6 more threats to auditor independence

Two-partner practices and multiple referrals are among the key threats to auditor independence.

The ATO is increasing its focus on SMSF auditors who fail to meet key auditor independence requirements.

Watch: ATO's red flags for targeting SMSF auditors


There is an arsenal of weapons to ensure adherence to the rules and regulations governing self-managed superannuation funds (SMSFs), and in its 2016-17 SMSF auditor compliance program the Australian Taxation Office (ATO) has auditor independence in the crosshairs.

“We may have different focuses from year to year, but along with quality and competence, risks to independence are fundamental bedrock,” says ATO superannuation director Craig Blair.

Three years post-auditor registration, there is still concern about the ability of approved SMSF auditors to comply with all of the independence requirements set out in the Accounting Professional and Ethical Standard (APES) 110 Code of Ethics for Professional Accountants.

Some of these are what CPA Australia audit and assurance policy adviser, Claire Grayston, calls “low-hanging fruit” – basic, highly obvious threats such as an auditor auditing their own or a relative’s fund. Such instances have decreased from about 90 in 2013-14 to 50 in 2015-16.

“Hopefully, we can now move on to looking at less obvious threats,” Grayston says.

She warns of six key threats to auditor independence:

1. Self-reviews

In 2015-16, the ATO started reviewing instances where an SMSF auditor also acts as the tax agent for the fund.

“We wanted to understand whether the auditors also prepared the financial statements and accounts, which would create a clear self-review threat,” Blair explains.

The ATO emailed a questionnaire to about 360 sole practitioners and found 25 per cent to be at significant risk of breaching independence. A further 17 per cent acknowledged threats to their independence, but advised they had already acted to resolve the issue or proposed a plan to do so.

“Just because they may be involved in providing taxation services doesn’t automatically mean there is a breach, but we’ll be following up on that 25 per cent and expanding our contact into the sole practitioner area,” Blair says.

Related article: Review or audit? Help your clients understand the difference

Depending on the outcomes, the ATO may make referrals to the Australian Securities & Investments Commission (ASIC) for possible enforcement action.

In the questionnaire, tax agents were clearly warned to “take appropriate steps to safeguard their independence or remove themselves from the audit engagement where they are concerned about compliance with APES 110”.

2. Reciprocal audits

Another growing concern is reciprocal audit arrangements whereby, as the ATO puts it, “auditors audit their auditor's fund”.

Not surprisingly, around two-thirds of SMSF auditors have their own SMSF. The ATO sees problems when two auditors who both have their own SMSFs audit each other’s clients’ funds, their own included.

“They might have 50 SMSF clients they’ve done the accounting for, including their own personal SMSF, and they just bundle them up and give a practitioner at another firm all 50 to audit. That practitioner returns not just audits of their own SMSF clients’ , but their own SMSF audit as well,” Grayston says. 

While practitioners preparing the accounts for SMSFs are often expected to assist the trustee to find an auditor, they need to resist offering all of their clients’ SMSF audits to another firm in exchange for that firm’s clients’ SMSF audits, adds Grayston. 

This may lead to self-interest threats to independence as the reciprocal arrangement creates a disincentive to question the other practitioner’s work or their clients, in case they do likewise or cease the arrangement. This self-interest is compounded when the practitioner’s personal SMSF audits are exchanged.

The ATO and ASIC have real issues about whether the independence risks this presents can be mitigated. They want the practice stopped, especially given analysis shows almost 1000 auditors (500 reciprocal arrangements) could be involved.

“It can give rise to self-interest, familiarity and even intimidation,” Blair maintains.

“There is also significant potential for quid pro quo. A lot of it goes to perception, but there are no obvious safeguards that could satisfy a reasonable third party that it is a truly independent and objective audit.”

3. Two-partner practices

According to Grayston, a related issue is sharing – or “swapping” – clients within one firm. 

The ATO is monitoring two-partner practices, mindful of potential threats to independence where one partner audits client SMSFs for which the other provides accounting and tax services. While some of these threats might be mitigated through implementing appropriate processes and controls, Blair says the ATO is intent on further investigation.

4. Multiple referrals

This threat emerges when an auditor relies heavily on referrals from one or two key sources. Blair says the 2016-17 SMSF auditor compliance program is upping the ante in circumstances where this happens, and “we will engage with relevant SMSF auditors to better understand their practice to assess the potential level of risks to independence”.

5. Personal relationships

A family relationship between an SMSF auditor and their referral source is continuing to attract attention, although the incidence of this is falling.

For example, the ATO would have concerns about independence where a son appears to audit his accountant father’s SMSF clients.

6. Data feeds

Finally, advances in software automation are presenting a whole new raft of risks. In an age of electronic data feeds, what guarantee do auditors have about the accuracy of the third-party supplied financial information they receive?

“Auditors need to understand the source of that data,” Grayston says. “It’s very easy to think that because it’s electronic then, of course, it’s reliable.

“If it comes direct from an investment house, for example, that may be sufficient confirmation, but data feeds can also be altered if they go through the wrong channels.”

Further resources: CPA Australia's toolkit for audit and assurance – tools, templates and resources to help you in your profession

Where data feeds are not received directly by auditors, putting in place appropriate controls and procedures to determine the completeness, accuracy and reliability of the information is imperative.

The ATO is increasingly applying data analytics across a range of areas, including to SMSF auditors.

“They now have powerful search engines that can quickly match auditors who audit their own fund, identify referrals and target all types of anomalies,” Grayston warns.

“Perhaps the most interesting thing isn’t so much about what auditors are doing with analytics – it’s what the ATO is doing.”

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