NALE detection hard for auditors

NALE SMSF auditor

Trustees and their advisers cannot automatically assume transactions involving NALE will be detected by an SMSF auditor.

A specialist practitioner has warned trustees that SMSF auditors cannot be relied upon as the sole individuals who will detect instances of non-arm’s-length expenditure (NALE) due to the nature of their client interaction.

Speaking during a question and answer session at the recent Chartered Accountants Australia and New Zealand SMSF Conference 2021, BDO superannuation partner Shirley Schaefer said: “The accountants are the ones with a [trustee] relationship. They know the clients. They know the [fund] transactions … and they’ve got that connection.

“[But] as an auditor in a lot of cases you don’t even know these people personally. {As such] you don’t know what their connections are, you don’t know what they do for a living necessarily, so it’s really difficult to identify whether or not a transaction should’ve occurred in a fund or whether a transaction just hasn’t occurred in a fund.”

Schaefer used the example of a plumber owning a property in an SMSF reporting no repairs and maintenance to bathrooms during a particular financial year to illustrate her point.

“Does that mean I [have to] automatically raise a NALE issue in my management letter? There may not have been any issues that year,” she noted.

“You don’t know what you don’t know [so] it’s really hard for the auditors. We’re not in a great position to be able to [identify NALE].”

According to Schaefer, the auditors need to explain to the accountants servicing SMSFs what they need to be looking at and the questions they need to be asking of their clients.

Deloitte superannuation, SMSF and retirement savings partner Liz Westover agreed with her observation, but pointed out detecting NALE is not a straightforward exercise for accountants either.

“I will often deal with a CFO (chief financial officer) or a bookkeeper, so the question then becomes if that bookkeeper is providing services to not only the [SMSF] but other entities belonging to that client group, is the SMSF paying its fair share of [the associated] fees and should it be?” Westover noted.

“If I know those services have been provided and I haven’t raised it with my client, what are my obligations there? Am I to blame?

“So I think there are a lot of issues around this we’re just not across yet.”

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