The road ahead for in-house audit firms
Evolv head of superannuation Santa Dutta explains what options are available to firms impacted by the independence guidance in terms of restructuring their audit engagements.
What proportion of the SMSF industry is likely to be impacted by this updated independence guidance?
There were an estimated 600,000 SMSFs at March 2020, and with the new guideline in place, the industry believes around 30 to 40 percent of these funds and the businesses servicing these funds will be impacted by this independence issue. One of the ways to reduce the threat to independence to an acceptable level is to outsource the entire book of SMSFs currently being audited in-house.
In terms of firms that need to restructure and maybe outsource those clients, what are their options in terms of how they restructure their audit services?
The ATO has advised firms that they have until July 2021 to restructure their practice. It will take an educative approach during the 2020 and 2021 income years for firms managing the auditor independence requirements. For firms currently providing both accounting and auditing services to SMSF clients, they must try to reduce the threat to an acceptable level or eliminate the circumstances which are creating the threat to independence. If firms continue to operate without reducing the threat to acceptable levels, then the ATO may refer the matter to ASIC for possible action in ASIC's capacity as the regulatory body. ASIC may decide to disqualify that SMSF auditor or cancel their registration.
SMSF auditors who are planning to break away from the firm and start their own business servicing the previous clients of the firm should also be aware that the ATO still considers there to be independence threats with this such as self-interest and familiarity risks.
Some industry commentators have suggested that SMSF firms currently offering in house audit services may consider entering pooled arrangements or large-scale reciprocal arrangements with multiple firms, where other firms complete the audits for their accounting clients and vice versa. Would this be enough to avoid breaching the independence standards? Is it practical in reality?
Reciprocal arrangements involving two auditors auditing each other's funds have long been on the ATO's radar. Hundreds of SMSFs being swapped between the audit divisions of two different firms has also been a focus for them.
There have been a number of firms impacted by the independence guidance who are considering entering an arrangement with a number of other firms where they put all their clients into a pool of SMSFs and then take out a certain portion to audit. The ATO has explained that under the APES 110 Code of Ethics for Professional Accountants, the potential threats to independence in a reciprocal audit arrangement may include self-interest, familiarity and intimidation threats. Therefore, any SMSF firms that engage in reciprocal auditing arrangements will be subject to increased scrutiny by the ATO.
How easy will it be for firms to acquire new SMSF audits clients that the firm does not provide accounting or administration services for?
Given that the industry is expecting around 200,000 SMSFs to be changing their SMSF auditor as a result of this updated guidance, it may not be possible to push all of that additional work out to existing independent SMSF audit firms so I think there may be a lot of opportunity to attract new SMSF clients. Businesses have till around 1 July 2021 to think about how they will do things differently and have processes in place to satisfy those independence requirements from 1 July next year by utilising Audit software and technology.
Any other tips or considerations that SMSF firms need to be thinking about in relation to the independence guidance?
Breaching independence may impact your professional indemnity insurance. If your insurer believes you have not met your professional obligations including Independence standards in APES 110, it may impact your insurance coverage.