The ATO and audit independence

16 Oct 2020

Meg Heffron

Managing Director

It’s great to see the ATO putting out its own commentary and explaining its compliance approach for the auditors when it comes to the new APESB Independence Guide. But there is an omission in the regulator’s response that would be well worth exploring.    

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The gap I’d like filled is the ATO’s position on the following arrangement:

  • a specialist firm (ABC Pty Ltd) prepares the financial statements,
  • that same firm conducts the audit, but
  • another business (let’s call them XYZ Pty Ltd) is the tax agent.

This is a really common arrangement for accounting firms that outsource their SMSF work but continue to manage the client relationship. In this case, the referring accountant is XYZ Pty Ltd and the firm to which they have outsourced is ABC Pty Ltd.

Conceptually, the argument for allowing this to continue is that there is a second firm (XYZ Pty Ltd) providing expert oversight and taking ultimate responsibility for the financial statements, even though they were both prepared and audited by ABC Pty Ltd. Those holding this view don’t try to claim that ABC Pty Ltd is providing a routine or mechanical service when preparing the financial statements. 

In fact, one of the great benefits of using a specialist is their expertise on the SMSF rules – it is “what they do” after all! 

Instead, proponents of this structure view the involvement (and ultimate sign off) of the financials by a separate tax agent as providing a genuinely independent eye that solves the problem.

But others argue (for example, Shelley Banton, ASF, in her article The limitations of routine or mechanical accountants) that the arrangement I have described would still fall foul of the new Independence Guide because, as a matter of fact, the same firm (ABC Pty Ltd) has both prepared and audited the financial statements.

I suspect the ATO, APESB and accounting bodies agree with Shelley. But I don’t know for sure. 

I would love the ATO’s guidance (and in fact the Guide itself) to be crystal clear on this with no room for doubt or debate. 

Many of us working in SMSF accounting and audit will need to make changes to our business models and service structures. The sooner there is absolute clarity on precisely what’s expected, the sooner we can get on with complying.