ATO Targets SMSF Auditor Independence

The ATO is targeting SMSF auditors who continue to defy the independence rules. As part of its risk assessment program, the ATO is reviewing high-risk auditors with independence issues involved in reciprocal audits and those who have single-source referral income.

In a significant move, three SMSF auditors were referred to ASIC by the ATO and suspended for breaching the independence requirements by auditing thousands of funds from a single referral source.

The decision by ASIC highlights the risks associated with SMSF auditors relying on one client for all of their audit assignments. Such dependency can compromise their objectivity and impartiality, leading to potential conflicts of interest. 

The suspension serves as a reminder to all SMSF auditors to diversify their referral sources and adhere to the highest standards of professional conduct.

APES 110 Code of Ethics

In January 2020, APESB revised the APES 110 Code of Ethics for Professional Accountants, including independence standards (“the Code”).

The Code stipulates that if the total fees from an audit client represent more than 30% of the total fees received by the audit firm for five years, there is a concern about the potential loss of fees, creating a self-interest and intimidation threat that may not be eliminated.

The ATO has released guidance on the conceptual framework of audit independence, identifying that firms with a large proportion of fees coming from one referral source, such as under a reciprocal arrangement or where an SMSF auditor predominantly has one large client, may be unable to eliminate an independence threat.

The suspended SMSF auditors received more than 99% of their overall fees from an online SMSF administration provider that assists SMSF trustees with their tax, accounting and audit obligations.

Reciprocal Auditing Arrangements Between Firms

The ATO also targets reciprocal auditing arrangements between two (2) firms, where each firm prepares the financials in-house and enters into an agreement to audit each other’s SMSF clients.

Such arrangements give rise to self-interest, intimidation, and familiarity threats, which include each auditor being sympathetic to the other’s interests or too accepting of the other’s work.

The problem is that reciprocal auditing arrangements do not pass the pub test because a reasonable and informed third party would consider the threats to independence in this situation to be at an acceptable level and would need to be addressed by the auditors.

Safeguards to SMSF Auditor Independence

To safeguard independence, SMSF auditors should spread out the referral of clients to several different SMSF auditors, which would minimise the dependence on one source.

Engaging external quality control reviews or external consultation on critical audit judgements can also help.

Increasing the client base, although challenging, is another way to mitigate self-interest and intimidation threats.

The most significant issues from these types of threats are the total fees generated from one client or multiple clients referred from one source, representing a large proportion of the audit firm’s total fees.

The reason is that the audit firm depends on the source and is concerned about losing clients.

If the threats cannot be eliminated and appropriate safeguards are unavailable, the auditor must decline the engagement and end the arrangement.

Conclusion

The ATO’s enforcement of independence standards ensures that SMSF auditors remain unbiased and independent.

The move sends a clear message from the ATO regarding their expectations in applying the Code’s conceptual framework and meeting the SMSF auditor independence requirements.

As the co-regulator, ASIC will continue to work with the ATO to take action where SMSF auditors fail to evaluate and address threats to their independence.

The move is expected to strengthen the overall governance and transparency within the SMSF industry, ultimately protecting the interests of SMSF members.

Read more articles in our SMSF auditor independent series.

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