SMSF Auditors Professional Association Stakeholder Group key messages 4 August 2020

Technical discussion

Publishing of SMSF frequently asked questions (FAQs)

The SMSF FAQs for COVID-19 have been relocated into related subject matter content on ato.gov.au. They have also been archived and permanently recorded on the ATO Legal Database.

This action item was completed. We published a News Article 19 August 2020 explaining the changes and emailed stakeholders the links to relevant web pages on 26 August 2020.

Feedback on Addendum to the Auditor/actuary contravention report (ACR) instructions

An addendum to the ACR instructions was published on 17 June 2020 in relation to COVID-19 relief for the 2019–20 and 2020–21 income years. The addendum was well received by the stakeholders. Auditors commented that the guidance was comprehensive, and they had received positive feedback from their clients.

Feedback on instructions for modifying Part B of the SMSF Independent Auditors Report (IAR) for COVID-19 relief

Recent changes were made to the instructions for the SMSF IAR in relation to modifying Part B of the report for COVID-19 relief.

However, there were concerns raised as to whether it is clear in the IAR itself whether such contraventions need to be reported, particularly given all the 'listed provisions' are still specified. Stakeholders requested further clarification around this.

On 7 August 2020 we asked for feedback on the best option to address concerns. Subsequently a decision was made to revert the IAR instructions back to their original wording to make it clear that auditors are still required to consider modifying Part B of the report for these contraventions. We also recommended auditors notify trustees in the management letter that these contraventions are ones the Commissioner will not take compliance action against for the 2020 and 2021 financial years.

The changes to the IAR instructions reflecting stakeholder feedback were published on 7 September. At the same time, we also published an accompanying News article explaining the changes.

Update on proposed legislative instrument on rental deferrals

Draft Legislative Instrument SPR 2020/D2 Self Managed Superannuation Funds (COVID-19 Rental income deferrals – In-house Asset Exclusion) Determination 2020 was published on 3 August 2020 and is open for public consultation until 31 August 2020.

The determination was drafted to cover situations where an SMSF trustee provides rental relief in the form of deferrals to a related party tenant or the SMSF has invested in a regulation 13.22B or 13.22C entity that has provided rental deferrals to tenants due to the financial impacts of COVID-19.

We published a News article on 4 August 2020 regarding the Open consultation. Comments on the draft Legislative instrument should be emailed to Kellie Grant, the contact officer at Kellie.Grant@ato.gov.au.

New Independence Guide and its impact on in-house audits

We published a News article on 24 June 2020, and emailed stakeholders on 1 July 2020 regarding the new Independence Guide (5th Edition) issued on 27 May 2020.

The Independence Guide provides revised guidance on how to apply the framework in APES 110 Code of Ethics for Professional Accountants including Independence Standards, effective from 1 January 2020.

It was agreed that in-house audits will be difficult if not impossible moving forward, as the Code and Guide make it clear an SMSF auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements for the SMSF unless it is a routine or mechanical service.

For the account preparation to be routine or mechanical the SMSF trustee must take on the responsibility of the financial statements and have the requisite knowledge, skills and experience to do so. Most trustees leave these types of management responsibilities to their fund administrator so where an auditor works for the same firm as the fund administrator who is making decisions on behalf of the fund, the auditor cannot audit that fund, no matter how simple the investments.

Even where a financially literate trustee takes on the responsibility for managing their fund and for the financial statements such that the service becomes routine or mechanical, the auditor must still address any self-review threats created by providing such services that are not at an acceptable level.

Other discussion points included:

• how the ATO will be able to identify in-house audits, for example, in cases where a firm prepares the financial statements and performs the audit but 'white labels' the statements so they are lodged under a different firm’s tax agent number
• the need for further clarity around the meaning of 'routine and mechanical', to ensure a consistent approach is taken to the interpretation of these words
• the practical effect of the requirement that an auditor, their staff or firm cannot assume management responsibility for the fund
• the importance of auditors and accountants having a proper understanding of the independence requirements.

The ATO intends to write to auditing firms during the 2020–21 income year to assist auditors comply with the requirements under the Code.

If stakeholders have any concerns regarding the independence requirements, they were advised to email them to ATOSMSFauditorteam@ato.gov.au.

Update on SMSF annual return (SAR) changes

The 2020 SAR has been amended so that trustees no longer need to report whether Part A qualifications have been rectified. The requirement to report rectifications only applies to Part B qualifications.

The instructions for the 2020 SAR have also been changed to direct trustees to report 'No' at Question 6 label B (Part A qualification) where the IAR is qualified due to insufficient audit evidence regarding the opening balance.

The content of an earlier News Article explaining these changes was incorporated into existing webcontent regarding the financial audit on 12 August 2020.

Move to Online Services for Business

The transition of the electronic superannuation auditing tool (eSat) to Online Services for Business is continuing as planned.

We developed prototypes of the ACR and Audit Complete Advice (ACA) in February 2020 and obtained feedback from stakeholders and other auditors through co-design sessions, limited practically during COVID-19. We are currently undertaking usability testing with a small group of participants in a controlled production environment.

Based on feedback from larger firms we have designed a bulk ACA template, which will make it easier for auditors to lodge ACAs by completing the template for all funds audited once a year if they prefer, as an alternative to completing them per fund. We are also considering advocating for a law change to make ACAs mandatory.

We asked stakeholders to advise us if they have a preference for completing ACAs for each fund or in bulk or if they have any other comments to feed into this process by contacting ATOSMSFauditorteam@ato.gov.au.

2019–20 ATO Compliance Program update

Our Compliance Program for the 2020–21 income year will continue to include the four key areas: Top 100 Auditors including an extension to the Top 200 auditors, high risk auditors, SMSF auditor number (SAN) misuse and reciprocal auditing arrangements.

Our Compliance Program outcomes for the 2019–20 income year are set out below:

Top 100 auditors

This group is selected based on the volume of audits they perform (>500 funds).

For the 2019–20 income year we completed 25 audits on the Top 100 auditors, resulting in the following outcomes.

Of the four auditors referred to ASIC, two referrals were for independence issues, one referral source and insufficient documentation substantiating their audit opinion.

The other two auditors were referred for the following reasons:

• insufficient evidence
• not evaluating available evidence
• not documenting their audit
• lack of knowledge of the SISA and/or SISR
• lack of engagement and trustee representation letters
• lack of plans
• insufficient continuing professional development (CPD).

The most common contraventions resulting from a lack of documentation are of sections 62, 65, 67, 109 of the SISA and regulations 4.09A and 8.02B of the SISR.

The outcomes to date demonstrate that the Top 100 auditors are generally complying with their obligations. 70% of completed cases resulted in an education outcome, as our compliance activities largely revealed minor deficiencies related to a lack of audit evidence, which if obtained may have resulted in unidentified contraventions.

The Top 100 Auditor program is likely to be finalised in the 2020–21 income year and the program extended to cover some of the Top 200 auditors.

High risk auditors

High risk auditors are those with known independence issues in the past, and those who demonstrate risks with auditor competency and audit quality.

During the 2019–20 income year we completed 61 high risk audits, resulting in the following outcomes.

The 21 auditor referrals to ASIC were for the following reasons:

• 18 did not comply with independence requirements
• 8 had inadequate or no audit plans
• 9 had inadequate, outdated or no trustee representation and/or engagement letters
• 19 had insufficient audit evidence to support their audit opinion
• 7 did not sufficiently evaluate the audit evidence
• 14 demonstrated a lack of knowledge
• 9 failed to sufficiently document the audit
• 4 did not meet their CPD requirements.

In relation to the 25 combined referrals to ASIC, 21 high risk and 4 top 100 during the income year, we have received 13 outcomes from ASIC to date, as follows.

SAN misuse

We completed 93 SAN misuse audits and reviews during the 2020 income year.

In March 2019 we commenced our SAN misuse mailout for the 2017 income year. A response rate of 50% was achieved. From the responses we identified 1445 instances of SAN misuse involving 626 tax agents and contacted these tax agents to determine whether the misreporting was inadvertent or deliberate.

Our investigations revealed approximately 1000 funds misreported inadvertently. Many instances were the result of software rolling over a previous auditor's details and the tax agent failing to check.

With respect to the remaining incidences of SAN misuse we investigated for the 2017 income year:

• 74 tax agents representing 106 funds did not respond to our requests for information and were referred to the Tax Practitioner's Board (TPB)
• 18 tax agents representing 154 funds were referred to the TPB for deliberate SAN misuse, 4 instances resulting in administrative sanctions in the form of written cautions for breaches of the Tax Agent Services Act 2009 Code of Professional Conduct. Other sanctions imposed included orders to complete certain TPB approved training courses and conditions on registration.

More recently, we have seen some stronger outcomes from the TPB in relation to SAN misuse referrals, including suspension and termination of registration, in most cases where tax agents lodged a SAR knowing an audit had not been completed.

In September 2019 we commenced our SAN misuse mailout for the 2018 income year. A response rate of 40% was achieved. From the responses we identified 832 instances of SAN misuse involving 230 tax agents. We recently contacted the tax agents who prepared the 2018 SARs and issued reminder letters on 19 August 2020.

Our SAN misuse mailout for the 2019 income year is scheduled to commence in September 2020. On 20 August 2020 we published News articles regarding the 2019 SAN misuse mailout and 2018 SAN misuse mailout results.

Auditors performing no audits for five years

In May 2019 we wrote to 109 registered SMSF auditors who had not been reported as an SMSF auditor on a SMSF annual return in the past five years. These auditors are considered a risk as they may no longer have the relevant knowledge, skills and practical experience to undertake SMSF audits.

We asked the auditors to provide us with evidence of audit work they had undertaken in the past five years, and evidence that they had met their CPD and professional indemnity insurance requirements during this period.

Following our review, 35 auditors voluntarily cancelled their registration and 31 provided evidence to support their request to remain registered. We referred the remaining 43 auditors to ASIC for failing to engage or provide information, resulting in 37 auditors having their registration cancelled and six having conditions imposed.

Australian Securities and Investment Commission (ASIC) update

ASIC advised that the next quarterly media release will cover auditors who have not performed audits for 5 years. This media release was issued by ASIC on 19 August 2020, and can be accessed on the News CentreExternal Link on their website.

Auditing and Assurance Standards Board (AUASB) update

Revised Guidance Statement GS 009 Auditing Self-Managed Superannuation FundsExternal Link (GS 009) was issued by the AUASB on 22 June 2020. GS 009 provides guidance to assist approved SMSF auditors fulfil the objectives of audits or assurance engagements and is considered a valuable resource for the auditor community and ATO staff. The AUASB advised that the guidance has been well received to date. The ATO and AUASB plan to record a joint podcast in August on the key changes.

Other business

Stakeholder Starter pack and Statement of membership expectations

A Member starter pack and Statement of membership expectations was recently issued to stakeholders. The Starter pack provides background information on stakeholder groups and the protocols to follow. The Statement of membership expectations makes it clear that members are required to contribute and provide feedback. This will help us monitor group performance and review membership.