SMSF Auditor independence for small-medium sized accounting firms
For some time there has been debate in the accounting community as to exactly what constitutes independence for an SMSF Auditor in relation to small and medium sized accounting firms. The recently released update (Feb 2013) to APES110 provides a clear guide via a number of specific examples for small to medium sized accounting firms.
SMSF Auditor Independence principles
The guid identifies 5 specific cases where independence would be breached:
- An auditor cannot audit an SMSF where the individual auditor has significantly prepared the accounts for the SMSF (APES 110, Sections 290.168 and 290.171)
- An auditor cannot audit an SMSF where staff reporting directly to them have prepared the accounts (APES 110, Sections 290.162, 290.163 and 290.171)
- An auditor cannot audit their own SMSF (APES 110, Sections 290.102 and 290.146)
- An auditor cannot audit the SMSF where a partner within their own firm is a member/trustee of that SMSF (APES 110, Sections 290.124 and 290.146)
- An auditor cannot audit the SMSF where a relative or a related party of the auditor is a member/trustee of that SMSF or where the auditor has a close personal relationship (APES 110, Section 290.127) or business relationship with a member/trustee of the SMSF (APES 110, Section 290.124). Reference to SIS Act definitions for relatives and related party should be considered
Whilst these principles are not new, the examples provided in the guide clarify the difficulty of small to medium sized firms remaining “independent SMSF Auditors” when they also provide other services. Many of the examples, including the following are fully accepted as breaching independence standards and therefore require SMSF audits to outsourced:
- An auditor cannot audit their own SMSF
- An auditor cannot audit an SMSF when a partner within their own firm is a member
- The books are prepared by the auditor – “if the auditor undertakes tax calculations or provides advice to the trustee on how to prepare the accounts, then it is not likely that the independence requirements can be met.” (APES 110 Para 9.4.1)
Practical SMSF Auditor Independence for small/medium firms
However, I still hear many small accounting firms saying they have addressed their SMSF independence issues through the use of “Chinese Walls”. The updated APES 110 specifically addresses some of the common situations seen in practice and points to the difficultly of remaining indepenent and compliant:
- One partner prepares accounts and tax returns and another partner audits the fund – APES notes this will generally only be acceptable where a firm has separate divisions (eg business services/SMSF Administration and Audit) with staff reporting to divisional partners. It goes on to note “Smaller firms with two or three partners would find it difficult to put appropriate safeguards in place”. Some firms attempt to address this by making the client responsible for the accounts and changes made by the firm but APES 110 comments in relation to auditor independence “In an SMSF context it would be difficult to see how these safeguards could actually work in practice, unless the firm is able to demonstrate their assessment that the SMSF trustee had sufficient knowledge of the accounts and any changes, to truly be in a position to take responsibility for them; and that in fact the trustee did take responsibility for them.”
- Sole practitioners “As discussed above, a sole practitioner would not be able to audit an SMSF for whom they have undertaken the accounts preparation.” (APES 110 Para 9.4.2)
- Sole practice with member of staff responsible for preparing the accounts & tax returns – This does not satisfy the standard for independence and the practitioner would not be permitted to undertake the audit. APES notes that sole practitioners would not be able to put appropriate “safeguards in place as all of their staff are essentially reporting to them, and there is no opportunity within the practice to segregate ultimate responsibility for the audit engagement from the non-assurance services. It is not relevant that different staff are carrying out each separate function or that a staff member prepares the accounts that are then audited by the partner. It does not matter if the partner had no role in the preparation of the accounts. The issue is that the reporting mechanisms within the firm are such that all staff ultimately report to the sole practitioner (auditor). Similarly, it would not suffice for the sole practitioner to prepare the accounts which were then audited by a staff member.”
- Firms that provide financial planning advice – APES 110 concludes that independence is unlikley to be possible where a firm has recommended specific products or structures to a client. “If an auditor is assessing the compliance or validity of a particular product or investment arrangement that has been recommended or implemented by the firm, it may be perceived that the auditor would not be independent in undertaking their role ….Despite the fact that they may be extremely knowledgeable about such arrangements,a reasonable person may not perceive them as being independent in making that assessment. It is the absence of independence (or perception of independence) that would require the auditor to decline the audit engagement in this circumstance.”
For more information a copy of the Feb 2013 update to APES 110 “Independence Guide” is downloadable here Independence_Guide 2013 APES110
SMSF Audit Outsourcing
Many small firms find the increased focus on SMSF Auditor independence as confronting or frightening. Some firms are concerned at potential client losses to competitors. Others are concerned as to the potential disruption in their office or how they will explain this change to their clients.
At DIYSuperAudit we are aware of these concerns and have designed out business in conjunction with small practices in order to address these concerns. Specifically:
- We only provide SMSF Audits – we do not provide general audit services, tax advice, SMSF administration or Financial advice. Out only interest is ensuring your practice delivers SMSF services and administration in the most efficient manner
- We have a secure online “click and drag” file upload system to minimise disruption to your office – no strange staff snooping around your office, no bouncing emails, no concerns as to wrong email addresses
- We are genuinely independent thereby ensuring your firm is fully compliant with professional standards and ATO regulations
- Our prices are highly competitive reflecting our specialisation in SMSF audits. We have developed tools and systems to streamline SMSF Audits with these benefits available to you and your clients
- We recognise the advantages of having trustees work with professional accounting firms and the resulting higher quality financial information and compliance standards. We therefore provide more favourable SMSF Audit pricing to professional accounting firms – our competitive fees and professional partner discounts usually offset any additional costs associated with having funds externally audited compared to performing SMSF audits in-house
- We have a strong client service focus and are happy to provide testimonials/references from accounting firms of similar size and profile who are existing DIYSuperAudit clients.
If you are interested in having us provide an SMSF Audit proposal for your firm please request our Professional Partner Pack by clicking on the button and providing a high level overview of your firms SMSF funds.