The ATO is targeting SMSF auditors who continue to defy the independence rules. As part of its risk assessment program, the regulator is reviewing high-risk auditors with independence issues involved in reciprocal audits and those who have single-source referral income.
In a significant move, three SMSF practitioners were referred to the Australian Securities and Investments Commission (ASIC) by the ATO and suspended for breaching the independence requirements by auditing thousands of funds from a single referral source.
The ASIC decision highlights the risks associated with SMSF auditors relying on a single source for their referrals. Such dependency can compromise their objectivity and impartiality, leading to potential conflicts of interest.
The suspension serves as a reminder to all SMSF auditors to diversify their referral sources and adhere to the highest standards of professional conduct.
APES 110 code of ethics
In January 2020, the Accounting Professional and Standards Board revised the APES 110 Code of Ethics for Professional Accountants, including independence standards.
The code stipulates if the fees from an audit client represent more than 30 per cent of the total fees received by the audit firm for five years, there is a concern about the potential loss of fees, creating a self-interest and intimidation threat that may not be eliminated.
The ATO has released guidance on the conceptual framework of audit independence, identifying firms with a large proportion of fees coming from one referral source, such as under a reciprocal arrangement or where an SMSF auditor predominantly has one large client, may be unable to eliminate an independence threat.
The suspended auditors received more than 99 per cent of their overall fees from an online SMSF administration provider that assists trustees with their tax, accounting and audit obligations.
Reciprocal arrangements between firms
The ATO is also targeting reciprocal auditing arrangements between two firms, where each organisation prepares the financials in-house and enters into an agreement to audit each other’s SMSF clients.
Such arrangements give rise to self-interest, intimidation and familiarity threats, which include each auditor being sympathetic to the other’s interests or too accepting of the other’s work.
The problem is reciprocal auditing arrangements do not pass the pub test because a reasonable and informed third party would not consider the threats to independence in this situation to be at an acceptable level and they would need to be addressed by the auditors.
Safeguards to SMSF auditor independence
To safeguard independence, auditors should spread out the referral of clients to several different SMSF auditors, which would minimise the dependence on one source.
Engaging external quality control reviews or external consultation on critical audit judgments can also help.
Increasing the client base, although challenging, is another way to mitigate self-interest and intimidation threats.
The most significant issue from these types of threats is the total fees generated from one client or multiple clients referred from one source representing a large proportion of the audit firm’s total fees.
The reason is the audit firm depends on the source and is concerned about losing clients.
If the threats cannot be eliminated and appropriate safeguards are unavailable, the auditor must decline the engagement and end the arrangement.
Conclusion
The ATO’s enforcement of independence standards ensures SMSF auditors remain unbiased and independent.
The move sends a clear message to auditors regarding the regulator’s expectations in applying the code’s conceptual framework and meeting the SMSF auditor independence requirements.
As the co-regulator, ASIC will continue to work with the ATO and act where SMSF auditors fail to evaluate and address threats to their independence.
The move is expected to further strengthen the overall governance and transparency within the sector, ultimately protecting the interests of SMSF members.
Shelley Banton is head of technical at ASF Audits.
