EXIT: The impact of declining SMSF Auditor numbers

Specialist SMSF auditor numbers have declined significantly over the past few years. Todd Wills delves into the significance of this trend for the operation of the sector.

A clear reduction in the population of specialist SMSF auditors has piqued interest in the sector of late. This trend has become more pronounced following the introduction of the Stronger Super reforms by the Labor government in 2013.

These reforms required practitioners conducting audits on SMSFs to register with the Australian Securities and Investments Commission (ASIC) as an approved auditor. At the end of the 2014 financial year, 7073 auditors had registered with the database. However, following the imposition of this requirement, each successive year has seen a reduction in the number of individuals qualified to perform SMSF audits.

According to the latest ASIC information, the industry currently boasts 4352 registered SMSF auditors, representing a 38 percent decrease in slightly less than a decade. This drop in practitioner numbers has become even more evident since the onset of the COVID-19 pandemic and the introduction of new independence standards under APES 110 from 1 January 2020, with over 1500 auditors choosing to exit the profession since 2019.

The decline in auditors is occurring at the same time new SMSFs are growing in number. To this end, the September quarter 2023 saw the highest total of net funds established in the past five years, with no indication this momentum will slow.

So why are fewer registered SMSF auditors remaining in the sector when it appears to be so healthy and what will this mean for the path ahead?

A changing regulatory landscape

The landscape has shifted from the early 2000s, a period when the ATO predominantly embraced a hands-off regulatory stance, offering guidance only when necessary and mainly in an educational capacity. During this era, there was no SMSF auditor register and the idea of referring auditors to ASIC was deemed overly expensive and time-consuming. Further, practitioners weren’t obligated to submit auditor contravention reports (ACR) even if they had detected contraventions of the Superannuation Industry (Supervision) Act 1993.

Fast forward to 2023 and SMSF auditors entering the profession are faced with an increasingly complex and sophisticated regulatory environment. Working in a specialised niche within the expansive financial services industry, SMSF auditors grapple with numerous requirements and obligations. The complexity of their operational landscape is exacerbated by the recent surge in legislative changes that have significantly influenced the SMSF sector. Examples of these changes include the proposed tax on total super balances over $3 million, or Division 296 tax, and the introduction of the non-arm’s-length expenditure regime.

There is an indication the challenges within this evolving landscape may have become too burdensome for auditors operating in the field, particularly for those only servicing a small number of funds. ATO data for the 2021 financial year highlights this situation, indicating 26 percent of practitioners were auditing less than five funds and 44 percent were performing audits on between five and 50 SMSFs.

According to Super Sphere director Belinda Aisbett, for practitioners in this category, the work of auditing SMSFs may no longer seem worthwhile given the associated risks and hassles.

“There’ll be auditors that don’t do very many funds who have just decided, for whatever reason, now’s the time to get out. It’s not a benefit to them to stay in the space. There’s a lot of specifics required to stay up to date as an SMSF auditor,” Aisbett explains.

“And if you only do a handful of funds, that would be a really onerous task. So I suspect a big number or a big percentage of that drop would be just those smaller auditors who’ve thought it’s just not worth the trouble. I can’t stay up to date, so I’ll just exit the space.”

Evolv Super Audits founder and The Auditors Institute director Ron PhippsEllis concurs but suggests the ongoing educational requirement auditors are required to maintain, which can be costly, might be another contributing factor prompting professionals to exit the sector.

“There is a large cohort of SMSF auditors who do very small amounts of funds. So the minimum is 30 funds, but there’s quite a lot who do less than 100.

And I’m figuring that their requirement to maintain minimum continuing professional development hours is also creating a barrier for them to want to remain in the industry,” Phipps-Ellis says.

It is worth noting the SMSF auditing profession predominantly comprises experienced practitioners. ATO statistics from 2022 show about 41 percent of auditors in the field are over 60. Although this figure has decreased from nearly 50

percent in the previous year, it perhaps can be inferred the recent decline in auditor numbers may be influenced by older practitioners opting for retirement or a similarly motivated exit.

A cause for concern?

Care must be exercised when examining the drop in numbers. At the start of the year, 374 auditors had their registrations annulled, with a further 30 removed from the register in June 2023. While the majority were deregistered for failing to submit annual statements, there were some practitioners who deliberately waited for ASIC to take its action to avoid paying the registration cancellation fee. This was originally set at $899 but has been reduced to $193.

SMSF Association head of policy and advocacy Tracey Scotchbrook believes the latter has impacted the overall auditor numbers, but says the industry body is not worried about the situation.

“The decline in registered auditor numbers is something the association is aware of, but it’s not something that concerns us, rather we see it as a natural consolidation in that space. I think why we’ve seen more recently an increase in the numbers of people leaving has been largely to do with the change in the ASIC fee structure,” Scotchbrook observes.

“Earlier this year, there were a number of auditors that ASIC had struck off the register and a large portion of those hadn’t submitted annual returns to ASIC. So ASIC terminated their registrations. And we think that a lot of that was driven by that $899 fee.

“I think now that the fee has actually come down, we’re just sort of seeing the natural movement of those that are going through the proper processes and deregistering because it’s no longer fit for purpose.

“The SMSF Association’s position is that we would like to see no fee. That should not be a barrier to exit, it should be frictionless. If somebody’s no longer capable or no longer willing to continue as a registered auditor for whatever reason, then they should be allowed to exit without penalty.”

As touched upon earlier, new independence standards for auditors were introduced on 1 January 2020 and took effect for audits performed from 1 July 2021. The Auditors Institute director Graeme Colley identifies this as another factor leading to sector departures.

“Historically SMSF auditing came from a cottage industry way back in the 1980s when the ATO put in the requirement for SMSFs to be audited, mainly because the bigger funds were being audited anyway. And then in 2013 we saw the registration of auditors. Now you would have thought those who were in the cottage industry and saw it becoming a bit more fair dinkum got out of it,” Colley says.

“But when the independence requirement was enforced sometime after that, it really sorted things out because what were common and accepted practices were no longer permitted under the independence requirement. And so a gradual a decrease in the number of auditors has resulted.”

On the surface, the significant exit of SMSF auditors has potentially painted a picture of an industry in decline, but this is not necessarily the case. To this end, Saul SMSF founder and managing director David Saul believes this phenomenon should be viewed as a positive development and might be precisely what the industry requires.

“To be honest, I think the reduction in registered SMSF auditors had to happen as a matter of course. SMSFs were previously just an add-on to many accounting practices and there was a requirement to have them audited,” Saul notes.

“The SMSF audit function wasn’t a sexy or complicated role in the business and it was usually done by a retiring partner of the firm or it suited someone who was easing themselves out of the business. You had all of these part-time operators that were doing SMSF audits. Usually, they were doing a lower number of audits and they were probably doing a bit of tax on the side and fulfilling several types of roles. As such I think there were a lot of practitioners who weren’t performing the audit function properly.

“So I think the reduction in numbers had to happen to get back to a core level of auditors who are truly serious about working with SMSFs and want to be professional in delivering those services.”

Bridging the gap

The question remains, though, as to whether the shrinking auditing industry can continue to effectively service an SMSF sector housing over 600,000 funds and seemingly growing. After all in 2014 there were around 74 funds per auditor, but today that figure stands at 140. However, the emergence of larger firms purely dedicated to SMSF audits may quell any angst over potential capacity constraints, Phipps-Ellis suggests.

“There is an opportunity for these specialised, audit-only practices to keep growing and gather more scale. And as they scale in a firm, you don’t need as many auditors because one auditor can do a lot more in one of these organisations than they could possibly do just on their own,” he acknowledges.

Supporting his viewpoint, ASF Audits head of education Shelley Banton asserts these more extensive and well-equipped firms are actively responding to the growing demand. However, this surge in capacity may have come at the expense of practitioners who were previously engaged in a smaller volume of audits.

“If you look at the number of auditors who are conducting audits on more than 250 funds, it’s increased from 53 per cent to 68 per cent over the past 10 years. What that means is those auditors today who are doing a smaller amount of audits are losing business to those who are doing a larger amount of audits,” Banton explains.

“We’re seeing an increase in the number of funds and they’re favouring being serviced by those accountants offering administration software and providing those efficient, streamlined services. Those accountants are then working with larger audit firms who are integrated with the software through application programming interfaces, which means the data integration is much more streamlined.

“If you’re auditing less than five funds you can’t get that sort of effectiveness because the SMSF administration software firms don’t offer it. You have to have a certain number of funds and five isn’t enough. You’ve got trustee clients who are potentially switching to those accounting firms who are using technology to its fullest.

“Looking at how those auditor numbers have dropped, the chasm is widening between those who are using technology to its fullest potential and those who aren’t. And I think that we’ll just see that gap widening as time goes on.”

A way forward

While a declining number of specialist SMSF auditors may not be as big a concern for the industry as it may appear, the lack of new entrants to the sector is another challenge being presented. ASIC data reveals 64 new practitioners sought registration in the 2023 income year, while 763 left the sector.

Aisbett has recognised some barriers to entry needing to be overcome.

“I think there are some challenges for people who want to come into the space. The application fee is $2000 so that’s a big cost for someone just starting out. Then you’ve got new entrants that will have independence issues because when you first start out, you get excited when you get your first client and you’ve got fee dependency issues,” she explains.

She points out a new approach to managing new entrants may be required to address the situation.

“Perhaps it might be worthwhile having some sort of mentoring approach so that these new entrants don’t necessarily have to fork out huge sums of money to get peer reviews. They could have a process where they have their hand held to a degree by a currently registered auditor to help them enter the space,” she says.

“I do a number of peer reviews for new auditors and it’s a significant cost to them, but those auditors are determined, they’re dedicated, they want to work in the space and they want to have a compliant approach and a quality approach. So that’s great for them. But how many others are deterred from entering because of those extra costs and issues?”

It’s clear there are a number of issues driving an exit of auditors from the industry. While some of these can be attributed to regulatory and legislative impacts, it appears the sector may actually be reaching a level of equilibrium, a change it sorely needed.

Whether the auditing profession can keep up with the growth of SMSFs remains to be seen, but there is optimism the industry will find solutions to address this evolving challenge too.