There are many statutory obligations placed on SMSF trustees when they agree to run their own super fund and one of these is for an annual audit to be performed on it.
While the significance of the annual audit has long been underestimated, and in the main the process has been viewed as merely a tick-and-flick exercise, a recent change to the Accounting Professional and Ethical Standards on the issue of practitioner independence may prompt the need for every SMSF to revise who they nominate as the fund’s approved auditor.
For years a debate has been raging about how audit independence can truly be established, the issue mainly being one of how one accounting firm could claim its audit function to be independent when it also prepares the financial statements for the fund.
The justification has always been to give assurances that Chinese walls exist separating each division of the firm, ensuring any collusion that may taint any of the firm’s operations does not exist.
A robust enough defence? Well, the Accounting Professional and Ethical Standards Board no longer thought so and has now stipulated the only circumstance where an accounting firm can perform the fund audit, as well as prepare the financial statements, is if the bookkeeping work is of a “routine or mechanical” nature.
This basically means it would be acceptable for an accounting firm to perform both functions if the SMSF trustees performed all of the necessary bookkeeping and the firm only prepared financial statements from a final trial balance. Unless the trustees have an accounting background, this would seem a highly unlikely scenario.
This change to the SMSF auditor independence standards could well result in accounting firms across the country having to relinquish either activity they are currently providing for SMSFs in the name of compliance.
When it comes to bookkeeping and the preparation of financial statements, this isn’t such a big deal, but with regard to the auditing function, this development has the ability to turn everything considered conventional on its head.
The obvious impact is that change to the standards will result in a significant number of trustees having to look to appoint a new auditor for their SMSF.
So what’s the big deal about that, I hear you ask. Well, from 1 July 2013, auditors could only service SMSFs if they had successfully registered with the Australian Securities and Investments Commission in order to do so. From its outset, this requirement reduced the number of practitioners providing audit services for the sector and this has unfortunately only been a continuing trend.
The latest ATO statistics indicate the number of SMSF auditors has dropped from 7032 in 2012/13 to 5565 in 2016/17. So basically there are fewer and fewer auditors able to operate in the SMSF space.
Bear in mind also that the practice of just swapping clients, say where firm A audits firm B’s SMSF accounting clients and vice versa, has been identified by the regulators as an unsatisfactory solution.
As you can see, the audit landscape has changed significantly due to the new independence standard and how it will play out in the SMSF space is unknown. As a result, don’t be surprised as a trustee if you receive a letter from your fund’s accounting firm to say it can no longer perform the yearly audit.
It’s a matter, when combined with potential capacity constraints, that could create some serious disruption to the sector with no obvious solution just yet.