Reciprocal auditing will be under scrutiny

Reciprocal auditing arrangements

Auditors entering into reciprocal arrangements may have no way of reducing the threat to independence, the ATO has warned.

Reciprocal auditing arrangements are a major threat to independence and auditors involved in such arrangements will be subject to increased scrutiny, the ATO has warned.

Highlighting arrangements where two auditors with their own SMSFs agree to audit each other’s funds, the regulator said auditors entering into such an arrangement would have no way of reducing the threat to independence.

“The threat to independence is similar to the scenario of a two-partner practice, in which one partner is asked to audit an SMSF where the other partner is a trustee,” it said in an update on its website.

“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.”

In addition, it pointed to arrangements where two professional accountants who are also SMSF auditors might prepare the accounts for a number of SMSFs and enter into an arrangement to audit the SMSFs of each other’s clients.

Safeguards against these types of arrangements could include ending the reciprocal arrangement or spreading the referrals to a number of different SMSF auditors, it said.

Citing the Accounting Professional and Ethical Standard 110 Code of Ethics for Professional Accountants, it noted potential threats to independence in a reciprocal audit arrangement could include self-interest, familiarity and intimidation.

“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 added.

In October, the ATO stated it would not be enforcing the new auditor independence standards for the 2021 financial year and would instead allow a transition period for accounting firms and auditors to adjust to the changes.

Earlier that month, it cautioned practitioners looking to establish a breakaway company to continue to perform SMSF audits for clients serviced by their former employer that such a move was unlikely to be considered a successful strategy to adhere to the new auditor independence standards.

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