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Self Managed Super Fund (SMSF) Article
SMSFs and the external audit

By Tony Negline.

This article may be out of date.

28th April 2004

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The Australian Tax Office is taking a keen interest in the auditors being appointed by self managed super funds.

So much so it is prepared to audit the auditors in order to get at SMSF's that are possibly in breach of the law.

The result is that it is going to become harder to find a good auditor to do the job properly at an acceptable price.

Which makes it more important for SMSF trustees to get the process right.

Each year trustees must appoint an auditor.  Only a person who satisfies certain qualifications can take on a SMSF auditing role.  A trustee cannot appoint a company as auditor.

This appointment can only occur during a trustee meeting.  (One SMSF trust deed requires at least 21 days written notice of a trustees meeting.  A very practical and efficient way for Mum and Dad to run their fund!)

Under the super laws, auditors are expected to confirm the integrity of a SMSF’s financial records and statements.  If a super fund invests in a related entity, such as a unit trust, then the auditor must closely review the related company or trust to confirm the integrity of that entity’s accounts and activities.

The super laws also require auditors to check if the trustees have complied with many of the super regulatory requirements.

The auditor must do both these jobs annually and must prepare a report to the trustee each year. 

The trustee is not required to give a copy of this report to the Australian Taxation Office on a fund’s annual return.  However trustees are meant to give the ATO on their fund’s annual return “a brief explanation of any … qualification [in the fund’s audit report] and/or other contraventions of the [regulatory] … requirements that occurred during the income year”.

Recent ATO data suggests that 20% of funds are not being audited with the necessary knowledge, skill and care.  The ATO estimate that there are about 9,000 SMSF auditors.  About 90% of these review less than 10 funds.  The Commissioner of Taxation, Michael Carmody, last year revealed that the ATO is directing resources into reviewing the work of SMSF auditors.  The ATO have reached the logical conclusion that it is easier to supervise the output of 9,000 auditors rather than trying to specifically supervise 260,000 SMSFs.

It is practically impossible for a super fund to comply with all the super laws.  There are too many rules and they are too complex.  Regardless we understand that the majority of SMSF annual returns submitted each year have no details of any contraventions.

In the next few years the number of SMSF auditors will reduce considerably.  Some auditors will realise (perhaps with some assistance from the ATO and industry associations) their limitations and will leave this business.  Many will leave because they will be unable to obtain Professional Indemnity Insurance for auditing SMSFs.

If an auditor finds something which, in the auditor’s view, doesn’t conform, or potentially will not conform because of some future transaction, with the super laws, the auditor must tell the trustees in writing.  In this report the auditor must request a written response from the trustees within a reasonable time frame about how the trustees intend to correct the super law breach or possible future breach.

If the trustees do not respond in the nominated time frame or, in the auditor’s view, do not respond satisfactorily then the auditor must tell the ATO about the breach and about the lack of adequate action by the trustee to correct it.  This rule is clearly giving a trustee a chance to correct a breach before the ATO finds out about it.

However recent significant amendments to the super laws will mean that if an auditor finds a breach they must tell the trustees and the ATO concurrently.  Trustees will no longer get a chance to correct a breach before the regulator finds about it.  We currently don’t know when this change will become effective but it will probably be in the next six to twelve months.

One major concern for the ATO is auditor independence.  “The person preparing the fund’s annual accounts or assisting the trustee in running the fund should not be the auditor,” said Susan Orchard, Superannuation Technical Consultant for the Institute of Chartered Accountants.

If an auditor is not independent there is a greater potential for breaches of the super laws to go undetected or unreported.  “A trustee might face fines or penalties if the ATO identify a breach during a review which should have been picked up during an annual audit,” Orchard said.  The ATO might also penalise the auditor she concluded.

A trustee can determine their auditor’s independence by checking that there is a separate engagement letter for the audit and that the audit report is not signed by the tax agent or their associate.

Auditing a SMSF should take between four to eight hours to complete and trustees should expect it to cost a commensurate amount.

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