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  • SMSF Auditors Professional Association Stakeholder Group key messages 12 August 2019

    Proposed guidance material

    Auditor checklist

    This checklist contains what the ATO audit staff look for when conducting an audit or review on an auditor. The checklist should be published by end of September.

    Market valuations and unlisted assets

    This provides guidance to auditors on what is sufficient appropriate audit evidence for verifying the market value of unlisted share or units in unit trusts and how to go about modifying the audit report and lodging an Auditor/actuary contravention report (ACR) when there is insufficient evidence.

    Our guidance was published on 28 August and has been linked to the valuation guidelines for SMSFs. It can be found at SMSF auditors verifying market values of unlisted shares or units in trusts.

    The stakeholders agreed that it would be better for this guidance to be incorporated into the ATO's valuation guidelines and Guidance Statement GS 009 Auditing Self-Managed Superannuation FundsExternal Link (GS009).

    Investment strategy Q&A for auditors

    After extensive consultation it was decided post meeting that this guidance would not be progressed. Auditors could refer to existing guidance in GS009 and trustee awareness on ensuring the investment strategy obligations were met could be raised through the planned ATO diversification mail out campaign to SMSF trustees (as discussed below).

    SMSF trustee and auditor letters regarding diversification requirements for purpose of complying with the investment strategy requirements

    Draft trustee letters and auditor letters were presented to the stakeholder group for feedback. It was explained that these letters would be sent to SMSF trustees and their auditors who had invested 90% or more in one asset or asset class asking them to check their investment strategy had complied with the diversification requirements and other factors stipulated in paragraph 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994External Link. Stakeholders supported the proposed letter campaign although some stakeholders recommended removing the penalties clause from the letter. We decided to retain the penalty clause as we were concerned that some trustees might ignore the letter or perhaps complain if the letter did not make the consequences of non-compliance with the investment strategy requirements clear. Post meeting we updated our online article about the letters to explain that they were only issued to approximately 17,700 funds who had invested 90% or more in one asset or asset class and who also had a limited recourse borrowing arrangement (LRBA), which was used in 99% of these funds to acquire property. We focussed on this group due to the Council of Financial Regulators and ATO report to government on 'Leverage and Risk in the Superannuation System' which said that less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset's price, could lead to a significant value of the SMSF. The article can be found at Does your SMSF investment strategy meet diversification requirements?

    Future of eSAT and form changes

    • Electronic Super Audit Tool (eSAT) - We are currently exploring digital solutions to replace eSAT. The options are being considered in line with current ATO digital systems architecture. Consultation with auditors was undertaken earlier this year with additional consultation expected in the near future to assist in further developing the design. The eSAT replacement will provide auditors with a more contemporary digital experience.
    • Self-Managed Superannuation Fund annual return (SAR) changes - Changes to the SAR for the 2019 year required Part A qualifications to be reported. We will use this information in conjunction with Part B qualifications and ACRs to assess risk. We will review the need to report Part A qualifications in relation to verifying opening balances in time for next year's SAR.
    • ACR changes - Changes to Section G of the ACR for the 2019 year were made as a result of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019. The new whistleblower legislation came into effect on 1 July 2019 and has implications for auditors who report 'Other regulatory information' at Section G. We have added a disclaimer to Section G to make it clear that auditors providing information about a fund or trustee(s) under this section are consenting to the disclosure of their identity to the SMSF trustee(s). Auditors who wish to keep their identity confidential can make a voluntary disclosure at Making a tip-off. We also updated the ACR instructions in line with the form changes. In addition, we modified example 10 to provide guidance for auditors who are unable to obtain sufficient appropriate evidence to support the market value of an unlisted asset and are unsure about how to report the maximum value of the contravention.

    Current ATO compliance program and treatments

    Top 100 auditors

    Auditors in this population audit over 500 funds for the year. During the 2019 year, we completed audits on 51 Top 100 auditors. We anticipate finalising the balance this financial year.

    The results of the 51 finalised audits are as follows.

    Referred to ASIC

    2

    No further action required (fully compliant)

    10

    Early exits (mainly due to voluntary cancellations)

    5

    Education outcome

    35

    Referred to ASIC - These two auditors were referred due to a lack of knowledge demonstrated by the failure to identify contraventions. Both auditors had failed to obtain and to properly evaluate the evidence at hand. ASIC has advised of the outcome of one of these referrals which resulted in the imposition of conditions.

    Education outcomes - Were appropriate where minor deficiencies were detected. We also recommended that these auditors review their practices in the following areas:

    • ASA 230 - insufficient audit documentation (10 instances)
      • permanent file not maintained or lack of documentation regarding the interest rates on investments, ownership, insurance for collectables, etc
       
    • engagement letter (seven instances)
      • did not reference specific SISA sections and SISR regulations, not signed, not updated
       
    • independence issues (five instances)
      • one or two referral sources only
       
    • trustee representation letter (four instances)
      • not used to confirm facts, not obtained or not retained
       
    • audit plan/checklist (four instances)
      • incomplete plan or checklist.
       

    We plan to publish an article on the results of the Top 100 auditor compliance program in the future.

    High risk auditors

    During the 2019 year, we completed audits on 100 High risk auditors which resulted in the following outcomes.

    Referral to ASIC

    49

    No further action required (fully compliant)

    3

    Voluntary cancellations

    22

    Education outcome

    36

    SMSF Auditor Number (SAN) misuse

    We have been active in continuing to detect and address SAN misuse risk. We issued 5446 auditors with a list of the funds that reported their SAN for the 2017 year, between March to May 2019. Just over half of the auditor population (2,739) responded to our email. A total of 420 auditors couldn’t match ATO records to their client list, resulting in 1,445 instances of SAN misuse involving 626 tax agents.

    In July 2019 we issued a news article to advise auditors of these findings and to let them know that they can still respond to our mail out if they haven’t done so yet.

    We will be contacting 626 tax agents involved in SAN misuse for the 2017 year via email in order to distinguish the number of cases of deliberate SAN misreporting from inadvertent errors. We will look to investigate tax agents who have deliberately misreported SANs with a view to referring them to the Tax Practitioners Board (TPB) and for possible criminal prosecution if evidence supports this action.

    We also intend to issue lists to auditors of funds that reported their SAN for the 2018 year during the period September to November 2019.

    During the 2019 year, we finalised 77 SAN misuse reviews and audits and referredd five tax agents, responsible for deliberate SAN misuse to the TPB.

    Reciprocal auditing arrangements

    We issued letters to 622 auditors in March 2019 advising that reciprocal auditing arrangements are an independence threat. We completed an analysis following lodgement of SARs for the 2018 year which showed that reciprocal auditing arrangements have fallen from 622 to 317. Of the 317 auditors:

    • 269 received our letter after the audit engagement
    • 48 received our letter prior to the audit engagement.

    We will allow another 12 months before we can confirm how many auditors are continuing to participate in reciprocal auditing arrangements however considering that 49% of auditors in the original population have ceased the arrangement, our risk treatment strategies appear to have been quite effective.

    Auditors performing no audits for 5 years

    We issued 109 letters to auditors who had not undertaken any audits in the last five years in May 2019. Just over 20% of auditors in this population have voluntarily cancelled their registration. A handful of auditors have advised that the cost of the exit fees precluded cancellation of their registration. Half the population are yet to respond to our mail out whilst the balance have put forward a case to remain registered.

    Overdue lodgments

    We issued letters to 570 auditors with outstanding lodgements of their own funds in November 2018. A total of 325 funds have lodged on average two returns and 14 funds have been wound up. Auditors that did not respond will be risk assessed and those considered to be high risk will be referred for audit.

    Super Professional 2 Professional (P2P) Service

    This service is provided to auditors to assist them with any queries they have when conducting audits. We issued a news article and emailed 6,000 auditors in November 2018 and January 2019 respectively to remind them of our support services. This resulted in the doubling of P2P queries. For the period January to June 2019 we received 187 P2P queries compared to 100 for the same period in 2018.

    ASIC update

    ASIC has commenced publishing the enforcement actions they take against ATO auditor referrals with the first one being published on 22 July 2019. ASIC will publish a media release with enforcement actions on a quarterly basis. A link to the media release for the June 2019 quarter can be found at 19-189MR ASIC acts against SMSF auditor misconductExternal Link.

    ASIC outcomes based on ATO referrals and their own compliance activities for the 2019 year are as follows.

    Disqualification

    6

    Suspension

    1

    Conditions imposedFootnote1

    25

    Voluntary cancellation

    19

    ASIC initiated cancellation

    1

    Auditing and Assurance Standards Board (AUASB) update

    The update of GS009 is on the AUASB's work program and is due to commence by December 2019. A lack of resourcing continues to be the main obstacle to progress. A number of guidance statements are due to be reviewed including GS009 which is considered a high priority. An update will be provided at the next meeting.

    There is currently a Parliamentary Inquiry into the regulation of auditing which impacts the AUASB, ASIC and possibly the ATO. Submissions on this matter are due by October 2019 and it may result in another review of the disciplinary processes of ASIC and the professional associations. The matter concerns RCAs and so may not impact SMSF auditors. The terms of reference are available at Terms of referenceExternal Link.

    A review of APRA is being undertaken following a recommendation from the Royal Commission. The concern is that APRA is not doing enough to oversee large funds. In its recommendations for the regulators, the report of the Royal Commission has called for the establishment of a new oversight authority for APRA and ASIC, independent of government, to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.

    Action item update

    Action item

    eSAT reference material

    Due date

    30 September 2019

    Responsibility

    All

    Action item details

    Professional associations to contact their members on the usefulness of eSAT reference material, including any parts that need to be retained.

    Footnote 1
    Conditions imposed - One of these auditors also voluntarily cancelled and another was also suspended

    Return to footnote 1 referrer

      Last modified: 25 Sep 2019QC 60186