Firms are urged to “grab the bull by the horns” and proactively adopt new SMSF independence measures.
Many accounting firms are still dragging their heels despite the rapidly approaching deadline for SMSF audit independence changes.
Our advice is to “grab the bull by the horns” and move through the discomfort now, to minimise disruption to both your firm and your clients. This is typically met with comments such as “I have no idea where to start”.
Our recommendation is to start the diligence process now, as there are significant internal and external factors that need to be taken into consideration. That said, many firms often bypass the internal due diligence process and launch into contacting external SMSF auditors.
In our experience, this often leads to less optimal results. Conversely, the first and, in some ways, the most important step is to conduct due diligence upon your internal SMSF offering and processes.
The answers to these questions should inform and help determine the optimal SMSF audit option to meet the specific circumstances of your firm.
Here are some considerations to get your internal due diligence and needs analysis underway and consequently minimise the level of disruption:
- Financial impact: Question what is the estimated net financial impact of losing the current in-house SMSF audits. While there may be a drop of revenue, there may also be a reduction in expenses (e.g. lowered PI insurance premiums if audit work is dropped).
- Chargeable hours: Forecast the impact upon chargeable hours and staffing. Due to the efficiencies inherent in conducting SMSF audits in-house, many firms will not see a proportional reduction in hours lost compared to the fall in revenue. As such, replacing internal SMSF audit fees with the same number of external SMSF audits may lead to an increase in chargeable hours required and, therefore, a drop in profit.
- Ceasing to offer SMSF audit services: Consider if we, as a firm, want to continue to offer SMSF audit services — or should we exit the space? Apart from possibly being a less enjoyable type of work for staff, ceasing SMSF audit services may well have an impact on the following:
- Lower risk of future litigation by disgruntled SMSF trustees.
- Removal of an area of increased ATO scrutiny and professional QA reviews.
- Partners and staff wanting to retain an SMSF auditor’s registration under ASIC will still be required to undertake the required CPD or risk losing the registration (currently 30 hours of relevant CPD each rolling three-year period). ASIC may also impose competency standards including minimum levels of practical experience.
- Staff considerations: Assess the impact the various SMSF audit options have upon staff resources and their skill sets (i.e. auditing other firms’ SMSFs versus exiting the SMSF audit space). Determine if the firm ceased doing SMSF audits whether staff could be reallocated to other parts of the firm, or whether staff would need to be decreased. As well, if the firm began offering SMSF audits to external firms, whether there’s enough staff of the right training and skill sets to be able to conduct such auditing work.
- The audit pool option: A topical area at the moment is whether a firm should consider participating in an SMSF audit pool with several similar firms? In this scenario, the firm’s SMSF audits would be allocated to various auditors within the pool. While this may appear initially to be a relatively simple and clean solution to “plugging” the revenue gap, there are some negatives that must be factored in:
- Whether other firms in the “pool” similarly conduct their SMSF audits (e.g. competency, cost, time frame and the risk profile of the client base).
- How the firm would satisfy the ATO that they have dealt with the self-interest and intimidation threats inherent in any “pool”.
- Would the firm be happy effectively losing the ability to change SMSF auditor if the quality, approach and turnaround times experienced was below expectations?
It is worth stressing that the ATO’s current position seems to be that while SMSF audit pools are theoretically possible, they strongly suggest that it would be very difficult to overcome the inherent risks.
We believe audit pools will only satisfy APES110 where the number of firms participating in the pool is very large, diluting the perceived negative impacts of issuing an adverse audit finding.