What constitutes independence?

Reece Agland

The Superannuation Industry (Supervision) (SIS) Act 1993 requires an SMSF to be audited annually by an ‘independent’ auditor.  But just what is an independent auditor?

The accounting profession has long grappled with the issue of auditor independence and has recently issued the fourth edition of its “Audit Independence Guide”. For the first time, the guide acknowledges the importance of the SMSF sector and has included an SMSF-specific section. This is not to say there is any difference in independence between an SMSF and a company audit, rather for many accountants the only audit they perform is for an SMSF and it was considered it deserved its own segment. Independence in audit is defined in section 290 of the Accounting Professional and Ethical Standards Board’s “APES 110: Code of Ethics of Professional Accountants”. Independence must not merely be of mind, but in appearance. Section 290 says:

“Independence comprises:


The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional scepticism.


The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm‘s, or a member of the audit team‘s, integrity, objectivity or professional scepticism has been compromised.”

That means not only must the auditor be independent, but they must be seen externally as being independent. The new guidance sets out some obvious instances where an auditor is not independent, in mind and/or appearance.

Quite obviously an auditor cannot audit their own SMSF (unfortunately some have done so) as there is a clear self-interest threat.

An auditor cannot audit an SMSF where they or someone under their direct guidance has significantly prepared the accounts. One of the functions of the auditor is to review the accounts. This cannot be a truly independent process if the auditor or someone under them has prepared the work to be reviewed. This is known as a self-review threat. This means where there is only one principal in a firm, they can either only do the accounts or only do the audit, not both.

Furthermore, an auditor cannot audit an SMSF where a partner in the firm or a relative or related party is a trustee. The reason for this is that such persons may have a direct or indirect influence over the auditor to act in their favour. This is known as an intimidation threat. Even if the auditor is independent in mind, a reasonable person is likely to be of the view independence has been compromised.

Why is independence so important for trustees? An independent auditor’s role is to ensure in part there are no contraventions of the SIS Act requirements and that the accounts are in order. If the audit is not performed properly, the auditor may miss out on inadvertent breaches, which if discovered later can be expensive to unwind and may put the fund at risk of being non-compliant. It is in the trustees’ best interests to ensure a clean set of eyes reviews the accounts and compliance with the act.

Another important factor is that the regulators and government put faith in the independence of auditors to ensure funds are complying. If the government and regulators do not trust auditors to be independent, then there is the real threat the regulation of SMSFs will be tightened and the regulator will scrutinise the activities of SMSFs more closely. This will increase the cost of maintaining an SMSF and the level of intrusion by government.

Therefore, auditors play an important role in safeguarding the system and keeping costs and regulation down. Trustees who downplay the importance of the audit, risk imposing costs and further regulation on the sector, which is already weighed down by the existing level of compliance requirements.

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