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Auditing

Challenging sector integrity

The federal government’s proposal to enable SMSFs with a good compliance and return lodgement history to switch to a three-year audit cycle took the industry by surprise. Belinda Aisbett explains why the measure may ultimately damage the integrity of the sector.

Now that the dust has settled somewhat on the shock announcement by the government in its 2018/19 budget to amend the annual audit requirement for SMSFs, I have been able to take a step back and see what the big picture issues will be.

SMSFs are currently required to be audited each year by an Australian Securities and Investments Commission-approved SMSF auditor. The proposal is to move to a three-year audit cycle. It has been touted as a cost-saving measure, a reward for compliant SMSF trustees, but how exactly is deferring the audit process for a three-year period going to save costs for the trustees of the fund?

There is currently little detail as to what the proposed measure will actually look like and how it will be rolled out, however, one thing clear to me is that regardless of how many funds are affected, the integrity of the SMSF sector will bear the brunt. At least one collective sigh of relief came with the confirmation there was not a two-year audit holiday. The proposal is to have each financial year audited, but to have the audits deferred and bundled into one audit covering three financial years.

As a specialist SMSF auditor, I have been contacted hundreds of times with concerns regarding the integrity of the system if SMSFs are to go unaudited for an extended period of time. Accountants and advisers have raised concerns with me that their clients will use this three-year window to access their superannuation early, presumably on the basis that it will be better to beg for forgiveness after the event rather than comply with the requirements each financial year.

The concerns are so significant the industry has established an SMSF Auditors Lobby Group and we have prepared a submission to document the collective concerns of those who have joined the organisation.

Initially our concerns were:

1. There will be trustees who may attempt to take advantage of no audit scrutiny for a two-year period and who may attempt to circumvent the Superannuation Industry (Supervision) (SIS) Act and regulation compliance requirements applicable to their fund.

The advice from accountants to date reflects exactly this risk – SMSF trustees are contacting them excitedly noting they can now do as they please for at least two years before the auditor will review their activity. Even if these funds fall under the ‘reward’ criteria, clearly this attitude should raise concerns and speaks to the very real risk of the integrity of the sector.

2.There will be no cost savings (as suggested) with the bundling of three audit years.

Undertaking three financial year audits at the one time will derive minimal economies of scale and, in fact, it is predicted audit costs will actually increase because of this proposed measure. The factors impacting this are multiple, and include:

  1. based on our experience, trustee retention of information will be poor and attempting to obtain historical documentation will add time and therefore cost to any audit undertaken,
  2. trustee recollections to explain transactions or events possibly four years earlier will be problematic,/li>
  3. attempting to source historical information on asset valuations will be time consuming, adding to the cost of the audit,
  4. auditing prior year financials (that of course will still be required to comply with the SIS Act and enable the tax return to be prepared and lodged) will inevitably identify errors, resulting in time spent preparing and lodging amended tax returns and other superannuation reporting. This will increase the workload for not only auditors, but accountants, trustees and the ATO, and
  5. practice overheads for auditors will somehow need to be maintained to ensure adequate staffing levels, to ensure continuing professional development is achieved and mandatory insurance is maintained – to name a few areas of concern.

An analysis of fees by some of the lobby group members identified zero cost reduction when undertaking three financial year audits at one point in time, with most noting an increase in fees of about 15 per cent for the bundled audit work.

If trustees decide to push their SIS Act compliance, audit fees will only increase due to the additional review, rectification and reporting-time compliance issues inevitably created.

It has been mentioned auditors are simply rallying on the basis of self-interest, however, given we anticipate our fees will increase, this claim is baseless.

3. Where an auditor identifies a compliance issue in say year one, the auditor may be required to bring this to the attention of the ATO, however, in many instances, this matter is only required to be addressed with the trustee directly.

A bundled audit cycle will mean these communications are not done in a timely manner and would create the following issues:

  1. there will be increased reporting to the ATO in year two and year three (and year four) as prior year and ongoing issues remain unidentified and unrectified by the trustee,
  2. increased ATO reporting will result in increased audit time, and therefore costs in connection with the year two and subsequent year audits. Additional ATO resources will therefore be required to review a greater number of auditor contravention reports, and
  3. attempting to source historical information on asset valuations will be time consuming, adding to the cost of the audit,
  4. trustees are at a greater risk of being penalised by the ATO for breaching compliance obligations in their fund, even if these matters are inadvertent.
  5. Auditors play a key role in trustee education.

To delay the annual audit waters down this key relationship.

5. Safeguarding of assets (via a review of asset titles) is a key audit check.

It is essential assets are held on trust for the fund. Delaying this audit check for a three-year period introduces the real risk that superannuation assets may be unprotected from administration or bankruptcy proceedings.

6. Fraud risk will increase for SMSF trustees.

An audit can, and does, identify fraud in an SMSF. Delaying the audit for a three-year period will clearly delay the identification of fraudulent activity.

7. The risk of elder abuse is amplified where the audit is delayed.

Auditors play a key role in identifying the early warning signs of elder abuse, and to delay the audit removes the review necessary to identify those at risk of elder abuse as early as possible. It has also been flagged that elder abuse will increase with the expansion of SMSF numbers from four to six members.

We have acknowledged that cost saving for the industry is a positive goal and, to this end, our submission has identified three areas that could be reviewed to assist in reducing audit fees for an SMSF. These include removing the need for certain minor contraventions to be reported to the ATO and removing the need for the auditor to review certain documentation throughout the audit. Both these suggestions would save time. Further, we believe consultation with standard setters with the goal of designing more relevant and efficient mandatory auditing standards applicable to SMSF audits would assist in reducing audit fees.

"It has been touted as a cost-saving measure, a reward for compliant SMSF trustees, but how exactly is deferring the audit process for a three-year period going to save costs for the trustees of the fund?"

Belinda Aisbett

Moving forward

Discussions with Treasury suggested only a small number of SMSFs would fall under the ‘reward’ criteria and be eligible to delay their annual audits. The criteria are yet to be established of course, however, it was discussed that any fund with the following should be precluded from the delay of their annual audit:

  1. Death of a member.
  2. Related-party activity, whether it be property leases, related-party trust investments or acquisition of assets.
  3. Limited recourse borrowing arrangements.

It should be noted a new SMSF will need three years of clean audits before it might otherwise be eligible to bundle its audits.

Auditors are aware many of the compliance issues identified during the audit are not required to be communicated to the ATO, and fewer still warrant a qualified audit opinion. However, the ATO and government need to be aware that what might seem to be a compliant fund may not be if you scratch below the surface. In addition, lodgement of the annual return should only be done after the completion of the annual audit, however, it is (unfortunately) a regular occurrence in this industry for the tax return to be lodged on time when the audit is still outstanding.

If the proposal is to be rolled out, the government will also need to consider who is responsible for advising the ATO of the completion of the audit process and what compliance issues are to be communicated to the tax office.

I think overall it is important to remove the premise that the audit is simply a red tape annoyance and focus on the integrity of the system. To remove or delay the audit would be akin to only putting a speed camera on the road once every three years and expecting the level of speeding drivers to remain at present-day levels. Without timely, annual audits, the integrity of the system will surely falter and the entire SMSF sector should be keenly aware of the implications a loss of integrity will have.

It is the goal of the lobby group to firstly attempt to have the proposed measure abandoned, but failing that, we would like to ensure a minimal number of funds meet the deferral criteria for all the reasons noted above.

We will also campaign that should the measures go ahead, independent reporting of audit obligations and compliance issues is implemented. Further, we would hope there is a staggered rollout of any funds that might be eligible to ensure there is minimal impact to auditor workflows. This would be essential to ensure auditors can manage and maintain qualified staff and the overall practice issues this proposal creates.

Anyone interested in adding their voice to our lobby group is welcome to contact me at [email protected]

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