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Guidance to SMSF Auditor Independence Perth

 The long-awaited guidance from the ATO to ensure the independence of SMSF auditors has been released. This confirms the requirements set forth in APES 110Code of Ethics for Professional Accountants (including Independence Standards).

The revised Code stipulates that SMSF auditors must use the conceptual framework to identify, evaluate, and address independence threats.

SMSF auditors must use professional judgment and be alert for any new information or changes in facts and conditions.

SMSF auditors need to apply a litmus test. They should ask themselves if they would hesitate in writing an adverse finding or preparing an audit report.

For example, an SMSF auditor could identify a compliance violation for a client and deal with it in a management letter. This would compromise independence.

SMSF Auditor Independence 

The ATO has provided the following information in several scenarios these situations will continue to pose independence threats and cannot easily be resolved. In these cases, the SMSF auditor should decline or terminate the audit engagement.

One of the most striking is the fact that the auditor's network firm or firm cannot assume management responsibility for the fund if the audit continues in-house. These activities, decisions and judgments fall under the responsibility of trustees. They can set policies and provide strategic direction, as well as ensure compliance with SISR and SISA.

The most important thing is that the firm can prove and document that the trustee has all the necessary skills, knowledge, and experience to continue being responsible for their decisions. The trustee must also oversee the service and be able to understand the goals, nature and outcomes of the firm's services.

Practically, the firm cannot no longer offer administrative or operational advice for trustees. This includes tax minimisation strategies, advising when a pension should be started, and making decisions about maximum contributions caps.

Feeds of Data

Management responsibility also covers the use of data feeds to automate financial statements. As Previously reported ASF Audits has ruled that the firm cannot make any decision or give judgment about the maintenance and setup of data feeds. This is because it must remain the trustee's sole responsibility.

The following situations are unacceptable for the firm to avoid:

  • Select the appropriate accounting software and configure it for trustees
  • Establishing the general ledger, and deciding how transactions captured by data feeds will be coded or classified
  • To ensure accuracy, verify the data in the tax calculations and financial statements.
  • Confirming that all transactions from the feeds were accurately reflected in fund accounts. This includes confirming that earnings and contributions are automatically allocated to an account member.
  • Monitoring the data feeds is a good way to make sure they work correctly
  • Being held responsible for any errors in the preparation of the statements from the data feeds.

According to the ATO, it will be very difficult for firms to prove compliance with this requirement.

 Accounting Arrangements between Firms

Reciprocal arrangements are where two firms prepare their financials in-house and then enter into an agreement to jointly audit the SMSF clients of each other.

These arrangements are a concern for both the ATO as well as ASIC. These arrangements can lead to intimidation, self-interest, and familiarity threats that must be addressed.

A good safeguard is to distribute the referrals of clients to multiple SMSF auditors to reduce dependence. External quality control reviews and consultations on critical audit judgments might be another option. An SMSF auditor might also think about increasing their client base. This isn't always easy.
The largest issues arising from self-interest or intimidation threats are the total fees generated by one client, multiple clients referred to one source. This represents a significant portion of the firm's total fees.

This is because the audit firm is dependent upon the source and is worried about losing clients.

ATO Benchmark

The Code does not specify the number of referrals sources or the percentage of fees that must be collected from each source to reduce independence threats to an acceptable degree. However, the ATO is more vocal.

The ATO's new guidelines state that firms with a long history of operation will not be considered independent if referral fees are less than 20% of total fees.

SMSF auditors who depend on the ATO’s 20% benchmark to enter into a reciprocal agreement will be disappointed. This is not a card that will get you out of jail, and it only addresses one of many independence threats that must be reduced to an acceptable level.

The ATO will amend its online independence guidance statement in order to clarify that the 20% benchmark does not apply to fee dependence issues.


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Location: Perth WA, Australia

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