NUMB3R ILL-USE

The practice of misusing SMSF auditor numbers surfaced fairly soon after the requirement for practitioners to have one was introduced. Tharshini Ashokan examines the nature of the incidents and the attempts being made to eradicate the problem.

The system requiring SMSF auditors to register with the Australian Securities and Investments Commission (ASIC) and be assigned an SMSF auditor number (SAN) was introduced in 2013. The framework dictates this type of practitioner must have a SAN to perform an audit of an SMSF. Since that time the ATO has found certain service providers in the industry have been misusing these numbers, causing concern among auditors intent on maintaining the integrity of the SMSF audit system and their profession as a whole.

In 2019, as part of its effort to counteract SAN misuse, the regulator began mailing auditors a list of their SMSF annual returns (SAR), which included their SAN as proof an audit had been performed. In March and April of that year, SMSF auditors received their list of annual returns for the 2017 income year and were asked to inform the ATO of any funds they did not have a record of auditing.

The regulator followed the same process in September and October 2019 for the 2018 income year and intends to repeat the process this year, in August and September, for 2018/19 SMSF annual returns. According to ATO director Kellie Grant, the lists have been a useful tool in helping to uncover instances of SAN misuse among practitioners.

“The strategy has been effective and has allowed us to estimate the extent of SAN misuse with the cooperation of auditors responding to our mail-out campaigns,” Grant says.

“For the 2017 income year, 50 per cent of auditors responded to our mail-out. In effect, 420 auditors confirmed 1445 instances of SAN misuse connected to 1695 funds and 626 tax agents. All these tax agents have now been contacted and all but 74 of them, representing 106 funds, have responded. These tax agents have been referred to the Tax Practitioners Board (TPB) for further action.”

Of the auditors who responded, the regulator found 1000 funds had accidentally reported an incorrect SAN, she adds. The ATO found many of these incidents to be a result of SAR soft ware rolling over a previous auditor’s details and the tax agent lodging the return without checking to ensure the correct current year auditor was reported.

I think with the lists that come out now it’s just easy to pick where someone’s taken your number. I think that’s a really good, proactive approach the ATO has taken.

“There were 154 funds that deliberately misreported a SAN. As a result we’ve referred 15 tax agents to the TPB during the 2019/20 financial year. We are still investigating around 500 instances of SAN misuse,” Grant says.

Further, for the 2018 financial year, 40 per cent of auditors responded to the ATO’s mail-out, with 137 practitioners confirming 832 instances of SAN misuse connected to 832 funds and 230 tax agents. These occurrences are currently being investigated by the regulator.

“We have not seen any cases where an auditor has falsely used another auditor’s SAN. What we most commonly see is the tax agent responsible for preparing the fund’s return falsely reports the audit as having been completed prior to lodgement of the return,” Grant reveals.

“The auditor reported by the tax agent is usually one that has legitimately undertaken an audit on the fund in a previous financial year, however, has not been re-engaged to perform an audit in the year the SAN misuse occurs.”

Auditors with long-held concerns over the likelihood of their SAN being fraudulently used believe the lists are an effective strategy in helping them prevent both accidental and deliberate misuse of their auditor numbers, and most agree it is a step in the right direction in terms of preserving the integrity of their profession.

For Elite Super managing director Katrina Fletcher, whose SAN was wrongfully used by other service providers, the lists are crucial to ensuring other auditors do not find themselves in a similar predicament to hers.

Fletcher, who discovered the most recent instance of her SAN’s misuse when reviewing the ATO’s list of funds that had used her audit number, urges auditors to make use of the lists being sent to them by the ATO.

“Check your lists, check them twice, and get back to the tax office [if there is a fund on the list for which you haven’t performed an audit] because they could be [more than just] innocent mistakes,” she suggests.

Before the lists were implemented by the ATO, it had been difficult for auditors to identify whether their number was being wrongfully used by others, she adds.

She cites her own experience of previously discovering another operator’s misuse of her SAN only aft er an SMSF trustee claimed she was holding up the audit of his fund. The fund in question turned out to be one Fletcher was not servicing.

“I think with the lists that come out now it’s just easy to pick where someone’s taken your number. I think that’s a really good, proactive approach the ATO has taken,” Fletcher says.

ASF Audits technical services executive manager Shelley Banton also sees the lists as a useful method for uncovering SAN misuse and providing some reassurance in terms of how prevalent the intentional misuse of auditor numbers might be.

“The lists have been very effective because they have allowed auditors to actually ensure that every single fund they’ve signed off on has been correctly lodged with the ATO and any anomalies have been followed through,” Banton explains.

“We are seeing, certainly, some tax agents misuse auditor numbers, but it isn’t necessarily as widespread as what we originally thought.”

Super Sphere director Belinda Aisbett agrees the lists are a positive initiative, but highlights the disappointing drop in the response rate to the ATO’s mail-out for the 2018 income year as a symptom of the main limitation of the approach.

“The ATO are limited in the fact that they need the auditor that has been sent the list to actually check the list and reply back,” Aisbett observes.

Nobody wants to see trustees taken in by fraudulent activities in this way. It doesn’t do anything for the integrity of our industry.

“The drop in the response rate may mean that auditors have checked the list and said: ‘I’ve got nothing to report so I don’t need to tell the ATO.’ But without the actual response to confirm that, the ATO doesn’t really know whether there are embedded issues there or not.

“In terms of effectiveness, the process really relies on the auditor. I’ve certainly been encouraging auditors to check the list and get back to the ATO, whether it’s a negative or a positive response. If we could have the full picture, I think that would be good for the ATO and for the industry generally.”

Some auditors believe it is SMSF trustees who, by believing an audit has been performed on their fund when it really has not, are the real victims of SAN misuse.

“They’ve paid for a service that they never received and then they’re going to be out of pocket to actually pay for the real audit,” Banton says.

“Nobody wants to see trustees taken in by fraudulent activities in this way. It doesn’t do anything for the integrity of our industry.”

Fletcher agrees. “It’s not fair on them when you have a professional doing the wrong thing and the trustees having to pay. They have to pay twice,” she says.

The ATO requires trustees to declare in their SMSF annual return they have received a copy of their audit report prior to lodging the return. As such, the regulator expects trustees to ensure they receive and review the signed audit report prior to signing and dating their SMSF annual return.

“If a trustee is being asked to sign an annual return without having looked at the audit report and confirmed it has been completed, they should refrain from doing so. Otherwise they could be making a false and misleading declaration to the ATO that could lead to the imposition of penalties,” Grant points out.

“If a trustee suspects that the audit report provided to them by their tax agent is false, they should contact the auditor directly to confirm whether they conducted the audit. If the auditor confirms they did not complete the audit, they should report the tax agent to the ATO.”

While Aisbett is sympathetic to trustees potentially being held responsible for SAN misuse by their tax agent or accountant, she highlights how important it is for trustees to take more ownership of the reporting process for their fund in order to prevent themselves from being exposed to fraudulent or negligent behaviour.

The ATO are limited in the fact that they need the auditor that has been sent the list to actually check the list and reply back.

“If you’ve got a trustee that doesn’t recall receiving any engagement letter or other information from their auditor, you really have to question whether that trustee is familiar with the audit process and whether they are completely across what is required for the audit,” she adds.

“Trustees that are quite removed from the process and aren’t overly engaged in the process, they’re the ones that, if the tax agent is filling in the forms wrong, are going to have potential consequences.”

Fletcher believes one way to protect trustees and the integrity of the SMSF audit system is for accountants to review their referral processes and the administration providers they use.

Citing one instance in particular, she explains: “We had a long-standing client, an accountant, check the prior auditor’s details on a fund they were just taking over. I think there were some issues with the financial statements and they wanted to discuss these with the auditor directly.

“The auditor revealed to them he had never audited the fund at all and the accountants had to break the bad news to the trustees that they had to have a lot of prior years’ audits done again.”

Banton agrees there is potential for a review system by accountants to have a positive impact on curtailing SAN misuse, but doubts how realistic it would be for all accountants to have the resources to be able to implement such a system.

“Obviously, when they’ve got however many clients – there can be dozens or hundreds of SMSFs that they’re dealing with – it can be hard to keep up to date with auditor information,” she says.

“There are ways in which they can do it, but it comes down to time as well.”

According to Aisbett, the impact of a potential review of accountant referral approaches on preventing SAN misuse is not likely to be significant, particularly in cases where the accountant or tax agent is deliberately misleading their client.

“It’s the accountant’s own internal processes and their own internal temperament in terms of how they approach their responsibilities that would dictate whether they are going down the wrong path,” she says.

She believes one change in the process that might be more effective in combating SAN misuse is to make the ATO’s electronic superannuation audit tool (eSAT) compulsory for all SMSF audits.

“Until the eSAT is mandatory you’ll have some tax agents lodging tax returns saying the audit has been done when it hasn’t. At a very high level, this might equate to SAN misuse because the audit has not been done at that point,” she explains.

In the meantime, the ATO’s mail-out of audit lists looks like the industry’s best hope of identifying the fraudulent use of SANs and, according to the regulator, has already helped it make considerable headway towards resolving the issue.

“Following our mail-out campaigns to auditors for the 2017 and 2018 income years, the numbers of tax agents being reported for misusing a SAN has significantly dropped,” Grant says.

“The ATO takes deliberate SAN misuse very seriously and will take appropriate action against any trustees or tax agents we find involved in this behaviour.”

Highlighting her own experience of SAN misuse, Fletcher is supportive of the action the ATO has taken so far.

“It has taken the most serious instances of SAN misuse to prosecution, so the ATO should be commended for doing a great job,” she notes.

In addition, she believes auditors would benefit from following their instincts and should report suspicious behaviour without waiting to receive their audit list from the ATO before flagging their concerns.

“I recommend if an auditor has a feeling that something might be suspicious about a fi rm that has recently left them, they should contact the ATO to start an investigation. It would save waiting until the annual list comes out,” she says.