Whilst working at the Australian Tax Office the issue of Self-Managed Superannuation Fund (SMSF) Auditor independence was often raised. Since leaving there I have noted that there has been additional debate in the accounting community as to exactly what constitutes independence for an SMSF Auditor in relation to small and medium sized accounting firms. Guidance Statement GS 009 - Auditing Self-Managed Superannuation Funds states that the auditor must comply with the requirements of APES 110. On February 2013 the fourth edition an Independence Guide (The Guide) was prepared by the three major accounting bodies in Australia which addressed APES 110 directly.
The guide identifies five cases where independence could be breached:
- An auditor cannot audit their own SMSF;
- An auditor cannot audit an SMSF where staff reporting directly to them have prepared the accounts;
- An auditor cannot audit an SMSF where the individual auditor has significantly prepared the accounts for the SMSF;
- An auditor cannot audit the SMSF where a partner within their own firm is a member/trustee of that SMSF; and
- An auditor cannot audit the SMSF where a relative or a related party of the auditor is a member/trustee of that SMSF or where the auditor has a close personal relationship or business relationship with a member/trustee of the SMSF. Reference to Section 10 and 71 of the Superannuation Industry (Supervision) Act 1993 should be consulted where related parties are to be considered.
In summary the following are fully accepted as breaching independence standards and necessitate SMSF audits to be outsourced:
- An auditor cannot audit their own SMSF
- An auditor cannot audit an SMSF when a partner within their own firm is a member
- Where the books are 'prepared' by the auditor - "if the auditor undertakes tax calculations or provides advice to the trustee on how to prepare the accounts, then it is not likely that the independence requirements can be met." (The Guide, February 2013).
Many small accounting firms are still stating that they have addressed their SMSF independence issues through the use of "Chinese Walls". The Independence Guide specifically addresses some common situations seen in practice and points to the difficultly of remaining compliant with independence requirements:
- Sole practitioners "As discussed above, a sole practitioner would not be able to audit an SMSF for whom they have undertaken the accounts preparation."
- One partner prepares accounts and tax returns and another partner audits the fund - the guide notes this will generally only be acceptable where a firm has separate divisions (eg SMSF Administration/SMSF Audit) with staff reporting to divisional partners. It also notes "Smaller firms with two or three partners would find it difficult to put appropriate safeguards in place". Additionally the guide states that this is "Often referred to as 'Chinese walls', it is possible for a firm to carry out both the accounting/tax work and audit work for an SMSF client, but only with appropriate safeguards in place to ensure audit independence. If the safeguards cannot be put in place, the firm will need to decline the audit engagement and outsource the audit function."
- Sole practice with member of staff responsible for preparing the accounts & tax returns - This scenario would not satisfy the standards required for independence and therefore the practitioner would not be permitted to undertake the audit. The Guide notes that sole practitioners would not be able to put appropriate "safeguards in place as all of their staff are essentially reporting to them, and there is no opportunity within the practice to segregate ultimate responsibility for the audit engagement from the non-assurance services. It is not relevant that different staff are carrying out each separate function or that a staff member prepares the accounts that are then audited by the partner. It does not matter if the partner had no role in the preparation of the accounts. The issue is that the reporting mechanisms within the firm are such that all staff ultimately report to the sole practitioner (auditor). Similarly, it would not suffice for the sole practitioner to prepare the accounts which were then audited by a staff member."
- Firms that provide financial planning advice - The Guide also concludes that independence is unlikely to be possible where a firm has recommended specific products or structures to a client. "If an auditor is assessing the compliance or validity of a particular product or investment arrangement that has been recommended or implemented by the firm, it may be perceived that the auditor would not be independent in undertaking their role. Despite the fact that they may be extremely knowledgeable about such arrangements, a reasonable person may not perceive them as being independent in making that assessment. It is the absence of independence (or perception of independence) that would require the auditor to decline the audit engagement in this circumstance."
Many firms have found the increased focus on SMSF Auditor independence as confusing and poorly explained. This has provided the opportunity for specialist firms to establish themselves as experts in the field as they are truly independent and help mitigate any unnecessary risks. As a matter of best practice the issue of independence should always be considered.
Heath is a registered SMSF Auditor and director of HG's Super Audits. If you require further information please see www.hgssuperaudits.com.au for contact details.