The role of an independent auditor

As described by the ATO, SMSF auditors play a critical role in helping to maintain the health and integrity of the SMSF sector, which is increasingly becoming an important part of the overall superannuation system.

This is mainly achieved by the reporting of contraventions to the ATO, being actively involved in the rectification of any identified issues and providing guidance to trustees and SMSF professionals in relation to record-keeping and other technical SMSF matters.

The 2016 financial year was one of continued scrutiny by the ATO and ASIC in relation to SMSF auditors. It saw the cancellation of 133 SMSF auditor registrations in July 2016, as well as ATO questionnaires being sent to SMSF auditors in relation to independence. As a new audit season approaches, it is a timely reminder for all SMSF auditors to review their requirements in relation to independence.

Section 128F(d) of the Superannuation Industry (Supervision) Act requires auditors to comply with the independence requirements as prescribed by the “regulations”. This is also echoed in paragraph 16 of guidance statement GS009 issued by the Auditing and Assurance Board, which provides guidance in relation to the auditing of SMSFs. GS009, as well as guidance from CPA Australia and the Institute of Chartered Accountants, thankfully provides a little more clarity than the legislation in relation to the independence requirements by citing the code of ethics outlined in APES 110, as well as the competency standards for approved SMSF auditors under ASIC Class Order 12/1687.

Specifically, ASIC Class Order 12/1687 requires an SMSF auditor to gather information about a fund to ensure an objective assessment can be made regarding independence, as well as making an assessment as to whether they possess the knowledge and skill required to undertake the engagement adequately.

APES 110 defines independence as being:

• independence of mind – the state of mind that permits the expression of a conclusion without being affected by the influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism, and

• independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit or assurance team’s, integrity, objectivity or professional scepticism has been compromised.

Section 290 of APES 110 provides further detail in relation to these two concepts and looks specifically at how independence may be affected by arrangements involving:

• related entities,

• financial interests in the audit client,

• close business relationships with the audit client,

• a long association of senior staff with the audit client, and

• fees that are large in relative size to the overall fee base of the auditor, overdue fees and contingent fees.

So where does that leave us with common situations observed in the SMSF space, such as Chinese walls and low fee quoting?

The Chinese walls approach, where the accounting and auditing of an SMSF is conducted by different divisions of the same accounting firm, has been existent in the profession for some time. While procedures are generally put in place to remove conflicts of interest, it is becoming increasingly difficult for firms to argue that they have been able to demonstrate either independence of mind or independence of appearance, regardless of their size. This remains open to debate, however, the ATO has made it quite clear by targeting these types of arrangements in their independence questionnaires that they are a clear threat to an auditor’s independence.

A number of accounting firms previously operating within the Chinese walls structure are now establishing relationships with independent auditors in order to comply with APES 110. A direct consequence of this, however, is the impact on revenue previously generated by audits. In addressing this, some firms are establishing reciprocal arrangements with other SMSF auditors to neutralise the impact on revenue. These types of arrangement also appear to be outside the independence requirements contained within APES 110.

With regard to fees, the SMSF industry continues to see competitive pressures placed on pricing. While questions always arise around the quality of an audit conducted under a low-fee arrangement, questions will also be asked in relation to auditor independence. The ‘low-balling’ of fees may be an indication that an auditor’s independence has been compromised in order to secure an audit contract or to open up other potential revenue opportunities. SMSF auditors need to be able to demonstrate the quality of an audit, through adequate resourcing and sufficient independence, is unaffected by a low-fee business structure.

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