The ATO’s stance on fee dependency as outlined in its audit independence guidance may disadvantage specialist SMSF audit firms, an industry expert has warned.
Pointing to the regulator’s recently published guidance on the ATO website, MyWorkpapers Australia general manager Kevin Bungard said the ATO’s view that firms generating more than 20 per cent of their total income from one referral source may be considered in breach of the new audit independence standards could give larger accounting firms an advantage over specialist SMSF audit firms.
“A typical accounting practice is generating around $1 million per partner and the average audit fee, from the latest ATO data, is $686 per audit. A two-partner firm could be auditing up to 500 SMSFs from a single source and they would be at a ‘dependency’ level of less than 18 per cent,” Bungard told selfmanagedsuper.
“On the other hand, if a specialist auditor with 2000 SMSF audits had 500 funds from one source, then they could expect the ATO to have some concern about their independence.”
Peak Super Audits managing director Naomi Kewley acknowledged the surface-level impact of such a requirement on SMSF specialist auditors might seem greater when compared to larger, multi-discipline accounting practices, but noted the ultimate aim was to ensure the most appropriate course of action for individual firms under the amended auditor independence standards, according to their specific circumstances.
“There will be different relevant factors that need to be considered in evaluating fee dependency threats between SMSF specialist audit firms and accounting firms that just have an audit department and I think that’s just part of the territory – dealing with different structures, you have different considerations. Once you peel back the layers, it really is still the same assessment,” Kewley told selfmanagedsuper.
She also noted the 20 per cent benchmark provided by the ATO was not set in stone and should be seen as a guide to help auditors spot potential independence threats.
“The 20 per cent benchmark isn’t an arbitrary line in the sand, it’s more like a high watermark that indicates the point at which fee dependency should raise a flag for the auditor,” she said.
“At the end of the day, if one referral source accounts for a large portion of the total audit fee revenue, then the auditor is going to encounter self-interest threats and also intimidation threats. In terms of general guidance, I think 20 per cent is a good starting point.
“It’s important to note even the ATO recognises that in some cases a different threshold may be relevant.”
Last week, ASF Audits head of education Shelley Banton said the ATO’s audit independence guidance would finally “put to bed” the idea data feeds and automated software might enable audits to be done in-house.
The amended auditor independence standards will be a discussion topic at the upcoming SMSFPD Digital 2021 in May. To find out more and register for the event, please visit https://web.cvent.com/event/1432890d-987b-46a3-970a-5d8043c4258f/summary?RefId=Program.