In the May federal budget, one particular paragraph proposing audits of SMSFs every three years caught the eye of many SMSF professionals scanning the budget papers. While still only a proposal, it is one of a number of ideas on which policymakers are seeking feedback. The Self-managed Independent Super Funds Association (SISFA) has been invited to participate in the feedback process and I’ll refer to this in future columns. For now, let’s examine the proposal to change self-managed fund audits from yearly to every three years.
One has to question what impact a move to three-yearly audits would have on the overall integrity of the superannuation system and it seems contrary to previous policy objectives. Clearly the change would impact on the standing of the auditors of super funds as this change would mean SMSF audit practices would have to seek alternative fees in the two years where audits are not being conducted, a move which could end up impairing auditor independence.
Overall, it’s fair to say we’ve got a system that isn’t working too badly with respect to SMSF compliance and a big reason for this is the ongoing annual audit, which keeps the SMSF industry in check. Moving away from an annual audit will create an environment where it will be very easy to not comply in years one and two, and get the fund back into compliance for the third year when it’s going to be audited. Alternatively, what would stop someone from simply withdrawing their monies in the year where an audit is not required and closing the fund down? With the billions of dollars currently invested in the SMSF industry, it is crucial compliance is maintained to ensure the stability and future reliance on the retirement system for which it was established.
"One has to question what impact a move to three-yearly audits would have on the overall integrity of the superannuation system and it seems contrary to previous policy objectives."
As a profession it is important SMSF auditors maintain their knowledge at high levels. The requirement to only audit funds every few years would impact on every single SMSF auditor’s knowledge base, in particular the many emerging issues and changes to the law will be difficult to keep track of. It is through this knowledge SMSF auditors regularly assist their clients to ensure they are not entering into transactions that may cause the fund to be in breach.
The question arises of who is going to keep track of when the SMSF will be required to be audited and follow those clients up on that requirement. One line of thought is this may fall to the ATO, potentially adding that additional work to the cost burden and therefore resulting in a potential rise in the annual ATO levy.
There are a whole range of matters that would cause a fund to be ineligible for a triennial audit. For example, a new audit engagement would often result in an auditor qualification of Part A financial statements for opening balances. There are also many instances where the SMSF is not fully compliant, resulting in the auditor issuing a management letter to the trustees covering their concerns, but the auditor does not have a corresponding requirement to lodge an auditor contravention report, as the two are mutually exclusive.
Questions arise around what will be required of the auditor, including:
Will the audit still need to cover all three years? If so, that would defeat the purpose of only requiring triennial audits as the time and cost to conduct an audit covering the combined three years would be potentially more than the current annual review process.
Difficulties might be encountered in accessing information where a transaction may have occurred say in year one, but would not be audited until year three. For example, a limited recourse borrowing arrangement would generally require the auditor to undertake a review of all of the property acquisition documentation as well as loan documentation to ensure the arrangement is compliant. Further, if the arrangement is not compliant, it will be several years before this is identified. Or will there be carveouts so that the auditor only audits current-year transactions and assumes any prior-year transactions are compliant?
While the intent seems focused on reducing the cost of auditing SMSFs, there is a minefield of issues, some highlighted here to consider. SISFA will be examining these issues in its submission to the government and welcomes your views via email to [email protected]