Experts says cutting audits of self-managed super funds (SMSFs) to once every three years instead of annually is unlikely to cut either costs or red tape and could have serious consequences for the SMSF audit sector.
The 2018 Federal Budget proposed allowing SMSFs to be audited every three years, rather than annually as currently required. It is not a one-year-in-every-three proposal, rather trustees would still have every year audited, but this would be completed once every three years.
“Trustees still have to verify the opening balance and reconcile and verify audit evidence over the three-year period, which may end up costing more. Any auditor will tell you it can be difficult getting clients to submit their material annually. This will be even tougher if they only have to do it every three years,” says Paul Drum, head of policy at CPA Australia.
Drum says that if trustees have made mistakes or inadvertently contravened regulations, the problem will only compound over three years. It is likely it will take more time and money to fix than if the issue had been picked up after a year.
Costs to rise for fewer SMSF audits?
There will be savings for some funds, but for many there won’t be any cost reduction at all, and for some an increase in costs is likely, says Richard Smith, managing director, ASF Audits. Smith says three-year audits may work for very simple funds, for instance those that only hold cash or managed funds.
“But even with simple funds, trustees can easily make errors with contributions and pensions,” he says.
Tenuous benefits aside, Drum argues moving to a three-year audit could threaten the integrity of the SMSF ecosystem.
“There will be an element who will take the opportunity to game the system. If you don’t regularly police it, you run the risk people will find loopholes. Trustees are also less likely to implement risky strategies in the existing annual audit system, in the knowledge the fund is regularly monitored.
“The extra checks auditors perform, especially around record-keeping for property investments and limited recourse borrowing arrangements, help support the regulator’s role,” he says.
Audit as checks for good administration
Drum says that rather than view the audit as an impost, a better approach is to see it as a useful tool to help ensure the smooth running of the fund.
“The audit gives trustees an invaluable check they are administering the fund appropriately. SMSFs are complex, so instead of looking at the annual audit as a burden they should be looking at it as a tool that supports their role.”
There are many details to be worked out should three-year audits be introduced, such as which SMSFs would be allowed to have their audits completed once every three years.
The Federal Government’s initial indication is that only funds with a good compliance and lodgement track record would be eligible, but no detail has been released about what constitutes a fund with a good record.
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Serious consequences for SMSF auditors
If the proposal goes ahead it is likely to have serious consequences for the SMSF audit sector.
Smith says managing fluctuating workflows will be a concern, particularly if a large number of funds will be eligible to be audited in the same year, while a much smaller number will be audited in the other two years.
“That is going to create serious resourcing issues, which may increase costs for us and for our SMSF clients. One reason is because we may have to employ more casual staff, which comes at a higher cost compared to full-time staff.”
ASF has never outsourced any of its services, “but I am sure many firms are starting to think outsourcing is suddenly an option,” Smith says.
Who will decide audit timing?
A potential problem may be keeping auditors’ skills up-to-date and relevant in a three-year environment. Another issue is which party will drive the timing of the audit – the trustee, the auditor or the Australian Taxation Office?
CPA Australia is in discussions with Treasury about how three-year audits would work in practice.
“If the government can demonstrate this measure will meet its objectives, and it is able to be implemented, we would support it. But at the moment we have a lot of questions about how to make this work,” Drum says.
A Treasury spokesman confirms the Federal Government has started consultations with stakeholders on the proposal.
“Consultation to date has been constructive. The government will continue to progress consultation with industry and ensure stakeholder views are taken on board in the design of the measure,” he said.
Meanwhile, the SMSF audit industry is awaiting details of the proposal that has many businesses in the sector seriously concerned about how this will play out.
Says Smith, “When more details are released we will be able to make a better assessment of any potential savings or costs. Until then, we can’t work out what the real impact will be.”
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