Plans to introduce a three-year audit cycle for compliant self-managed superannuation funds (SMSFs) will fail to reduce compliance costs for trustees and instead could force some auditors out of the market, accounting professionals warn.
In the 2018 Federal Budget, the Australian Government proposed allowing SMSFs to be audited every three years, rather than annually as currently required. The change would not mean that only one out of every three years was audited; instead, three years of SMSF financial statements and compliance would be audited at the same time.
SMSF advisers say this change in particular will not lower the cost of audits for super fund trustees because it will not reduce the overall work involved in auditing a SMSF.
“If they’re doing three years in one hit, I don’t think it’s going to reduce the cost – or it’s going to be a very minimal reduction,” says Gabrielle Philp of Melbourne accountancy firm Abacus Professional Group.
The longer period could make the job of the auditor and accountant more difficult because it will be harder to get the required paperwork from trustees “because the older it is, the harder it is to get”.
“Both from the auditor perspective and the accountant perspective who works with the client trying to get that information, that becomes a problem,” she says.
Risks to SMSF audits
CPA Australia and Chartered Accountants Australia & New Zealand have made a joint submission to the Australian Treasury arguing the proposal is a risk to the integrity of the A$712 billion SMSF segment.
In particular, they are concerned that the current 1.6 per cent contravention rate among SMSFs could rise.
“The SMSF annual audit regime serves two purposes – it reduces the risk of deliberate non-compliance, but also enables early identification of inadvertent non-compliance, which can enable rectification in a timely manner,” they write.
However, switching to three-yearly audits would mean that material errors in the financial statements or contraventions identified during the audit may have existed for up to three years under this proposal, rather than being restricted to one year.
“This delay in detection may result in greater administration, costs and penalties because the scale and impact of the error or non-compliance often multiplies over time. Greater work effort is likely in order to identify their full impact and navigate a more complex and onerous rectification process than if errors or non-compliance had been identified in a timely manner.”
Small contraventions identified in year one, for example unpaid rent from a related party, are not reportable if they are under the Auditor Contravention Report (ACR) reporting thresholds of greater than A$30,000 or 5 per cent of the fund’s total assets.
In this instance, the contravention could be rectified following identification by the auditor before it became reportable, but after three years the contravention may have compounded, exceeding the threshold resulting in the consequences and impact becoming much greater.
Enough work for SMSF auditors?
Another issue for auditors with a large number of funds that shift to three-year audits is whether the auditor will still perform the minimum number of audits required every year in order to retain their registration.
Philp, who prepares annual accounts for SMSF clients, is concerned that the change could also impair good relations between accountants and auditors.
“I have a really good working relationship with the auditor of my super funds and if I or clients have a question, I get in contact with him. I think from that perspective, he’s not going to have the more recent memory in relation to the fund or is he even going to want to be as helpful if he hasn’t had any revenue for three years?” she says.
“The support that I feel I get in relation to my role as the accountant may diminish.”
Many SMSF trustees don’t really have a deep understanding of what they can and cannot do, so advice sourced from an auditor is very important.
“Quite often, it’s a sort of a protection for the clients, just a way of saying, ‘I’ve spoken to the auditor. He’s not happy with that’,” she says.
SMSF funds that qualify for a three-year audit
Michael Davison, CPA Australia’s senior policy adviser for superannuation, says the change would mean auditors’ earnings would shift from annual revenue to three-year revenue and the workflow would be very up and down, with most of it coming in the third year, depending on the transitional arrangements the government puts in place.
“That could have a significant effect on the auditors’ cash flow and force some auditors out of the market,” he says.
“This will have implications for trustees seeking auditors because obviously there will be a supply and demand issue, and costs will probably be pushed up further.”
Davison also questions how many funds would meet all the requirements to qualify for three-year audits. These include having no examples of non-compliance and that a previous return has been lodged on time each year.
Also, if funds undergo a key event – such as changing members, death of a member or starting a pension – then they are required to do an annual audit.
“Between the two we think the number of funds that would qualify will be actually quite small,” he says.
“If the uptake is low then the potential red-tape reduction will be minimal. This, coupled with the unlikelihood of cost savings given the same amount of audit work is still necessary overall, means the policy is unlikely to be effective.
Three-year SMSF audits: how auditors will be affected