ATO, Auditing

Outsourcing may not ensure audit independence

outsourcing auditor independence

Auditing firms enlisting the accounting services of other businesses to comply with the amended auditor independence standards should proceed with caution.

The ATO has warned SMSF auditing firms that outsourcing non-auditing services to a specialist third party in an effort to comply with the amended auditor independence standards may not constitute compliance with those requirements.

In the auditor independence guidance recently released on its website, the regulator pointed out firms looking to outsource accounting or bookkeeping services to a specialist firm in order to meet the requirements of the new APES 110 Code of Ethics for Professional Accountants should not assume such arrangements would be compliant with the code.

Regardless of the specialist firm being enlisted by the outsourcing accountant, and not providing accounting services to the trustees of the fund directly, engaging in this type of arrangement could still mean the auditor independence requirements of the code enforcing restrictions on financial statements and audits being prepared by the same party could fail to be met, the ATO warned.

“If the specialist firm conducts the fund’s audit, or the audit firm is a ‘network firm’ of the specialist firm, the specialist firm and/or the audit firm still need to comply with the independence requirements of the code,” it said.

“The fact that the accounting services may be provided by the specialist firm to the outsourcing accountant and not directly to the trustees under the arrangement does not change this. We consider that the services are still being provided to the SMSF audit client.”

It pointed out specialist firms in these arrangements would only be allowed to prepare the financial statements for an SMSF audit client if the service was considered ‘routine or mechanical’ and the firm addressed independence threats created by providing that service by either eliminating the circumstances creating the threats or applying appropriate safeguards.

“Whether the outsourcing arrangement complies with the independence requirements will ultimately depend on the circumstances. This includes the individual service agreements between the trustee(s) and their accountant, and the accountant and the specialist firm, and how these agreements are implemented in practice,” it said.

“We cannot provide any definitive or binding guidance on these arrangements in the absence of a complete analysis of the facts and circumstances of a particular case. We are only likely to undertake this type of analysis where we engage in a compliance review.

“We do not think these arrangements are within the spirit of the code so we will be closely scrutinising these types of arrangements because of the independence threats involved and significant risk of non-compliance.”

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