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Three-year audit cycle fraught with danger
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
Joanna what I referred to is the fact that accounting and audit firms are not required to have their own accounts externally audited, unlike SMSFs which must have them audited now and in future. All assessees are exposed to the risk of ATO audit!0- We should discuss this issue, however we need to be aware of the facts (in response to the comments above).
SMSF auditors are approved and monitored by ASIC - first error.
Second error - SMSF's invest in mostly non-related party investments, ranging from listed securities, private companies, private unit trusts, collectables (art, gold, silver etc),
3rd error - Accountants preparing the funds CANNOT be the auditor. They lodge a tax return which doesn't require them to audit the fund. Audits performed are bound by legal principles including planning, materiality, risk assessment, identification of issues/potential issues, testing of ownership, testing of changes in ownership of private entities (director and/or shareholder changes can make an investment become an In-House Asset and hence further rules and constraints apply to the investment), testing of pensions and contributions (eligibility, early access, min pension met etc) and so on. The auditor is legally responsible for their audit report. Simply allowing the trustees' accountant to lodge the tax return is fraught with danger, indeed it increases risk through advocacy and familiarity.
4th error- Auditors/audit firms are monitored by ASIC and the ATO. The ATO performs audits of us SMSF auditors regularly. They test our work programmes, procedures and randomly (without advance warning) select a random sample of funds to audit themselves to ensure we are doing the correct work.
Audit firms are bound by legally mandated auditing standards, They are monitored by ASIC. If the audit isn't performed it's a slippery slope; Industry funds will jump on the opportunity to say the SMSF sector can't be trusted.
Make sure your SMSF auditors are technically sound and independent, and please don't suggest that the audit role is pointless.
On the contrary, the auditors have helped the SMSF sector grow, and have provided the ATO and ASIC with confidence in the overall system.
0 - Given past experience with ATO gross inefficiencies it would not be prudent for them to carry ouf full SMSF audifs especially given the staff shortages epidemic in the ATO just to cover basiic duties such as answering enquiries. The bureacrats who dream up these ridiculous policy changes have their head in the clouds and just do not understand the reality of the complexities required to ensure a fund operates efficiently. This is another huge stel backwards and an administrative nightmare in the making and should be scrapped as another stupid policy which threatens to undermine smsf s0
- Ramani, this is not true that the audit companies are not audited. I am SMSF auditor and I was audited recently by ATO (no issues discovered :) Quick SMSF Audits
0 - Generous tax concessions are never a freeby. If you don't want the oversight, invest in less regulated vehicles.
Contrary to common belief, SMSFs are not "DIY", they are an alternative super savings vehicle that can provide greater flexibility than some APRA Funds. The associated regulation is required, given the level of public support, via tax concessions, afforded to them, to encourage individuals to save for their retirement.
An annual compliance audit is necessary to ensure that SMSFs remain fit for purpose.
An argument that "it's my money", may hold AFTER the youngest SMSF member turns 65 but, up until an unrestricted condition of release has been satisfied, it is a savings pool with very generous public support. No other savings vehicle has tax as low as 15 per cent0 - Reliance can be placed on Naz Randeria, an auditor, to justify the status quo. But from the consumer's perspective, consider:
unlike publicly owned companies and public offer super funds, SMSFs only involve related parties with greater identity between members and those who run the funds
most SMSFs use accountants drawn from the same pool as auditors, and they should do a proper job or be denied their practice certificate
audit firms themselves are not audited by others
no audit partner has been jailed for faulty audits (yet)
audits do not guarantee there won't be a tax audit
Self-interest can be a powerful driver!
0 - Why the need to have a SMSF audit. The ATO can perform this function as they do with all taxpayers!0
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