Is the accountant off the hook?
There is much talk, maybe even defiance, about the changes to the independence standards of SMSF auditors resulting in some accounting firms facing the loss of fee income. Already some providers are seeking ways to defeat the upcoming changes by a range of methods. As an example, by pooling audits with the expectation of earning revenue from referrals back from the same pool. Reciprocal auditing arrangements can be twisted and disguised.
Imagine the auditor, who is not truly independent, issuing an audit report that includes in Part A the wording “…I am independent of the SMSF in accordance with the auditor independence requirements of….APES 110….”. Part B includes the following “I have complied with the independence and other ethical requirements relating to assurance engagements and applied Auditing Standards ASQC 1….” (Para 21 onwards is expansive on independence.) These are two bold statements in the audit report that the auditor must verify! If it is later determined that the auditor did not meet the standards, could that mean the audit report is false or maybe of no effect?
The trustee clients sign the income tax returns in good faith that includes the auditor’s details. They have relied upon the accountant for guidance and advice. If it is later determined that the auditor did not meet the independent standards, it could end up with an unhappy client for the accountant and there will be consequences upon investigation by the ATO.
A further aspect for the accountant who recommended and arranged for the audit without having taken due care to confirm the independence, is the status of the tax return. In these cases, has the accountant lodged a false income tax return? Consider the ramifications from the accounting body and the Tax Practitioners Board for any neglectful behaviour all for the sake of lost fees.
A further risk for the accountant who fails to ensure that the auditor is truly independent (or tries unsuccessfully to beat the system) is that if the mistake is made, it could involve many or maybe all the SMSF income tax returns lodged by that accountant which could later come into question.
The limited opportunity in the “routine and mechanical services” is unlikely to provide any real opportunities and safeguards to reduce the self-review threat to an acceptable level. This arrangement may typically suit sole practitioners who may not have the software to produce SMSF financial statements by providing a finalised trial balance to the auditor. Bear in mind that when an accountant assumes management responsibility for the preparation of financial statements for an SMSF then the services would unlikely be routine or mechanical. This would include networking firms.
CPA Australia recently put out the following statement. “The Australian Taxation Office, regulator of SMSFs and co-regulator of SMSF auditors with ASIC, has identified that in most circumstances accounting firms offering multiple services to SMSFs including audits will not meet the requirements of the Code (of Ethics for Public Accountants). Many firms will be required to restructure SMSF client engagements by withdrawing from ..… the audit.”
Professional Indemnity Insurance
Accountants who have wrongly taken part directly or indirectly in audit functions should check their PI insurance. Typically, a PI policy would exclude cover for an insured if they acted beyond their duty and by failing to exercise the standard care and skill reasonably expected of a person. Accountants should further consider if their actions to defeat or side-step the requirements for auditor independence could be argued as an intentional breach of the Code of Ethics or reckless disregard that could nullify any PI claim. This can certainly be an independence trap for the unwary!