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Falling into line

On 31 January, ASIC’s online register for SMSF auditor applications officially opened as part of the federal government’s Stronger Super reforms. Krystine Lumanta investigates how the initial stages of the process have gone.

The new Australian Securities and Investments Commission (ASIC) regime asks auditors to complete an online registration, with approval dependent on competence through qualifications and proof of experience via additional supporting documentation.

The deadline to be registered as an SMSF auditor expires on 1 July, however, the corporate regulator has strongly advised applicants to apply by 30 April to allow enough time for applications to be assessed by 30 June. If registrations are not finalised by 1 July, practitioners will be prohibited from conducting SMSF audits and it could also result in penalties.

By April, ASIC says around 3800 applications were received and 2056 SMSF auditors had been approved. It has expectations of 6000 applications over the registration period.

With just over a month to go, concerns have been raised about the success of the process itself, as well as potential implications for the industry post 1 July, including a decrease in the quality of auditors.

Problems with the process

At this year’s SMSF Professionals’ Association of Australia conference, ASIC commissioner Greg Tanzer admitted while the online registration process was straightforward, certain problem areas had been identified around supplying additional documentation and that had forced the regulator to look at making improvements.

Some of the major accounting bodies have confirmed the situation.

Institute of Chartered Accountants in Australia head of superannuation Liz Westover believes her members will meet and satisfy ASIC’s requirements within the deadline.

However, a trouble spot has been the communication with applications, particularly to those who didn’t easily tick all of the ASIC boxes, according to Westover.

“If they couldn’t meet a particular request, they didn’t know what to do next, so there was a bit of panic around not being registered because they couldn’t provide a copy of their transcript, [for example],” she says.

“It’s not the end of the line if you can’t tick all the boxes. But the communication to those people wasn’t brilliant in terms of conveying that there are other options available to people.”

Institute of Public Accountants chief executive Andrew Conway envisages a large proportion of the 3600 practices in its network will be engaged in SMSF audits. 

Conway says the professional body is watching out for issues specifically around ASIC’s ability to process a large number of applications, which is certain to hit a bottleneck at some point.  

“It’s one of those cases that could very well be a sleeper of an issue – 30 June may well creep up on the applicants if ASIC are taking a while to process them,” he says.

“The perception here is that once a person has lodged their application they’ll be treated [correctly]. The concern we would have is that if ASIC came back and had issues with an application or had questions to ask of applicants, that they should do that as quickly as possible.”

He also refers to the implications on the time and cost to individual practices and their businesses where training or knowledge gaps are evident. Some courses may result in significant costs some auditors are not prepared to incur, let alone be able to afford, he says.

“We are hearing some of those issues bubble up, but they’re not in the majority of cases. Again, it is that notion of concern about how an applicant actually meets the requirements,” he says.

SMSF Audit Specialists principal Peter Davis underwent the SMSF auditor registration and describes the experience as relatively easy and simple.

“I was lucky enough to be involved in a pre-registration focus group of people with ASIC and after reading all the documents before Christmas, I found the process very simple,” Davis says.

“I was well aware of what had to be provided, gave everything upfront and was approved extremely quickly.”

Nonetheless, he points out obtaining the correct information from his professional indemnity (PI) insurance provider and academic records was a challenge.

“Most of the PI insurance companies weren’t aware of what ASIC was doing so they made very little attempt to get their policies in alignment because they must cover SMSF audits. There are about 30 companies and I think only five or six were up to date,” he says.

He believes some of the industry’s grievances against ASIC’s procedure are unwarranted.

“The most essential part was filling in the forms – if you didn’t fill in the forms properly, then it was going to be an obstacle,” he says.

“I think there’s a complacency in the auditing profession. A substantial amount of applications did not have the required documentation and so if accountants are inept and can’t complete the documentation, one must wonder how they could be considered an SMSF auditor.

Quality of audtors

According to former Labor senator and superannuation minister Nick Sherry, the approach taken by the government will provide a robust oversight of the sector, bearing in mind SMSFs are not regulated or supervised, but effectively report via notification to the Australian Taxation Office (ATO).

“The ATO is heavily reliant on the role of the auditor, so it’s an indirect form of supervision, [hence] very different from an APRA (Australian Prudential Regulation Authority)-regulated fund,” Sherry says.

Whether or not there will be a rush to the finish line, Westover says the number of applications is indicative of the need to get on with the process.

Davis is hopeful the standard of auditing and the checking of SMSFs will dramatically improve after 1 July.

Evolv managing director Ron Phipps-Ellis raises concerns over ASIC’s due diligence process on the applications it’s receiving, as the level of scrutiny hasn’t been made evident.

“Was there a proper data matching of the names of auditors who have physically lodged audit reports to the ATO to what they’re saying on the application process?” Phipps-Ellis says.

“Being such a critical piece of the superannuation puzzle, it’s unknown to me what their control process inside of their own allotment of these approvals actually is. A bit of publicity by ASIC to give assurance to the people that are qualified is important.”

In addition, he expresses surprise at the transitional arrangements for existing approved auditors, whereby any auditor who has signed off on at least one SMSF audit in the prior 12 months will not be required to meet the 300 hours experience component.

The transitional period ceases on 1 July.

“Item one states that you can sign off one SMSF audit to qualify,” Phipps-Ellis says.

“I’m disappointed for people who have extensive experience and someone who has very little experience can just come through automatically with those three layers [in the transitional arrangements].”

Furthermore, these requirements along with ASIC’s scrutiny level demonstrate a focus on quantity rather than quality, he says.

“It’s disappointing to not have that bar raised further.

Registration effect on auditor numbers

The gap in the number of auditors post 1 July compared to the 11,000 approved auditors currently conducting financial and compliance audits for SMSFs could be an indication of the new process’s success in terms of quality assurance. The main question lies around whether the new auditor population will be able to physically service the 478,000-plus SMSFs currently in existence.

Conway says the approach to the registration was always going to be a major factor that would influence auditors’ decision to submit their application.

“That’s the point we’ve been making all along. We want to avoid a mass exodus. If it’s all too complex and costly, they won’t register,” he says.

ASIC commissioner Peter Kell says he’s confident the industry will have an auditor population able to service the growing industry.

“We would expect that, as with other service providers in this sector, there’s strong growth which in turn generates the sort of demand we would expect would bring new players into the area,” he says.

“As long as they can satisfy the licensing and competency requirements, that’s good.”

ATO superannuation assistant commissioner Stuart Forsyth believes ASIC is tracking well, as the pace has picked up to somewhere between 80 and 100 registration approvals a day since commencing.

“[ASIC commissioner] Peter [Kell] wasn’t crowing about it, but if it was me I’d pretty happy about that because it is only April and they set up those teams in January to be operative effective 1 February,” were Forsyth’s comments at last month’s CPA Australia SMSF Conference and Expo.

“If it was me running that team, I’d be giving myself a gold star.

“People are a little bit worried about where the numbers are going to stabilise or where it’s going to finish, but it will go where it needs to go. In the end, we can’t make auditors apply for registration.”

Equally, he says there are fears trustees won’t be able to get an auditor.

“The conversations we’ve had, with the larger auditors in particular, they say they can gear up, they can do more and if they’re given the work, they’ll find a way to get it done,” he says.

As the ATO can no longer disqualify approved auditors, it is preparing some referrals to ASIC for approval of cases that were already in motion, he reveals.

He adds the ATO will still participate in auditor work where there is evidence of misconduct.

Phipps-Ellis says the registration process is an opportunity for new entrants into the marketplace, but there will be a question mark over whether they are appropriately qualified.

Nevertheless, Westover believes registration will vastly improve the standard across the board for auditors due to those previously completing low numbers of audits choosing not to go through the process.

“There are approximately 11,000 approved auditors at the moment and I’m anticipating only half of those will go through the ASIC registration process,” she says.

“There will be a number of people who will say, ‘I’ve only audited two or three funds in previous years and I would rather find an external auditor or another auditor for those particular clients’.

“That’s a good thing because if we have a lesser amount of experienced auditors conducting a greater number of audits, the experience base and average level lifts significantly.”

She says there has been a good lead time for practitioners to work out what they want to do in the future, including whether to offer SMSF audit services and if so, who within the firm will participate.

Effect on external audit practices

However, the time frame to meet these minimum requirements is resulting in some practices delaying their decision to outsource their audits and keep them in-house, according to Phipps-Ellis.

“They want to bring their internal people through. Did ASIC contemplate that possibility and what the effect of that might be going through to future years? So is independence being impaired?” he says.

“The big issue with outsourcing has always been loss of revenue and what their attitude will be to replacing that revenue. That’s been the biggest barrier to smaller practices serving 20 or 30-plus SMSFs.”

In addition, he questions the effect pricing is having on auditor registration.

“Is there a proliferation of audit practices slashing and burning prices in order to get market share and take advantage of [the registration process]?” he says.

He believes pricing will absolutely come into play next year.

Meanwhile, the registration process continues as the industry awaits the introduction of the new auditing regime on
1 July.   

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