Real-time auditing of SMSFs

One issue with auditing of super funds is that it typically occurs many months after a financial year has finished.

Auditing self-managed super funds in “real-time” is currently a big topic of conversation for those who work in the SMSF industry.

To understand what this might mean for your SMSF, you first need to understand what an SMSF auditor is meant to do.

The role of an auditor

The superannuation legislation gives SMSF auditors two jobs: The first is to confirm that the financials of an SMSF are accurate, and the second is to make sure an SMSF complies with the various super laws.

The financial audit is really no different to any other checking process that auditors typically do. They confirm the numbers in your financial reports are accurate and nothing untoward has gone on in your super fund.

Next comes the compliance audit. If the auditor identifies that a super fund has failed to comply with the super laws, then depending on the severity of the breach, the auditor has to tell the Australian Taxation Office (ATO).

Officially, this is called a Contravention Report.  In these reports, the auditor has to note the dollar value of each breach.

For the 2013/14 financial year, SMSF auditors had sent in about 9000 Contravention Reports involving 22,000 breaches of the super laws.

It might sound like a lot but it actually means that just 1.7 per cent of SMSFs are found by their auditors to have a problem. More than 98 per cent of SMSFs are found by their auditors to be following the law. What a great advertisement for the SMSF sector!

When reporting the breaches to the ATO, the auditor also has to say if the breach has been fixed.  Last year, just under half had been fixed.

What does the ATO then do with these notices? It decides to pursue or leave alone a super fund’s trustees for breaching the super laws.

It would be reasonable to assume that more energy would be spent looking at the breaches with a higher value, even those breaches that have been fixed.

Time delay

The problem with auditing of super funds is that it typically occurs many months after a financial year has finished. Let’s suppose your super fund’s financial year ends on 30 June and your fund will be audited in the following November.

Let’s assume your auditor found that you had accidentally used your super fund’s bank account to pay one of your personal bills and you did this illegal transaction early in the financial year.

The longer the time it has been since you committed the breach, the harder it is to solve.

This is where real-time auditing might potentially help. Some see it as enabling an auditor to continually monitor your fund.  If a problem is found, then it can be dealt with not long after a transaction took place. 

Some SMSF administrators already have the capacity to perform this function, if they receive a steady stream of financial data about your fund into their administration systems.

Other administrators only receive your financial data after the end of the year.

The pros and cons

The idea behind real-time auditing is that it would enable an auditor to identify and assess risk areas more frequently. This would, in turn, enable them to report to trustees, so any problems can be dealt with as soon as possible. (Very large super funds and your bank currently perform similar functions to make sure all financial transactions are accurate. Error reports will be produced trying to find any anomalies above a certain dollar threshold.) 

Some argue that real-time auditing is unnecessary because a good SMSF administrator will be constantly reviewing all their funds trying to find errors.  They also argue that this would potentially make an auditor an adviser to the fund, which is typically not their job.

They say that an auditor’s job is to confirm accuracy, not advise on the appropriateness of particular transactions. In any event, some of them conclude that this idea might not be necessary nor deliver much additional value.

What’s the future?  At this point in time, there doesn’t seem to be much demand for real-time auditing in the SMSF space.

But the same could be said for online educational videos and other content. Fifteen years ago, there was almost no demand for these services.  These days this technology has become ubiquitous.

Uber and other similar systems are using technology to shake up the taxi industry.  So as technology developments continually improve financial reporting systems and processes, don't be surprised if real-time SMSF audits become commonplace.


April 2020
April 2020

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