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Accounting, Auditing

Auditor links with accountants must be clean

Auditors ex-employee accountants

Auditors using former employees to complete financial statements for SMSF clients will fall foul of independence standards.

Auditors planning on working with third-party accountants to maintain their independence under new standards will be unlikely allowed to do so if either party is an ex-employee of the other, an SMSF legal expert has claimed.

DBA principal Dan Butler said the new independence standards for SMSF auditors would view ongoing commercial relationships between auditors and accountants unfavourably where they had worked together in the past, regarding them akin to an ongoing employer/employee relationship.

Pointing to the APES 110 Code of Ethics for Professional Accountants, Butler highlighted a scenario where an auditor uses a contractor who is an accountant and tax agent, as well as an ex-employee, to prepare the SMSF client’s financial statements and tax returns, while the auditor performs the audit for the fund.

“The contractor, being an ex-employee, would be considered a threat in this case to the auditor’s independence,” he said in a recent webinar.

“There is a period of time that suggests if the contractor was really an independent contractor, that arrangement could be sustainable, but if the contract is a recent departure from the auditor, there’s a familiarity and other threats to independence that could arise in that scenario.”

He said this issue could be managed with appropriate safeguards, but auditors had to apply multifactor tests to ensure they were in safe territory when dealing with a former employee.

“The threats to consider in this case with the contractor would be familiarity. Is there a close relationship? Is there a period of time for that relationship to subside to become more acceptable?” he said.

“Is there a dependency on fees and is this contractor just one of many in use to prepare the financial statements on behalf of the auditor or is there a financial reliance on that relationship?”

Auditors and accountants needed to be aware these relationships would be reviewed under the new standards and they may still be viewed as if they were working together, he said.

“In this case, even though the contractor is now independent, being a former employee – and given the relationship the standards really look at – this is much the same as the employer/employee relationship, where the employee would be seen as under the intimidation threat,” he said.

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