The body that oversees and the issues standards that outline the responsibilities of SMSF professionals, the APESB (Accounting Professional & Ethical Standards Board) has recently published an updated Independence Guide.
Tied closely to other recent changes made to the APESB’s Code of Ethics 110, released last January, these guidelines specifically spell out a potential new direction regarding the independence standards expected for SMSF auditing practices.
The new Independence Guide Fifth Edition, issued in May 2020, draws a new line in the sand — or rather writes in that sand the phrase “routine or mechanical”.
This term is firming as the critical indicator of where independence disappears, with the guidelines affirming that an auditor cannot perform the auditing process for any SMSF when the auditing business (the firm and its staff) has also prepared the fund’s financial statements, unless this is done as a “routine or mechanical” service.
While that term may seem relatively open to interpretation, the new guidelines are tangible reason to re-think this standpoint.
Sharif Eldebs is the founding director of Assured Super, an independent audit firm that provides audit services for accountants, financial planners and SMSF administrators. Sharif contends that the routine or mechanical tasks referred to would rarely be found in current SMSF accounting processes.
“A routine and mechanical service would be where there is very little or no professional judgment in preparing the financial statements,” Sharif says. “For instance, a company can have their own in-house accountant who prepares the general ledger, lodges the BASs, and gets the accounts up to a trial balance stage. So then an auditor can just plug in the client’s numbers into some type of template to produce a set of financial statements. That can be seen as routine and mechanical.”
But Sharif’s experience sees a divide between auditing as provided in accounting circles and the sort of service required by the SMSF sector. “In the SMSF world, the above situation would rarely happen,” he says. “The trustee may prepare the financials up to trial balance stage, and then give those numbers over to their accountant — more or less just handing over bank statements, source documents, and these days we have data feeds.”
“But I’d say that in 99.9% of the time, a trustee will just leave it up to the accountant, and just say ‘yeah here’s all my books, you deal with everything’.”
And it is precisely here where the new line in the sand is drawn.
For firms to maintain both accounting and auditing clients, the task will come down to having conclusive documentation of independence between these functions, however in Sharif’s experience this may be difficult. Many firms may have to make a choice between providing one service or the other. “I can’t see firms giving up doing the accounting work in these situations, but they probably may give up the auditing work,” he says.
The thing to be aware of, he says, is that the ATO has already flagged that the issue is already on its radar. “So they will be looking at examples where the tax agent’s address is the same as the auditor’s address and so on. But they have said they are not going to ‘commit compliance resources’ until at least 2021. So I guess they’re allowing some accounting forms to get their house in order.”