their superannuation savings, the restrictions to do so being placed by the constantly evolving and increasingly harsher legislation, the requirement that all funds must be subject to an annual audit and the pressure on the auditor to facilitate this process. 

There is also a link with auditor independence.

Accountants and financial advisers are increasingly pressured to find ways to assist their clients to accumulate wealth. As traditional wealth accumulation strategies become more vanilla such as those using a SMSF, other riskier and more innovative ways emerge. Clever taxation strategies are always being tested.

I hasten to add emphatically that the clear majority of members of our accounting profession, including those who practice in audit, are totally ethical, diligent, highly trained professionals who comply with their codes of professional conduct, accounting and auditing standards and the law. 

However, some don’t.

Some accountants and auditors - I am leaving financial planners out of this as they are required to comply with their own strict professional standards - incorporate innovative, often risky edge-of-the-cliff practices to attract and satisfy SMSF clients. They stretch the taxation laws to their clients’ advantage and push the envelope. Many do this legitimately, some may not.   

When it comes time to audit the clients’ SMSF which have taken on these tactics, the auditor may well be encouraged to overlook transactions that may not pass the “smell test” because of the relationship the auditor may have with the accountant or adviser, the ongoing importance of the client and their SMSF to the firm, and if the auditor is part of the firm, the relationship they may have with their colleagues.

Issues which all SMSF auditors must watch:

  • Independence

Clearly, the SMSF auditor must exercise both actual and perceived independence in accordance with APES 110 Code of Ethics for Professional Accountants and the codes of conduct required of their Professional Association.

  • Undue influence in relation to an audit

Don’t be subject to undue influence by any person, including the client or a colleague in the accounting or audit firm.

The applicable legislation contained in Section 130BA of the Superannuation Industry (Supervision) Act 1993 and its Regulations (commonly known as SIS) may well be elevated to prominence given the foregoing pressures alluded to relating to wealth creation via a SMSF.

SIS sec 130BA — An auditor must notify the regulator of attempts to unduly influence the auditor (extract applicable to SMSFs)

             (1)  If an auditor of a (SMSF) is aware of circumstances that amount to:

                     (a)  an attempt, in relation to an audit of the (SMSF), by any person to unduly influence, coerce, manipulate or mislead the auditor or a member of the audit team conducting the audit; or

                     (b)  an attempt by any person to otherwise interfere with the proper conduct of the audit;

the auditor must notify the (ATO) in writing of those circumstances as soon as practicable, and in any case within 28 days, after the auditor becomes aware of those circumstances.

             (2)  An auditor commits an offence if the auditor contravenes subsection (1).

Penalty:  Imprisonment for 12 months or 50 penalty units, or both.

SIS sec 130BB — Giving false or misleading information to auditor (extract applicable to SMSFs)

  • A person commits an offence if:

                     (a)  the person is the trustee of a (SMSF)

                     (b)  the (trustee) gives information, or allows information to be given, to an auditor of the (SMSF); and

                     (c)  the information relates to the affairs of the (SMSF); and

                     (d)  the (trustee) knows that the information:

                              (i)  is false or misleading in a material particular; or

                             (ii)  is missing something that makes the information misleading in a material respect.

Penalty:  Imprisonment for five years or 200 penalty units, or both.

Offence — the (trustee) fails to ensure the information is not false or misleading.

             (2)  A person commits an offence if:

                     (a)  the person is a trustee of a (SMSF); and

                     (b)  the (trustee) gives information, or allows information to be given, to an auditor of the (SMSF); and

                     (c)  the information relates to the affairs of the (SMSF); and

                     (d)  the information:

                              (i)  is false or misleading in a material particular; or

                             (ii)  is missing something that makes the information misleading in a material respect; and

                     (e)  the (trustee) did not take reasonable steps to ensure that the information:

                              (i)  was not false or misleading in a material particular; or

                             (ii)  was not missing something that makes the information misleading in a material respect.

Penalty:  Imprisonment for two years or 100 penalty units, or both.

             (3)  If information is given to the auditor in response to a question asked by the auditor, the information and the question must be considered together in determining whether the information is false or misleading.

Auditors face increasing pressures as superannuation law becomes more complicated and restrictive and the scope to accelerate retirement wealth creation using a SMSF becomes more difficult.

Thick skin, resilience and the exercising of healthy scepticism is becoming more important than ever.

Failure to do say may attract severe penalties and grief.

Of course, unscrupulous trustees have similar problems.

Chris Malkin, senior consulting auditor, Baumgartner Super