What is the meaning of an Independent SMSF Audit?

Auditors are required to be independent smsf auditors – and have been for some time.

As an ASIC approved SMSF Auditor, WE ARE REQUIRED to be independent under the SISA and SISR – being the Superannuation Industry Supervision act and regulation respectively.

These are specified in the APES 110 Code for ethics for professional Accountants and the Auditing standard ASA 102 requires SMSF Auditors to comply with APES 110. We must follow all auditing standards.

What is APES saying?

Well, it works something like this. Identify any and all threats to independence > Work out which threats are unacceptable threats, Take action on any unacceptable threats to independence.

How do we identify threats?

APES 110 identifies and clarifies what these threats are.

Self interest – As the name suggests, financial motivations keeping the Auditor from losing a client. Maybe they are a client that provides a lot of work to the auditor and so, they are not worth losing. This may compromise an auditors work or opinion. At the most – 20% to 30% of an auditors work can come from a single source.

Self-review – Where essentially an SMSF Auditor is auditing the work of someone within their firm. I have always found this one concerning even before these independence requirements came out. An auditor is far less likely to give a true opinion and less likely to report potential financial or compliance breaches where this is the case.

Advocacy Theat – An SMSF Auditor conducting work for another accountant and is essentially giving biased opinions in exchange for the accountant telling everyone how good they are as an auditor.

Familiarity Threat – Easy one – they have been clients of yours for such a long you are almost friends or are friends and so an SMSF Auditor is less likely to provide a true and fair opinion.

Intimidation threat – happens from time to time where an SMSF Auditor is threatened with losing work, being reported, or similar. These threats must be eliminated. I have personally reported accountants over this threat.

A particular circumstance might involve multiple threats at the same time.

What do we do when there is a threat?

Is the threat at an unacceptable Level? We work that out – this looks a bit subjective really – and it can be, but it doesn’t have to be. APES 110 talks about the reasonable and informed third party test.

I look at it like this – are any of the threats mentioned above apparent or obvious both to myself as the auditor and to someone external to me, if I were to tell them about the threat? If most people agree that it’s a threat (and therefore unacceptable) then we move to taking action to mitigate this threat. I personally have zero tolerance towards unacceptable threats to independence. That’s my position and I stick to it.

Taking action on threats to independence?

Yes – where a situation arises where an SMSF Auditor is compromised with threats of obtaining less work that’s a threat. There is a severe financial consequence whenever the SMSF auditor is not doing what he is told – like accepting less information – or asked to change opinion either by anyone who is essentially paying the SMSF Auditor, by the client or an intermediate third party.

This practice is still rife in the industry and something needs to be done about it. I personally want to see the ATO opening up a special line for SMSF auditors to report it. But many do it through secondary channels.

More to come…