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Three-year audit cycle fraught with danger

Three-year audit cycle fraught with danger

Naz Randeria
25 May 2018

Conducting audits once every three years will see errors and misstatements made in the first year snowball into bigger issues in subsequent years.

Considering the recent revelations of the banking royal commission which shows the levels of misconduct that can occur in an environment without regular independent reviews, the government should reconsider their proposal to introduce the three year audits of self managed superannuation funds.

The proposal at first glance appears fairly attractive to trustees, advisors and the superannuation sector in general. However, when analysed within the scope of audit engagements, the move is fraught with danger and could become an administrative nightmare.

The treasury proposal fails to address whether SMSF audits will need to be conducted once every three years for a continuous three-year period or for just the third year.

Only having an audit for one out of three years may be attractive to wayward trustees who could potentially perform transactions in unaudited years since there is no independent review. Such noncompliance could include:

  • Drawing less than the minimum pensions as required under the law
  • Drawing more than the maximum allowable for transition to retirement pensions
  • Conducting prohibited related party transactions
  • The over- and under-valuation of assets
  • The manipulation of tax free and taxable components of superannuation savings
  • Inaccurately claiming tax deductions
  • Understating income
  • Reporting incorrect calculations on tax exemptions on pension income
  • Distributing death benefits without appropriate checks and balances
  • Winding up the fund during non-audit years

Conducting audits one out of every three years is highly risky. Errors and misstatements in the first year could snowball into bigger issues in subsequent years. This may require rectifications on a retrospective basis to the SMSF’s financial statements, tax returns and transfer balance account reporting, which could become a costly exercise for trustees.

It’s also bad news for the industry. Audit firms could potentially face significant cash flow issues with little or no work in the first two years and a sudden rush of work in the third year. It would also be difficult to attract qualified staff since hiring employees on a three-year seasonal fee-base would be impossible for many professionals. Finally, there would be no cost benefit for SMSF trustees as the auditor would have to charge for performing three years’ worth of work in one year. It will merely defer and even increase audit costs rather than minimise them.

The auditor’s role is not just that of a reviewer but also an educator on issues that may need rectification. For the process to be effective, annual reviews must be conducted. The government’s proposal should be scrapped in its entirety.

Naz Randeria, managing director, Reliance Auditing

Three-year audit cycle fraught with danger
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