Many SMSF trustees and advisers could be forgiven for thinking that recent developments in technology mean that SMSF auditors no longer add any value to the audit process.
Nothing could be further from the truth.
The changing face of technology in SMSF audits may have refined some of the more tedious tasks, but the professionalism and experience of an SMSF auditor will never be replaced.
The use of technology has been making SMSF audits easier ever since the introduction of Excel spreadsheets in 1987. This made processing large quantities of data quicker and clients much happier.
Nowadays, the word “technology” has been replaced by “digital disruption”, which builds on the concepts of simplifying processes and providing client satisfaction by interconnectedness. Billions of people are now rapidly connected by mobile devices, which has fundamentally changed the way in which businesses and clients interact.
Regardless of the pace at which technology moves, the auditing standards and SIS legislation that underpins the audit process ensure that technology and audit quality will never be a perfect match.
One of the reasons for the mismatch is that while the financial audit has been automated to a relatively high degree, the compliance audit involves stringent checks and balances over the operations of an SMSF against the complicated SIS legislation.
In 2016, the ATO said they would be concerned if they saw “SMSF auditors not necessarily providing their skill and judgement, just relying on the automated process to do the finance checks, and then not actually turning their mind to the regulatory issues.”
One of the benefits of technological advances in audit is the ability for advanced analytics to make it possible to rapidly analyse far larger, more complete populations of financial and non-financial data. This will allow the auditor to draw a deeper, more robust understanding of potential risks.
The bottom line is that cognitive technology will help SMSF auditors to drill down to examine underlying transactions and the details that help to explain why something deviates from the norm.
This means that the audit can start earlier and resources can be focused on high-risk items and those where more judgement is required.
SMSF Audit Expectations
One side effect will be that clients and the regulators will expect more from the audit regarding its scope and value.
However, building such a process takes time and resources. There is no benefit in rushing to market with a service (or using a service-provider) that tarnishes the reputation of an SMSF auditor, just to be the first.
Ensuring that a high-quality audit continues to be provided from an automated platform will require SMSF auditors to develop a new skill set to use advanced tools such as data and analytics, robotic process automation and cognitive intelligence to manage processes, support planning and inform their decision-making.
The experience of the SMSF auditor should not be underestimated as they instinctively know whether a transaction has passed “the smell test” or not. Also, more complicated investments will always require the auditor to undertake more rigorous testing and potentially ignore a system-generated green flag.
There are investments that will require continual scrutiny by the SMSF auditor including related unit trusts and unlisted companies to name a few. One common example is when a fund purchases property as a going concern and is GST-free.
What Can Go Wrong?
Things can start to go wrong when the purchase price of the property is booked in the fund’s financials excluding GST.
This happens in the blink of an eye, especially when the fund is registered for GST and the SMSF software processes it as a standard transaction. The GST is reversed out of the asset account and recorded as a separate asset called ‘GST refundable’.
Under these circumstances, fund financials have to be amended with the property re-booked at the full purchase price without the corresponding GST refundable. Where this isn’t picked up, the SMSF may face issues such as:
- a breach of r8.02B SISR with an incorrect market value of property asset/s in fund financials
- triggering an ATO tax audit that may result in penalties and interest charges
When the fund has already claimed and received the GST from the ATO, it’s imperative that the error is found and rectified as soon as possible.
It is important that SMSF auditors remain focused on the fine details and not rely on software to ‘get it right’, as this approach may bring significant problems in the future.
SMSF auditors are living through an unprecedented era of rapidly changing technology, with many feeling as though they are in a race to the finish that they never entered in the first place.
The anomaly is that while the industry continues to revolve around technological development, SMSF trustees have yet to demand “real-time audits” from their auditors.
This doesn’t mean that SMSF auditors should ignore the leaps that are being made in automated audit or administration platforms. Like all advances in technology, users will have to adapt or get left behind.
The commoditisation of SMSF audit and the industry, in general, will ensure that quality SMSF auditors continue to find their niche in the market and thrive.