Three-yearly SMSF audits not worth the cost or risks: professional bodies

Nest egg, superannuaiton, SMSF, retirement
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Professional bodies have roundly criticised the Government’s proposal for some SMSFs to only be audited every three years.

The Government announced in the 2018/19 Budget its proposal for three-yearly SMSF audits. It was initially unclear, but later set out, that each year would have to be audited, though not annually as is currently required but every three years.

Professional bodies have criticised the proposed measure – including the SMSF Association and accounting bodies CPA, CAANZ and Institute of Public Accountants (IPA) – in submissions in response to a Treasury discussion paper.

Treasury says: “The objective of the measure is to incentivise good record-keeping and compliance by SMSFs whilst maintaining system oversight and integrity.”

However the professional bodies argue the change to three-yearly SMSF audits is likely to push up audit costs for most funds, increase the prevalence of contraventions and create issues for the SMSF audit industry.

CPA/CAANZ say that the “proposed measure will not meet its stated policy intent”.

The IPA says the “Government has not provided any evidence to substantiate its policy rationale that the measure will reduce compliance on trustees”.

The SMSF Association says: “Reducing costs and making the sector more efficient are laudable goals, however, we do not believe this proposal will achieve these policy outcomes.” Though immediately after the Budget the measure had been “welcomed” by the Association.

Several submission pointed to the Super System (Cooper) Review, which considered the timing of SMSF audits and said that “the current frequency of annual audits is appropriate and should not be reduced”.

CPA & CAANZ, in a joint submission, examined 2018/19 pre-Budget submissions, and could not find a recommendation for changes to the timing of SMSF audits, “including from organisations that had previously advocated changes to this policy setting”.

SMSF professionals are likely to discourage eligible clients from taking up the option of three-yearly SMSF audits. The SMSF Association surveyed some of its members and found that 84% would recommend their clients continue to have annual audits.

The survey, which had 249 respondents, also found that 89% didn’t support the proposal for three-yearly SMSF audits and 86% thought it would not reduce costs.

“We believe that the proposed policy would not achieve the policy rationale of reducing costs for SMSF trustees,” says the SMSF Association, in its submission.

“In the majority of cases, our members conveyed the notion that SMSF audit fees may in fact increase. Auditing three years’ worth of information may not create the desired efficiency due to the fact that auditors and trustees will lose familiarity with the fund. This would result in further complexity in auditing transactions that have occurred up to 36 months prior.”

However simple SMSFs with “vanilla” investments could see a “small cost savings by moving to a three-year audit”. SMSFA members suggested the best-case was a $600 reduction in audit costs over three years, from $2,100 to $1,500.

But the SMSFA says this benefit is “quite minimal” compare to the risk of higher costs to other funds and SMSF professionals.

“Where audit savings do occur, there is a risk that the proposal may merely push costs from the auditor to the SMSF adviser, administrator or accountant. It is highly likely that if an SMSF is moved to a three-year audit, an additional layer of checks and reviews will be undertaken by these parties as a ‘best practice’ process when an SMSF is unaudited in the financial year under review.”

84% of respondents to the SMSFA survey believed that a three-year audit cycle would increase time spent on compliance by auditors, accountants, advisers and administrators and SMSF trustees.

CPA/CAANZ note that auditors will still have to audit the funds for each of the three years, and the delay between events and the audit will make it a “more time consuming and costly exercise” to gather audit evidence.

“As a result, the measure may be at best a potential cost deferral but may in many cases lead to higher audit fees.”

Also errors or contraventions may have existed for up to three years, with this delay possibly resulting in “greater administration, costs, and penalties because the scale and impact of the error or non-compliance often multiplies over time”.

The value of the Auditor Contravention Report (ACR) to the ATO may be diminished by the reduced frequency. “If auditors were only identifying and reporting contraventions when they are engaged every three years the timeliness of the ACRs would clearly be lost. It would also result in many more rectified contraventions being reported for little regulatory value. The flow on effect to the ATO’s compliance program will be less reliable data when it is based on the SMSF Annual Returns (SARs) that will be unaudited for two out of every three years.”

The accounting bodies also have concerns that three-yearly SMSF audits would disrupt the audit sector.

“The eligibility criteria and key events proposed in the discussion paper may limit the uptake of three-yearly audits and so minimise the potential impact on SMSF auditors’ workflow. However, if there is a large take-up of the three-year audit cycle there is a real risk the variable workloads and flow-on effect on revenue will make it difficult for audit firms to manage staffing levels and may see many auditors exit the sector, resulting in future supply shortages and upward pressures on audit fees,” says the CPA/CAANZ submission.

The IPA has similar concerns: “A reduction in audit frequency could alter the workflow of the SMSF audit industry, reducing profitability. This could lead to a reduction in the number of businesses specialising in SMSF audits and lower quality audits.”

The IPA was also critical of the dismissive attitude taken by Treasury in the discussion paper, which said that “concerns will be mitigated by appropriate eligibility criteria and, if necessary, transitional arrangements”.

“Considering the number of concerns expressed by stakeholders, we find this statement of ‘will be mitigated’ to be unhelpful and downplays the important role SMSF auditors perform in the regulatory oversight of trustees,” says the IPA.

“Whilst we appreciate some of the concerns can be mitigated, to categorically say they will be addressed through appropriate eligibility criteria, suggests that Treasury may not fully understand the SMSF audit procedures and the environment that SMSF’s operate under.”

The IPA gives the example of checking that assets are held on trust for the fund as one risk that can’t be managed through the Annual Return.

The IPA suggests other ways to reduce the audit burden on SMSFs, including removing the need to report certain minor contraventions, removing the need for auditors to review certain documents and the design of “more relevant and efficient mandatory auditing standards applicable to SMSF’s audits”.

“If the overall aim is to reduce red tape and costs for trustees, these other options should also be evaluated and bench-marked against the change in audit cycle proposal,” says the IPA in an earlier submission.

The professional bodies are calling for the Government to not proceed with the three-yearly SMSF audit proposal, or if it does proceed to at least make substantial changes.

SMSFA says: “If the Government does choose to proceed with the proposal then we strongly suggest that it considers a simplified, principles-based eligibility test and requiring SMSFs that are using a three-year audit cycle to have a light touch compliance check style audit in the non-audit years.”

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