ASIC recently announced that seven (7) SMSF auditors with independence issues were either deregistered or had a condition placed on their registration.
It’s beyond belief that SMSF auditors continue to be pinged by the Regulator for auditing their own, or a related party, fund in 2019.
The ATO has addressed their concerns surrounding independence by announcing a renewed focus on independence breaches for SMSF auditors which include reciprocal auditing arrangements.
While it’s true that the number of fundamental independence cases has decreased since the ATO first started reviewing in 2013, there were still 10 SMSF auditors disqualified in 2018 for not being fit and proper persons and in 2019, a further 37 SMSF auditors have been referred to ASIC.
Blatant Independence Issues
The type of independence issues the ATO have traditionally been most concerned about are those with self-review and self-interest threats, such as where the SMSF auditor is the registered tax agent and involved in preparing accounts and statements for the SMSFs they audit.
It would be difficult to believe that a situation of this type would be perceived by an independent third party to be independent. Accordingly, there are no safeguards available which would enable any practitioner to audit their own work, meaning they must withdraw from either the accounting or audit engagement.
Through risk profiling, the ATO can now determine whether an SMSF auditor is auditing their own work, a related party fund or that they have a potential lack of SIS knowledge where no auditor contravention reports are being lodged.
It’s evident that independence issues such as these would result in the auditor being in clear breach of their professional and ethical obligations.
Hidden Independence Issues
One of the most common independence issues hidden by firms is where they offer both financial advisory services and SMSF audit services to the same client.
When one hears the SMSF audit partner of an accounting practice with this business model stating there’s no way their firm is giving up SMSF audits unless the ATO comes knocking, it’s apparent that some SMSF advisers still see independence as a dirty word.
According to the Joint Accounting Bodies Independence Guide, where a firm is receiving remuneration under structures such as commissions or asset-based remuneration, it would be difficult for smaller firms with two or three partners to put appropriate safeguards in place to overcome threats to independence.
This is mainly because the auditor’s income is directly linked to the financial advice given and under this scenario, the SMSF auditor would need to consider declining the audit engagement.
Even if the firm ceased to offer financial advisory services, the auditor would still face the same independent risks as the product recommendations, and investment decisions would continue to remain in place the following years.
Safeguard Independence Issues
The biggest challenge to true independence is the perceived loss of a revenue stream. This mindset, however, ignores the opportunity cost of freeing up resources to concentrate on more profitable core activities, such as providing financial and business advice.
In some situations, implementing safeguards may reduce the threat of independence to an acceptable level.
Assisting an audit client by providing accounting and taxation services may create a self-review threat even when the services are of a routine or mechanical nature. Threats of this nature may be reduced to an acceptably low level by applying safeguards such as ensuring that accounting services are not performed by a member of the audit team.
The harsh reality is some firms continue to engage in activities that compromise independence without considering or documenting any of the available safeguards to independence.
Problems also arise when SMSF auditors believe that safeguards exist for all situations, such as when the firm’s staff make management decisions for the SMSF through the provision of administrative services.
Under these circumstances, there are no safeguards available to reduce this self-review threat to an acceptable level, with the only possible action to withdraw from either the administration or audit engagement.
Given that independence is now high on the ATO’s radar, those SMSF advisers still running the gauntlet face a high risk of being targeted in the ATO’s compliance program.
The path to independence can be hidden when an SMSF audit is viewed as merely a revenue stream. It’s about time questionable practices that hamper true independence were stamped out to enable SMSF auditors meet their obligations under professional standards and ethics.
Independence is no longer a dirty word.