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In-house SMSF audit services ‘not worth the risk’, says law firm

While SMSF firms may be reluctant to drop SMSF audit services in response to the APESB guidance, it may be an advantage in the long run, with audit services representing a high liability risk for little reward, says a law firm.

SMSF Miranda Brownlee 24 August 2020
— 2 minute read

Recently, there were changes made to the APES 110 Code of Ethics which address the issue of SMSF auditor independence.

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The guidelines state that an auditor cannot audit an SMSF where the auditor, their staff or firm has prepared the financial statements unless it is a routine or mechanical service. 

This is expected to impact firms that undertake both the preparation of financial statements and the audit for the same client. 

While the ATO is currently taking an educative approach as the industry adjusts to the changes, it has previously flagged that many organisations will need to make significant changes within their business

DBA Lawyers director Daniel Butler said while there is currently some reprieve on the enforcement of the independence standards for at least the current financial year, advisers should be looking at their position and making appropriate adjustments sooner rather than later. 

While firms are facing the “fear of the unknown” at the moment, he said, with auditors facing greater responsibilities, increased scrutiny from the ATO, higher liability risks and an increased workload due to the COVID-19 relief measures, the decision to cut SMSF audit services and use an independent firm instead could be a good strategic move for many firms.

Mr Butler said after representing a number of auditors in a number of cases in recent years, he has seen the ATO has ramped up its scrutiny of SMSF auditor work.

“The ATO is looking at these [audit] files in great detail, seeing whether the relevant evidence existed and that appropriate records of the work were undertaken,” he said. 

SMSF auditors are also facing an increased workload at the moment in light of the impact of COVID-19 and the resulting relief measures, he noted. 

“Auditors are going to have a lot on their plate and they’ve got a make a lot of tough critical judgements on how they handle these COVID matters,” he said. 

SMSF auditors are in a very delicate position, he said, and when firms look at the bigger picture, the “best thing may be to get out of audits”.

“Auditing is a very competitive game, you can get your audits done on a volume basis at a very competitive price,” Mr Butler said. 

“The only way you can make money from auditing is really with a volume business, and unless you’re [operating on] a real volume basis, then this audit work is one big distraction and not worth the resources given the amount of risk that they’re wearing.”

Mr Butler said by removing audit services from the firm, this can also help reduce some of the tensions around how different partners of the firm deal with clients, particularly for smaller firms.

“If you’re a small firm and you’ve got one partner who’s giving strategic advice, while the other partner is likely to have to do an ACR to blow the whistle, you’ve got tension. Will the partner who wants to blow the whistle win, or will the partner who may lose the client? [Removing the audit services] takes that out of the equation,” he explained.

In-house SMSF audit services ‘not worth the risk’, says law firm
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