Fee threshold a barrier to entry

auditor fee threshold

A specialist professional body for auditors has argued against the introduction of a hard fee threshold in an effort to make the auditor independence standards more robust.

The SMSF Auditors Association of Australia (SMSFAAA) has argued the proposed 20 per cent fee threshold to be imposed on auditors to ensure independence standards set out in APES 110 are met will place undue pressure on sector practitioners.

In its submission to the Accounting Professional and Ethical Standards Board (APESB) with regard to the 20 per cent fee limit from one referral source, the professional body pointed out the recent trend of falling approved SMSF auditor numbers will not be helped by the new proposal and instead will be exacerbated, given higher fund establishments as a result of the coronavirus pandemic.

“It creates a barrier for new auditors entering the industry. As a new practice it will be difficult to meet this benchmark,” the SMSFAAA said.

“For example, if you are planning on growing your firm, you would take on a new referral source even if it will represent more than 20 per cent of your current workload because you plan on growing beyond the point where there is an independence issue.

“However, if it takes three to five years to achieve that growth and you need to incur costs for an appropriate reviewer over that time, then it may be not commercially viable to take on that work. It is unlikely that the perfect-sized referral accounting firm will come along and fit neatly into the required benchmarks.

“This will not make for a vibrant and healthy SMSF audit market.”

The association also suggested the proposal represents a shift from the APESB to make the professional standards more prescriptive, which in itself may prove counterproductive.

“The purpose of standards are to provide guidance to professionals so they can accomplish their duties properly (with integrity) and in an ethical manner. Now it appears that the standard setters’ approach have shifted from guidance towards controlling the behaviour of auditors by imposing different variables as barriers in the real-life audit engagement,” it noted.

“This control may be treated itself as interference in the overall independence of auditors.”

It also criticised the proposal for failing to take into account the structure of accounting firms that provide both audit and other services. In particular, it suggested focusing on a 20 per cent threshold for fees originating from one referral source regarding the audit division ignores how material that business arm is for the overall practice. To this end, it argued breaching the threshold may not cause an independence issue if the audit division only makes a miniscule contribution to the revenue of the entire accounting firm.

Further, it questioned the seemingly arbitrary nature of the 20 per cent limit and recommended auditors be given more time to adapt to the original independence standard amendments before additional compliance hurdles are introduced, given the challenges practitioners are already facing during the COVID-19 pandemic.

Last week, four independent SMSF auditing firms communicated their concerns over the proposed fee threshold in a submission to the APSEB.

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