Pooling no independence fix

pooling auditor independence

Pooling arrangements set-up among several accounting firms may not provide a compliance solution with the amended auditor independence standards

An SMSF specialist practitioner has warned establishing pooling arrangements among several different accounting firms will not be seen as a satisfactory method of complying with the amended auditor independence standards.

“I think it would be a serious mistake to think that a pooling arrangement is going to be the holy grail of SMSF auditor independence,” ASF Audits head of education Shelly Banton told delegates during the most recent Accurium technical webinar.

“I know that these types of arrangements are getting a lot of air play, and everybody’s on a quest to find out what the magic number is that is going to make them into a complying independence arrangement, but the issue here is that there is no magic number,” she added.

A pooling arrangement is where a group of accounting firms that have previously relied on Chinese wall arrangements to meet auditor independence requirements, place their SMSF audit clients into a pool to have them re-distributed among the members of group.

According to Banton, the idea this could be a potential auditor independence solution has come about from the directive that referral or reciprocal arrangements are allowable for accounting firms providing administration and book keeping services as well as audit services as long as the referrals are sourced from a good variety of external accounting firms.

However she points out this logic is flawed due to the inherent characteristics of a pooling arrangement itself.

“The application of that safeguard in the reciprocal arrangement is completely different to applying it in a pooling arrangement. The reason is that the safeguard in the reciprocal auditing example doesn’t include distributing clients to auditors who are in a common grouping arrangement with that SMSF auditor,” Banton said.

“So the auditor referred to in that example of reciprocal arrangement must be fully independent and the overriding objective of a pooling arrangement is fee retention or fee agreements which means that the threats to independence [can’t be properly addressed].”

“The other issue to consider here is where the pooling arrangement maybe of such a size that then the cooperative becomes a network.”

Further, Banton warned the ATO is aware of the accounting firms looking to use pooling arrangements as an auditor independence compliance measure and has indicated it will be applying increased scrutiny to these situations.

Accurium head of education Mark Ellem suggested pooling arrangements also come with commercial concerns.

“[If] Firm A contributes 300 funds [to the pool] what’s the guarantee that Firm A will get 300 of the other funds [in the pool] to audit,” he said.

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