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INDEPENDENCE DAY: AUDITORS DISRUPTED
The amendment to the auditor independence standards under APES 110 will have a significant impact on who is able perform an audit. Tharshini Ashokan assesses what the implications are for the SMSF sector.
The introduction of amended audit independence standards enforcing restrictions on financial statements and audits being prepared by the same party is set to impact the SMSF sector in a big way, with as many as between 200,000 to 300,000 funds estimated to be required to find a new auditing firm this year.
The restructured APES 110 Code of Ethics for Professional Accountants and accompanying Independence Guide, which was developed by the Accounting Professional & Ethical Standards Board in conjunction with Chartered Accountants Australia and New Zealand (CAANZ), CPA Australia and the Institute of Public Accountants, will be mandatory for audits in Australia from 1 July.
The guide clearly states an auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for that fund, unless it is a routine and mechanical service, and the requirements placed on auditors to ensure they are not in breach of the new standards have left many in the industry scrambling to find possible solutions for the funds cast adrift by the change.
An outcome professionals across the sector tend to agree on is that the amended standards will signal a surge in demand for specialist audit firms due to the number of larger firms having to find alternative audit arrangements for many of their clients.
“It’s a turning point for firms that specialise in SMSF auditing. If they haven’t been getting lots of inquiries over the past few months, I’d be very surprised,” Super Sphere director Belinda Aisbett says.
“There are so many firms the new standards impact. It would have to have a positive impact on specialist firms.”
Peak Super Audits managing director Naomi Kewley agrees the implementation of the new standards is likely to mean a boom time for SMSF specialist auditors, but anticipates some hurdles as a result of the increased workflow.
“It’s going to be a challenge for the industry and firms like mine in terms of how we can adapt our staffing and skills and resources to have the range to absorb that increased workflow,” Kewley points out.
While she believes the influx of work is a good opportunity for people considering moving into the SMSF audit space, she also recommends they look before they leap, noting the SMSF audit is “a world within itself”.
“You really need to know what you’re about in this industry. And like we’ve seen in recent years with regard to litigation, it doesn’t deal lightly with the SMSF auditor, so people will need a lot more than a degree and 300 hours in audits to do this job well,” she says.
“What I would say to people looking to come in is don’t enter it lightly. But if you think this is your thing, then go for it because there’s going to be a lot of work moving through this industry.”
A recent spate of ultra-cheap audits being offered across the SMSF space from companies targeting accounting and auditing firms has also highlighted the possibility of the new standards giving rise to audit services that may lack the required skills.
Aisbett agrees there may be potential for some firms taking advantage of the situation by offering low-quality services, but believes the new standards will ultimately lift the quality of audits in the SMSF space.
“There’s the good, the bad and the ugly in every industry and SMSF auditors are no different unfortunately. I’ve no doubt there will be some auditors that you do have to question how they have such low fixed fees and whether the quality of those audits are reflective of that,” she says.
“There may be an increase in questionable audit services, but I’m also hoping that there’ll be an increase in the quality at the other end of the spectrum. There are some really decent, quality SMSF specialist auditors out there and if their practices grow and allow them to increase their staffing and their ongoing training, we’ll have both ends of the spectrum improved.”
Kewley notes a reduction in fees from SMSF audit providers cannot necessarily be taken on face value as a resultant drop in the quality of the audits being performed.
“The industry at the moment is certainly experiencing a lot of pressure to reduce fees and, to a point, this has been really healthy because there are real efficiencies that can be gained through the intelligent use of audit software that doesn’t compromise the quality of the audit at all,” she says.
However, she like Aisbett is cautious about the presence of fund audits being offered at extremely low prices.
“I’m very concerned to see some of the advertising that is going around like for flat fees of $400 or $300 irrespective of a fund’s investment mix,” she admits.
“I think there is a risk that the new independence guidelines are going to set an increased number of audits adrift out there and we could see some cowboys entering the industry as a result.”
In addition, she points out when it comes to audit services trustees do get what they pay for.
“The decision to have an SMSF should never be about saving on administrative costs. As a former administrator myself, my experience is it’s worth every cent to engage an auditor who is going to help you navigate the compliance terrain and who will take the time to answer your questions,” she suggests.
“It comes down to a challenge for all the good SMSF auditors out there, we need to be providing real value in the service we offer as compliance experts, and then we need to communicate that to accountants and the trustees as well.”
While many firms continue to look for a suitable way to adapt to the changes, larger accounting firms may have the advantage of having anticipated independence issues long before the new standards were imposed on them.
“For us, it’s going to be business as usual because we actually made the decision over 18 months ago that we were going to use an outsourced provider for our audits,” Deloitte Australia partner Liz Westover reveals.
“Even though Deloitte has an SMSF compliance business and an SMSF audit business, we made the decision some time ago that independence is not just about actual but perceptions, and that it was in our best interest to move away to make sure there was no question around independence for us.
“Part of that process was to literally analyse who we were using, what we were doing, how we were operating, and we looked at that piece and we made the decision as a firm that we would use an outsourced provider.”
Firms that have been used to doing SMSF audits in-house and are only now thinking about adapting to the new standards need to be mindful of time constraints, Aisbett warns, especially those that want to find auditors with values that align with their own.
“Timing is really crucial now. We’re all going to be heading into the May deadline and those firms that are doing those audits in-house are going to be busy right up through until possibly the end of the year,” she says.
“It means that 30 June is going to sneak up on all of us pretty quickly. Trying to find yourself an auditor that has capacity and that suits your firm, ethics, objectives, and has a good fit with your client base is going to be perhaps a little rushed and a little more challenging. We really don’t have long to have these decisions considered and decided.”
CAANZ superannuation leader Tony Negline acknowledges the impact of the COVID-19 pandemic on businesses has also made the timing of the introduction of the new standards less welcome among practitioners.
“Everyone’s been extremely busy with additional workload because of the pandemic,” Negline acknowledges.
“Change is never particularly popular in business and the impact of the pandemic has probably made APES 110 implementation even less welcome.”
Despite this, he believes the initial largely negative reaction to the new standards is gradually giving way to more firms accepting the inevitability of the changes and being willing to work out the best way to implement them.
He also looks forward to the implementation of the new standards helping to improve the perception trustees have of audits, particularly those who tend to view audit services as a “grudge purchase”.
“Our hope is that the benefits of seeing audits and other fund work performed independently of each other will help improve the outcomes of the audit process,” he adds.
“We’ll be able to point to that and say to the government that the current SMSF settings are appropriate and do not need to be tightened along the lines of some of the things that have been said to them in the past.”
Aisbett believes the new standards will help change how SMSF audits are viewed by the industry as a whole, as well as the trustee.
“I think the end goal of what the ATO is trying to achieve is that independence is treated a whole lot more seriously than what it has been in the past. Just with that as the primary motive, the quality of the audits has to improve when they’re taken out of an internal environment,” she says.
“Clients will get better service because when you go to a truly independent auditor, you’ve got a clean slate. We as auditors start with the fund and we know nothing about the client, and have no preconceived idea about whether they’re a good client or a bad client or somewhere in between, which means our audit procedures won’t be clouded or predetermined.
“I think there will be an improvement in quality, just from that aspect alone. The client is then paying for a really complete and top-notch audit versus them paying an audit fee and not having things looked at as thoroughly as would otherwise be by a specialist firm.”
Westover concurs, noting the enforced standards will take away any doubts firms may have previously had as to whether or not audits being conducted were truly independent.
“I think it will focus people’s thinking on making sure that the audit is actually undertaken in an independent way,” she says.
“I’ve spoken with firms over the years who wanted to talk through independence with me. And my response often was ‘if you’re having to ask the question, then you’re probably not independent’.
“So this takes that doubt away. People have to genuinely operate in an independent way, in a more prescribed fashion and that has to be good for the industry.”
For firms wanting to ensure a smooth transition, Negline recommends reading the APES 110 standard, as well as the Independence Guide, as a necessary place to start.
“You’ve actually got to read the document and think about how it may apply in your business because I think otherwise you’ll start from behind. You run the risk of implementing it not quite the right way or maybe not the best way for your practice,” he explains.
“It would be good to get it right from the get go – it’s one fix and one fix only and away you go.”
He also encourages firms to contact their relevant professional accounting body and highlights the importance of contacting the ATO with any doubts about ensuring their compliance with the new standards.
“At the end of the day, the ATO does knock on people’s doors with a checklist and the implementation of this standard roughly from July onwards will be one of the things that will be on the checklist,” he adds.
“Making sure that you’ve satisfied them is going to be an important element.”
