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The below was released by ATO - https://www.ato.gov.au/Super/Sup/Reciprocal-auditing-arrangements/

Reciprocal auditing arrangements

A major risk that relates to the performance of approved SMSF auditors is auditor independence.

Blatant independence breaches such as auditing your own SMSF or those for close family members have attracted our attention in the past. More recently we have broadened our focus to include other less obvious independence risks. One such area of concern is in relation to auditors who enter into reciprocal auditing arrangements.

A reciprocal arrangement arises where two auditors with their own SMSFs agree to audit each other’s funds. The threat to independence is akin to the scenario of a two partner practice in which one partner is asked to audit an SMSF where the other partner is a trustee.

Responses to a recent ATO survey suggested that some auditors believed that independence risks arising from such reciprocal auditing arrangements could be safeguarded against. It is the view of ATO and ASIC that there are no safeguards that can reduce the threats to independence arising from this type of arrangement.

Another reciprocal arrangement which raises independence concerns is where two professional accountants who are also SMSF auditors and prepare the accounts for a number of SMSFs, enter into an arrangement to audit each other’s clients’ SMSFs. Safeguards could include ending the reciprocal arrangement or spreading these referrals to a number of different SMSF auditors to minimise reliance on this source for SMSF audits.

When applying Accounting Professional and Ethical Standard (APES) 110 Code of Ethics for Professional Accountants, potential threats to independence in a reciprocal audit arrangement may include:

  • Self-interest threat – an SMSF auditor may be influenced to vary their audit opinion or not report a contravention if they perceive this will influence the outcome of the audit on their own fund or if they fear a potential loss of business as a result.
  • Familiarity threat – an SMSF auditor having a close relationship with, or a high regard for, the other auditor may be influenced to ignore certain issues or to undertake a cursory and inadequate SMSF audit.
  • Intimidation threat – intimidation due to other auditor’s knowledge or their industry contacts may influence the auditor to not report certain issues and to apply less scrutiny to the audit.

Approved SMSF auditors who continue to engage in reciprocal auditing arrangements will be subject to increased scrutiny. Referral to ASIC may result if we consider SMSF auditors have failed to meet the independence requirements.


 

Editors Comment: 

I have voiced my concern for many years on SMSF Auditor independence issues in the below situations:

  • A Audits B funds  and B Audits A funds: Auditor "A" audits funds for Accounting firm owned by Auditor "B", where Auditor "B" audits funds of Accounting firm owned by auditor "A". This is very common practice in small firms, say where the firm is administering less than 50 funds.

 

  • Employee relationships: Where a Pty Ltd company of an SMSF Auditor is employed 12 months in the year by an accounting firm. The company is paid a regular monthly fee by the accounting firmThis is generally the practice where the firm administers 50 - 100 funds - the employee prepares the funds accounts and does other non SMSF accounting work like a regular employee and issues audit report for all funds. Auditors company is used for billing purposes to hide employer / employee relationship. 

  • Multi Partner Firm SMSF Auditor: This situation is where an accounting firm has 3 / 4 Partners that manage 100 - 300 funds. One partner is chosen to be the firms "SMSF Auditor", other partners act as administrators of the funds which the accounting firm looks after. Other partners act as financial advisors / tax agents in the fund's income tax return. In this situation one or two staff are employed by the firm - who maintain two files for the fund - one accounting and one audit - generally the staff is supervised by the administration partner and the audit partner merely sings off the audit - no SMSF audit actually takes place.

  • Auditor Rotation: Here the auditor is more or less a full time employee of the administrator and each year, audits the same funds for only one administrator. This practice is generally used by large administrators - 500 + funds. In my opinion, the auditor and the audit firm must resign after three continues year's audits.

The ATO and ASIC has addressed the first situation, now I am hoping they will look into other situations. If all above four ideas are implemented by legislation - SMSF Audit will be a real business and skeletons will come out of the closet as I believe - many funds, which breach, never get reported.

I am aware, if all of the above four ideas get implemented, some accounting businesses will have to change their procedures etc, which may cost them. However, in my opinion, with these new laws, SMSF space will be truly cleansed. We will then have a system which will be complying - backed up with professional integrity of independent auditors.

Today should be marked as a "win day" for independent SMSF Auditors.

Manoj Abichandani

ASIC Approved SMSF Auditor

If you are in any of the above situation, Click here to learn how to conduct an independent audit of an SMSF in less than half time. For trainning sessions near you Click here.

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