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ATO flags audit pooling risks

ATO audit pooling risks

Audit pooling arrangements to sidestep restructuring costs and comply with new audit independence standards carries many risks, the ATO has noted in new guidance.

The ATO has highlighted the risks within audit pooling arrangements that some firms may look to use to sidestep the costs of restructuring while complying with the amended auditor independence standards.

Releasing its auditor independence guidance on its website, the regulator warned firms to be wary of such arrangements as a way of mitigating revenue loss while still satisfying the requirements the new APES 110 Code of Ethics for Professional Accountants enforcing restrictions on financial statements and audits being prepared by the same party.

“Depending on how they are structured, [audit pooling] arrangements may give rise to self-interest, familiarity and intimidation threats to independence. These threats will need to be evaluated and addressed if they are not at an acceptable level,” the ATO said.

In particular, the structure of certain audit pooling arrangements and the nature of the relationships between the firms involved could result in the creation of networks of practices, which could lead to further independence issues or the reciprocal auditing of SMSF clients, it stated.

“Even where the arrangement does not involve reciprocal auditing, firms within the pool still need to avoid creating a network of firms within the meaning of the code as the independence requirements will still apply,” it noted.

Highlighting networks formed as a result of structures built on a shared business strategy, it said firms should be cautious of situations where the firms in the pool had an entity overseeing the arrangement and allocated audits among participants.

The same level of caution should be applied in circumstances where there were agreements in place and the terms of those agreements provided that the firms would exclusively audit each other’s clients on an ongoing basis, it pointed out.

“Whether a firm engaged in an audit pooling arrangement complies with the independence requirements will ultimately depend on the facts and circumstances,” it added.

“However, we encourage firms to take care when entering into these arrangements as they are ultimately responsible for ensuring they comply with the requirements. This is the case even where the arrangement is structured through a third-party provider.

“These arrangements will be subject to extra scrutiny by us because of the potential threats involved in structuring a group of firms and the risk of non-compliance.”

In January, ASF Audits head of education Shelley Banton said establishing pooling arrangements among several different accounting firms would not be seen as a satisfactory method of complying with the amended auditor independence standards and that white-label or outsourced arrangements may not meet the standards either.

In response to the auditor independence changes, specialist accounting software firm MyWorkpapers has built a client exchange program for SMSF accounting firms that would also them to retain their auditing arms while not breaching the independence standards.

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