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  • Reciprocal auditing arrangements

    A major risk that relates to the performance of approved self-managed super fund (SMSF) auditors is auditor independence.

    A blatant breach of the requirement for auditor independence occurs where an approved SMSF auditor audits their own SMSF or the funds of close family members. Another area of concern to us relates to auditors who enter into reciprocal auditing arrangements.

    A reciprocal arrangement arises where two auditors with their own SMSFs agree to audit each other’s funds. The threat to independence is similar to the scenario of a two-partner practice, in which one partner is asked to audit an SMSF where the other partner is a trustee.

    The view of both the ATO and the Australian Securities and Investment Commission (ASIC) is that no safeguards can reduce the threats to independence arising from this type of arrangement.

    Another reciprocal arrangement of concern is where two professional accountants who are also SMSF auditors:

    • prepare the accounts for a number of SMSFs, and
    • enter into an arrangement to audit the SMSFs of each other’s clients.

    Safeguards could include ending the reciprocal arrangement or spreading these referrals to a number of different SMSF auditors.

    The Independence Guide (5th edition) also provides some examples of these types of reciprocal auditing arrangements.

    Under the Accounting Professional and Ethical Standard (APES) 110 Code of Ethics for Professional Accountants (including Independence Standards), potential threats to independence in a reciprocal audit arrangement may include:

    • self-interest – an SMSF auditor may be influenced to vary their audit opinion or not report a contravention if they perceive this will influence the outcome of the audit on their own fund or if they fear a potential loss of business as a result
    • familiarity – an SMSF auditor having a close relationship with, or a high regard for, the other auditor may be influenced to ignore certain issues or to undertake a cursory and inadequate SMSF audit
    • intimidation – the other auditor’s knowledge or their industry contacts may influence the auditor to not report certain issues and to apply less scrutiny to the audit.

    Approved SMSF auditors who continue to engage in reciprocal auditing arrangements will be subject to increased scrutiny. Referral to ASIC may result if we consider SMSF auditors have failed to meet the independence requirements.

    See also:

    Last modified: 06 Nov 2020QC 59850