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ATO, Auditing

Reciprocal auditing may attract ASIC action

Reciprocal auditing ASIC action

Reciprocal auditing arrangements are a risk to auditor independence and the ATO has called for auditors to avoid the practice to prevent ASIC action.

Reciprocal auditing arrangements can compromise independence and are a major risk to the performance of approved SMSF auditors, the ATO has said, warning auditors of increased scrutiny and possible ASIC action if they continue to use such arrangements.

In a statement on its website, the ATO said: “A blatant breach of the requirement for auditor independence occurs where an auditor audits their own SMSF or the funds of close family members. Another area of concern to us relates to auditors who enter into reciprocal auditing arrangements.”

The SMSF regulator stated a reciprocal arrangement, such as one between two auditors where both agree to audit each other’s funds, would pose a threat to auditor independence similar to that of one partner in a two-partner firm auditing an SMSF where the other partner is a trustee.

“The view of both the ATO and the Australian Securities and Investments Commission (ASIC) is that no safeguards can reduce the threats to independence arising from this type of arrangement,” it said.

“Another reciprocal arrangement of concern is where two professional accountants who are also SMSF auditors prepare the accounts for a number of SMSFs and enter into an arrangement to audit the SMSFs of each other’s clients.”

It listed spreading referrals to a number of different SMSF auditors and ending such an arrangement altogether as potential safeguards against auditors compromising their independence and falling foul of regulators.

Highlighting the Accounting Professional and Ethical Standard 110 Code of Ethics for Professional Accountants, it noted arrangements involving self-interest, familiarity and intimidation were all considered to be potential threats to auditor independence.

“Approved SMSF auditors who continue to engage in reciprocal auditing arrangements will be subject to increased scrutiny. Referral to ASIC may result if we consider SMSF auditors have failed to meet the independence requirements,” it said.

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