The balancing act of SMSF auditors
If auditors are, indeed, the eyes and ears of the regulators in the SMSF sector, Liz Westover writes that the new auditor registration regime will prove to be crucial as the industry evolves over the next few years.
Michael D’Ascenzo, Commissioner of Taxation, has described self-managed super fund (SMSF) auditors as the eyes and ears of the Australian Taxation Office (ATO).
Auditors play an important role in the integrity of the SMSF industry and are relied upon heavily by the ATO to ensure trustee compliance.
In his review, Jeremy Cooper also felt that SMSF auditors play a significant role in the superannuation industry, describing them as the cornerstone of the existing regulatory framework.
Unsurprisingly therefore, the Cooper Review panel gave some attention to SMSF auditors as part of the Super System Review.
Cooper’s final report, handed to the Federal Government in 2010, made a number of recommendations with respect to SMSF auditors, including the introduction of a new registration process as well as changes to promote auditor independence.
SMSF Auditor Registration
An announcement is still pending from the Minister for Financial Services and Superannuation, Bill Shorten, on various aspects of a new SMSF auditor registration process.
However, it has been confirmed that a registration process will be introduced and be managed by the Australian Securities and Investments Commission (ASIC).
ASIC has been tasked with developing the registration process, including registration requirements, in consultation with industry representatives.
The introduction of a registration process is a real opportunity to take stock of the SMSF audit industry and develop systems and processes that will produce positive outcomes, beyond creating a list of SMSF auditors, or regulation for regulation’s sake.
The new system can and should support the overall policy objective of the changes to ensure we have competent auditors carrying out quality audits.
The challenge in this will be ensuring that regulation or criteria for registration do not become too onerous, and that they do not impose too significant a barrier to entry that would ultimately place a stranglehold on the industry.
We need to make sure we have enough auditors to audit a growing number of SMSFs.
The new registration process, developed using a collaborative approach between relevant parties, will be the best approach to ensuring a workable and useful process that will meet good policy objectives.
Importantly, the new process should ensure that the professional bodies are supplied with the appropriate information to undertake directed activities to their members.
It is these directed activities that will truly enhance audit quality.
It has been an anomaly in the SMSF audit industry that the ATO, as regulators of the SMSF industry, has never been able to provide the professional accounting bodies (or other relevant associations) with the names of their respective members who were reported to them as conducting audits.
This created a scenario in which the ability to target those auditors with respect to education, communication and compliance was limited. The new registration regime, appropriately designed, can take away this limitation.
The Government has also confirmed that a competency exam will be introduced for SMSF auditors as part of the registration process.
Details of exactly who will need to sit this exam are still to be released, although it is likely that new auditors will be required to sit a test, as will some existing auditors who have only previously audited a low number of SMSFs.
Experienced SMSF auditors who have been conducting large numbers of audits are not likely to be required to sit an exam prior to registration.
It is questionable as to whether a competency exam will achieve any of the desired policy outcomes. Treasury's strategic review of audit quality in Australia does not identify competency tests as a driver of audit quality.
Rather, the drivers identified in the report include targeted communication and education, mentoring, on-the-job training, professional scepticism, technical training and supervision.
The final design of the registration process will need to support and facilitate these drivers as being part of the new SMSF audit landscape.
Independence
The independence of an auditor is a crucial aspect of audit activity. In his review, Jeremy Cooper believed “independence of auditors is crucial for the efficient and effective operation of the SMSF sector”.
His final report recommended mandatory outsourcing of SMSF audit activity.
That is, if a firm was offering any other services to an SMSF or its trustees, the firm would be required to decline the audit engagement and outsource to a third party in what Cooper described as “true independence”.
Unfortunately, such arrangements do not ensure independence. An auditor would still be required to take a principles-based approach to determine their independence.
Imagine an arrangement between two firms whose principals happened to be best friends or where a significant portion of an auditor’s work came from one source.
They may well be able to ‘tick the box’ under Cooper’s suggested arrangement, but their independence would still be questionable.
In fact, under the current Code of Ethics that applies to professional accountants, it is highly likely they would be required to decline the audit engagement.
The Government, in its Stronger Super reforms, rejected Cooper’s recommendation for mandatory outsourcing and instead adopted APES 110, the Code of Ethics for professional accountants as determined by the Accounting Professional and Ethical Standards Board (APESB).
Independence is a subjective issue to be determined by an auditor in relation to each and every audit engagement they undertake. It cannot be determined without considering the individual facts of each case.
This is why a prescriptive approach to independence would never work, and why the Government was right to back the principles-based approach as set out in APES 110.
All SMSF auditors will now be required to adhere to APES 110, regardless of their membership of a professional accounting body.
It is anticipated that adherence will be given legislative backing and SMSF auditors will be required to sign off on their adherence as part of their initial and ongoing registration with ASIC.
As the number of SMSFs in Australia increases, it is important to ensure that SMSF auditors are providing a high-quality service that can be relied on by trustees, Government and regulators.
We need to make sure the upcoming changes to the industry meet the goals of competent auditors and quality audits.
Over-regulation, without considering the implications, will only serve to stifle the industry.
Liz Westover is head of superannuation at the Institute of Chartered Accountants in Australia.
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