Auditor independence in the crosshairs

Since SMSF auditor registration commenced in 2013, up to 30 June 2018 ASIC has deregistered, suspended or imposed conditions on 101 SMSF auditors for various breaches.

The ATO is clamping down on SMSF auditors who fail to comply with their obligation to ensure audit independence.

By Zilla Efrat

In 2018, the Australian Securities and Investments Commission (ASIC) disqualified 10 self-managed superannuation fund (SMSF) auditors for breaching independence requirements.

Since SMSF auditor registration commenced in 2013, up to 30 June 2018 ASIC has deregistered, suspended or imposed conditions on 101 SMSF auditors for various breaches, including issues relating to audit independence such as auditing their own fund, a family member’s fund, or a business partner’s fund or funds for which they also prepared accounts or financial statements.

In other words, the auditors failed to remain independent from parties that might have a financial interest in what is being audited and allowed the bias, conflicts of interest or undue influence of others to adversely affect their judgement.

Trustees need to be satisfied that an independent auditor has been appointed with the competence to conduct a thorough quality audit. This provides the trustee with the confidence that their SMSF’s financials are not misstated, that  the SMSF is compliant with the SIS legislation, and whether the SMSF’s assets are properly safeguarded.

In December last year, the ATO noted that in addition to blatant independence breaches, such as auditing one’s own SMSF or those for close family members, it had recently broadened its focus to include less obvious risks to independence of auditors entering into reciprocal auditing arrangements.

One such arrangement is where two auditors with their own SMSFs agree to audit each other’s funds. Another is where two professional accountants who prepare the accounts for a number of SMSFs enter into an arrangement to audit each other’s clients’ SMSFs.

Related: 6 key threats to auditor independence

SMSF auditors need to consider whether these arrangements are impacting their independence and if so apply safeguards, such as diversifying their client base to reduce reliance on one referral source or, when providing accounting or advisory services, spread audit referrals amongst multiple auditors. The size of the respective practices and the specific circumstances need to be considered.

The question is, why are some SMSF auditors are still not complying with independence requirements?

“We can only assume that this comes down to a lack of education and awareness,” says Australian Taxation Office (ATO) assistant commissioner, SMSF segment, Dana Fleming.

“Additionally, for some auditors, there is perhaps an unwillingness to comply. They may believe they are independent of mind, but they are not meeting the second limb of independence, which is independence in appearance.”

Independence of mind is where auditors reach a conclusion without being affected by influences that could compromise their professional judgement. Not meeting independence in appearance is where a reasonable and informed third party is likely to conclude, weighing all the specific facts and circumstances, that the auditor’s judgement has been compromised.

CPA Australia policy adviser for audit and assurance, Claire Grayston, adds that some accountants may want to provide a complete service solution for SMSF clients. This may include providing advice on setting up an SMSF, accounting services, tax advice and the audit, even though they should advise the trustee to use another practitioner to conduct the audit.

“Some practitioners worry they will lose their client if they give one of the services to another accountant, but instead they risk ATO investigation and ASIC enforcement action,” Grayston warns.

If auditors have prepared the SMSF’s financial information, they may not scrutinise that information adequately, she says.

“Or, if they are close to SMSF trustees, they may be lenient if they find non-compliance or simply not look too hard for it.

“Consequently, lack of independence is likely to result in a poor quality audit. As audits of SMSFs are intended to assist in safeguarding the retirement savings of nearly two million Australians, it’s important that those audits are conducted properly.”

SMSF auditors – including their independence – are clearly in the ATO’s sights. In 2018, the agency released a Law Administration Practice Statement outlining matters ATO staff need to consider when determining whether SMSF auditors should be referred to ASIC for possible enforcement action.

Under the Superannuation Industry (Supervision) Act 1993 (SISA), auditors must comply with the auditor independence requirements set out in Sections 290 and 291 of the APES 110 Code of Ethics for Professional Accountants, (the Code of Ethics) issued by the Accounting Professional & Ethical Standards Board (APESB). 

In addition, the Auditing and Assurance Standards Board (AUASB) require auditors to comply with relevant ethical requirements, including independence, as contained in the Code of Ethics, as explained in its Guidance Statement GS 009 Auditing Self-Managed Superannuation Funds. The Code of Ethics also applies to all CPA Australia members.

Fleming notes that auditor independence threats fall into one or more of the following categories:

  • Self-interest threat: that a financial or other interest will inappropriately influence the auditor’s judgement or behaviour.
  • Self-review threat: that an auditor will not appropriately evaluate the results of a previous judgement they made or service they performed, or that was made by another individual within the auditor’s firm.
  • Advocacy threat: that an auditor may promote a client’s or employer’s position to the point that the auditor’s objectivity is compromised.
  • Familiarity threat: that, due to a long or close relationship with a client or employer, an auditor will be overly sympathetic to their interests or too accepting of their work.
  • Intimidation threat: that an auditor will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the process.

According to Fleming, where an independence threat has been identified, the auditor should evaluate the significance of that threat and apply safeguards to eliminate it or reduce it to an acceptable level.  Where appropriate safeguards are not available, the auditor should decline or terminate the audit engagement, in accordance with paragraph 290.7 of the Code of Ethics.

To help SMSF auditors to avoid falling foul of independence requirements, CPA Australia has provided extensive commentary on the issue through articles, podcasts and the Independence Guide issued by the Joint Accounting Bodies, which will be updated in 2019. 

The ATO’s SMSF auditors' professional-to-professional support service (Super P2P service) also provides technical assistance. Its electronic superannuation audit tool (eSAT) helps identify contraventions, together with webinars and other content to ensure SMSF auditors do their jobs properly.

Read next: 6 more threats to auditor independence


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