In its 2018 budget, the federal government announced plans to introduce a three-year audit cycle for compliant SMSFs. Such a change won’t mean only one out of every three years is audited. Instead, three years of SMSF financial statements and compliance would be audited at the same time.
While the Self-managed Independent Super Funds Association (SISFA) applauds the government’s objective of reducing red tape and the compliance burden on the industry, we believe a move to triennial audits may only marginally reduce costs, while creating other issues, including increasing the administration burden on fund trustees and compromising the integrity of the system. From the industry response thus far, it seems the view is widely held that the issue of the audit report is only a small portion of the work required by the auditor and issuing one audit report covering all three years as opposed to issuing an audit report in each of the three years will only marginally reduce audit costs.
We believe it is more likely moving to a three-yearly audit cycle would actually increase the costs of the annual audit, for the following reasons:
- three years is a long time for an audit to not be undertaken. There would be an expectation the auditor’s assessment of the underlying risk profile of the client will increase as a result. The auditor will therefore need to introduce additional measures and tests to mitigate the increased risk of the audit,
- source documentation may not be readily available for each financial year; in particular, there may be gaps in documentation provided, which could be difficult, time-consuming and costly to obtain, and if a trustee needs to recall and explain a transaction to the auditor several years later, that could be problematic,
- there would be an expectation that over time the cost of auditing naturally increases as a result of, for example, increases in labour costs and consumer price index adjustments. Under a three-yearly audit cycle, the audit that is being conducted for each of the preceding three financial years would be charged at the higher yearly rates, and
- any change in service provider during the course of the three years would present its own challenges in the ability to undertake an audit at reasonable costs. For example, the auditor may be engaged to conduct the audit for the three years, however, the financial accounts for years one and two may have been undertaken by one accountant and year three by another. In this instance, the auditor would need to liaise with at least two accountants to undertake the audit, with an expectation of additional accounting costs being incurred for the retrieval of documentation from an accountant who is no longer acting for that client.
The implementation of this policy objective will see yet another complex layer of legislation that will need to be understood and implemented by the SMSF community
We would expect any errors in the financial report identified by the auditor would result in additional costs. In particular, should an error occur in year one, the financial accounts would need to be adjusted for year one with corresponding adjustments expected to flow through to years two and three. It is also probable the SMSF annual return (SAR) would need to be amended and relodged, or alternatively an auditor qualification may result where the accounts are materially misstated, again increasing the overall costs of conducting the audit. This, coupled with the increase in accounting time to amend financial reports and prepare and lodge amended SARs, again raises the total costs to the SMSF.
With many trustees not having a deep understanding of what they can and cannot do, auditors play a critical role in educating trustees to help avoid any future compliance issues. Aside from the yearly audit, the auditor may remind the trustees of their responsibilities in relation to what the unit trust can and can’t do in the types of investment permissible to avoid any potential breaches.
The implementation of this policy objective will see yet another complex layer of legislation that will need to be understood and implemented by the SMSF community, as well as be monitored by an ATO team for compliance. This in itself will increase the compliance burden and red tape with no real foreseeable cost benefits resulting.