Mark Phillips | November 2021
This article was current at the time of publication.
With input from CPA Australia, the Australian Taxation Office (ATO) has issued guidance on non-assurance services and in-house audits for self-managed superannuation fund (SMSF) auditors.
Since the independence requirements were clarified in the restructured APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (Code of Ethics) practitioners, in most cases, cannot prepare the account and then conduct audit for a self-managed superannuation fund.
Instead, they can either refer SMSF audits to another registered SMSF auditor or offload the accounting work.
However, the Accounting Professional & Ethical Standards Board (APESB) has since released an Exposure Draft (ED) of amendments to fee-related provisions of the Code of Ethics which, although subject to change, is expected to take effect from 1 January 2023.
Various stakeholders, from Deloitte, EY, KPMG to small-to-medium entities and sole practitioners, have pushed back on aspects of the ED, especially concerning SMSF auditor independence.
In its submission, CPA Australia questioned as “arbitrary” the selection of a 20 per cent threshold for audit fees from one referral source creating threats to independence.
“This threshold does not align with the thresholds for threats from audit fees from a single public interest entity [PIE] audit client of 15 per cent, nor the proposed threshold fees from a non-PIE audit client of 30 per cent,” says CPA Australia’s Senior Manager – Audit & Assurance Policy, Claire Grayston FCPA.
“We believe there should be better alignment between the fee thresholds for identifying an independence threat or clearer logic for a different fee threshold for referrals from one source.”
Regardless, APESB chief executive officer, Channa Wijesinghe FCPA, insists the threshold is not a prohibition as it does not prevent a referral source if it exceeds 20 per cent of total fees.
“If the 20 per cent is exceeded, the firm is required to evaluate the significance of the threat and apply safeguards when necessary to reduce the threat to an acceptable level,” Wijesinghe says.
Audit fees from one referral source over 20 per cent of total fees was an indicative threshold set by the ATO for its compliance monitoring.
“The threats are likely to be at a higher level where the referral source generates more than 20 per cent of the firm’s fees and has done so for [several] years,” an ATO spokesperson says.
“This is because there is more likely to be a dependence on the source and a concern about losing those clients [that] can create self-interest and intimidation threats.”
“We strongly advocated that the fees from one referral source need to be considered over an appropriate timeframe,” Grayston says.
“While there is no specific number of years after which a threat will arise, five years provides sufficient time for a firm to build their client base so that they are not over reliant on a particular referral source.”
Need for clarity
The ED does not clarify when a referral ceases to be a threat to independence.
If an initial referral is considered part of the 20 per cent threshold every year, what criteria will need to be met for a source to be deemed as no longer representing a threat to independence?
Will the referral threat remain for as long as the referral source has ongoing involvement in providing accounting or other services to the client?
According to Grayston, consideration needs to be given to the circumstances of the referral, not the proportion of fees alone.
For example, whether the referral source has an ongoing influence over the clients referred, which may affect the auditor’s independence.
“It may disadvantage a small firm in accepting new clients if the source of a referral creates an independent threat indefinitely,” she says.
“Instead, the referral source may cease to provide services to the clients referred and so the threat may abate.”
The proposed 20 per cent threshold relates to the total fees of a partner of the firm, an office of the firm or the firm itself.
As Wijesinghe says, this does not mean it is prohibited for fees from a referral source to exceed 20 per cent – however, if it is exceeded, the firm is required to evaluate the significance of the threat and act accordingly.
What are the safeguards?
Although the Code of Ethics is predominantly a principle-based standard, there are various “rules” throughout it – including in Part 4A – which set out auditor independence requirements.
Wijesinghe is adamant, however, that proposals in the ED will not create mandatory audit firm rotation.
Rather, where a firm determines action is necessary, it can implement safeguards such as having an appropriate reviewer not engaged in the audit review the work, ensuring a partner’s remuneration is not significantly influenced by referral source fees, or increasing referral sources to reduce dependency.
The risk of non-compliance
Without exception, all firms need to be satisfied they adhere to the Code of Ethics.
“When accepting or continuing an audit client, they need to document how they identified and evaluated independence threats and when necessary implemented safeguards,” Grayston says.
“If the audit file sets out the basis for the auditor’s assessment of their independence from an SMSF client – including relevant information and professional judgements made – it should be straightforward to address any queries from the ATO.”
She says that while threats to independence can depend on circumstances, fee dependency from a single client may be more significant – certainly on an ongoing basis – than from a referral source for multiple clients, which may diminish over time.
However, referral sources could have greater influence if they can provide further referrals.
“Auditors and auditing firms should have internal controls in place to ensure they evaluate all types of independence threats when completing an audit for an SMSF client, including the referral source issue,” the ATO spokesperson confirms.
“[We] use our data and any intelligence to monitor an auditor’s compliance with the independence standards as well as their obligation to complete a proper and adequate audit.
“Where we find serious breaches, we may refer the auditor to the Australian Securities & Investments Commission, which may apply enforcement action such as imposing conditions on the auditor’s registration or, for the most serious cases, disqualification.
“Where we find less serious breaches, we may provide education to the auditor and the chance to rectify any issues.”
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