Misaligned strategies will create audit delay

investment strategy audit delay

In order to prevent an audit delay down the track, an SMSF’s investments must align with its investment strategy, an audit expert has said.

Ensuring the investments of an SMSF actually align with the fund’s investment strategy is key to preventing an audit delay down the track, an audit expert has said.

ASF Audits head of education Shelley Banton noted the situation where trustees did not give full effect to their investment strategy and their fund’s investments lay outside its stated asset allocation ranges as a result was one of the most common problems faced by auditors.

“There may be good reasons why those ranges are different, such as the fund’s cashed-up and ready to invest in property, but if the investment strategy states that it has a minimum 50 per cent investment in shares, for example, but it’s all in cash, your auditor is going to ask why,” Banton said today during the virtual SMSF Association National Conference 2021.

“That’s going to hold up the audit and it’s going to cause delays to completion.”

She pointed out trustees could provide a short-term reason for the discrepancy that might prove to be acceptable from an audit perspective, but it would not be a “get-out-of-jail free” response.

“There needs to be a good reason why [the asset allocation from the investment strategy ranges varies]. It needs to be reasonable and it can’t continue year after year,” she noted.

“The reason for that is that the auditor has to document the trustee’s response. So we should either be getting a revised investment strategy or some sort of advice [as to] when the asset allocation or the investments of the fund will be returned to meet the conditions of that original investment strategy.

“From a best practice point of view, it’s probably not ideal to just embed that information in your annual minutes because you may have difficulty trying to find it in future years if there was an ATO audit.”

Trustee compliance with investment strategies has become a key area of focus for the ATO after it wrote to 17,700 SMSF trustees in late 2019 regarding the lack of diversity within their portfolios.

In February 2020, the ATO released guidance for trustees warning them not to use cookie-cutter approaches and to have clear reasons why investing in an asset would achieve their retirement goals.

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