xx division - sharyn long chartered web viewinterestingly the word auditor comes from the latin ......

AUDITOR INDEPENDENCEWritten by:

Sharyn LongManaging Partner

Sharyn Long Chartered Accountants

© Author’s name, Company 2013Disclaimer: The material and opinions in this paper are those of the author and not those of The SMSF Professionals Association of Australia did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

Auditor IndependenceSharyn Long

CONTENTS

1 Introduction................................................................................................................................... 3

2 Greater Independence for SMSF Auditors.................................................................................5

3 The SIS Rules................................................................................................................................ 7

3.1 SIS Section 128F(d)................................................................................................................7

3.2 SIS Regulation 9A.06..............................................................................................................7

4 APES 110 Code of Ethics for Professional Accountants..........................................................8

4.1 Provision of Non-audit Services............................................................................................10

4.1.1 Preparation of the financial statements..........................................................................10

4.1.2 Valuation Services..........................................................................................................12

4.1.3 Tax Services.................................................................................................................. 13

4.2 Relationships between auditors and referral sources............................................................14

4.3 Firms that offer financial advisory services............................................................................15

5 Monitoring of Auditor Independence........................................................................................16

5.1 Summary of ASIC's inspection findings.................................................................................16

5.1.1 Larger national firms.......................................................................................................16

5.1.2 Other national and network firms....................................................................................16

5.1.3 Smaller firms.................................................................................................................. 18

5.1.4 Conflicts of Interest.........................................................................................................18

5.2 JAB quality review programs & disciplinary procedures........................................................18

6 The Cost of Independence.........................................................................................................20

Appendix 1 – APES 110 Section 290................................................................................................21

Appendix 2 – JAB - Decision Tree for SMSFs.................................................................................21

© Sharyn Long, slca 2013


1 IntroductionWhen I looked up independence, the thesaurus produced words such as “self-governing”, “self-sufficiency”, “autonomy”, “impartiality”, “self-rule”, “freedom” and “liberty”. These words provide images of an individual who are truly free of reliance on any other person or thing which in my view is a very good “yard stick” by which to judge if an auditor is truly independent.

Throughout time great reliance has been placed on auditors to provide comfort to investors and in the case of SMSFs, the members and the Regulator that things are as they should be.

In researching auditor independence, I discovered that the first auditors on record date back to circ 500BC and they were the spies of King Darius of ancient Persia. Apparently these auditors acted as “the King’s ears” checking on the behaviour of provincial satraps. Interestingly the word auditor comes from the Latin word “to hear” because in ancient times auditors listened to the oral reports of responsible officials (stewards) to owners or those having authority, and confirmed the accuracy of the reports. Over the centuries the role of auditors as verifiers of official reports evolved to include that of verifying written records. In the 16th century double-entry bookkeeping had evolved to the point of being documented by Luca Pacioli of Italy in the first known book on accounting. Pacioli was a very insightful man because he also recommended that the accounting records be verified by auditors. By the early 19th century auditors acting as independent outside experts were frequently called upon to investigate and report on business failures or to settle business disputes.

Modern auditing began in the mid 1800s in Brittan when the parliament passed the Joint Stock Companies Act, which for the first time required that company director’s report to shareholders via an audited balance sheet. But at that time the auditor wasn’t required to be an accountant nor independent, however in 1900 a new Companies Act was passed that required companies appoint an independent auditor. 1

What that short history lesson tells us is that the concept of auditors being independent has been with our profession for over a century, although in the early 20th century only balance sheets were provided and auditing was transaction based relying almost exclusively on internal evidence.

As a profession we tend to question the role and practices of the auditor when a major catastrophic event occurs. Inaccurate reporting practices contributed to the 1929 stock market crash and the world depression that followed through the 1930s. Widespread changes were then enacted to require companies listed in the US to lodge both balance sheet and profit and loss statements. The US led the way with further developments following the McKesson and Robbin’s fraud case, where in 1938 it was estimated that US$20million was wiped off the company’s reported US$87million in assets. The developments included the requirement for audit committees to be formed with non-executive directors and for auditor appointments to be approved by shareholders.

The next major shakeup happened in the 1970s, when after several business failures and alleged auditor failings in the US further regulation pursued from the recommendations of the Cohen Commission.

1 McGraw Hill Ebook, Introduction to Auditing – Chapter 1 - Professional Practice, Appendix 1B, Brief History of Auditing

© Sharyn Long, slca 2013 3


Those systems remained in place until the early part of this century when Sarbanes and Oxley questioned audit practices including auditor independence after the collapse of Enron which led to the demise of major accounting firm and the auditor of Enron, Arthur Andersen. Enron was considered a highly innovative energy company that piloted new energy solutions, but its financial performance was largely based on manipulating energy prices with related parties which hid liabilities and losses by speculating on energy prices. Likened to a Ponzi scheme, Enron relied on new investors so that the price of the Company’s shares continued to rise. The managing partner of Arthur Andersen tried to explain the apparent audit failure by attributing the problems to the vagueness of accounting standards and the complexity of Enron’s financial statements. However, Arthur Andersen had been involved in designing these transactions as part of their consulting work for Enron, so Arthur Andersen was effectively auditing its own work.

The Sarbanes–Oxley Act 2002 introduced widespread reforms including making company directors more accountable for financial reports and increasing the independence requirements of external auditors.

In this paper I have attempted to consider the issue of auditor independence more broadly and to adapt research and experience from the commercial world and apply that, where appropriate, to the self managed super sector.

I feel that there is general acknowledgement that SMSFs differ from commercial enterprises, predominately due to the following:

SMSFs are closely held, as all the members must be trustees and therefore members have the right to participate in major decisions impacting the fund. This differs from shareholders in a company where the board of directors is charged with making decisions and with some limited exceptions, shareholders generally have no opportunity to influence these outcomes.

There are very few commercial issues associated with most SMSFs, if an investment declines in value the member absorbs that loss and there is no detriment to any external party, unlike unsecured creditors exposed to an operating business who stand to lose if the entity defaults.

Self managed superannuation funds are however afforded tax concessions (as are all complying funds in Australia) and for this reason they are subject to regulations to ensure that these concessions are not abused.

Auditors play a major role in the regulation of SMSF by assisting the Regulator to police compliance.

Auditors also give trustees and members comfort that the assets actual exist and that the fund is compliant as they have a statutory obligation to notify trustee of breaches of SIS. Auditors also help trustees keep financial advisers, accountants and service others in check by confirming that the service provider got it right.

A new regime applies from 1 July 2013 so that self managed super fund auditors will need to be registered with ASIC and comply with mandatory independence requirements in order to retain their “SMSF Approved Auditors” status and continue to be able to audit SMSFs.

This paper is limited to addressing the independence requirements, for details on SMSF Approved Auditor registration refer to Concurrent Session 3A at the SPAA 2013 National Conference or http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/SMSF%20auditor%20registration


http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/SMSF%20auditor%20registration


2 Greater Independence for SMSF Auditors

The review into the governance, efficiency, structure and operation of Australia’s Superannuation System (the Cooper Review) made the following recommendations regarding SMSF Auditors in its final report issued in July 2010:

Recommendation 8.8

Government should:

(a) appoint ASIC as the registration body for approved auditors and give ASIC the power to determine the qualifications (including professional body memberships as appropriate) required for eligibility to be registered, set competency standards, develop and apply a penalty regime including the ability to deregister approved auditors. The registration requirements for approved auditors should be linked to minimum ongoing competency and knowledge standard; and

(b) task the ATO to police the approved auditor standards and enable information to be appropriately shared between ASIC and ATO so as to carry out their roles effectively.

Recommendation 8.9

Subject to the Government implementing recommendation 8.8, ASIC should develop approved auditor independence standards, which auditors must meet as part of their ongoing registration requirements, as outlined in recommendation 8.8.

Keys comments made in the Cooper Review Report to support recommendation 8.9 included:

The compliance audit is unequivocally the central component of the SMSF regulatory framework and in this regard, government is arguably as much a stakeholder as individual SMSF trustees

SMSF auditors have a fundamental role in the regulatory framework

The Cooper Review Panel preferred full independence whereby the auditor or auditing firm has no connection to services or advice provided to the individual member/trustees or their family businesses (that is wider than just in relation to the SMSF itself). This was supported by numerous submissions calling for legislated independence, whereby firms who audit an SMSF could not also provide non‐audit services to that SMSF.

The Review had access to ATO data that showed the following:

Auditors auditing 18% of SMSFs provided some other services, such as acting as a tax agent, accountant, financial adviser or administrator

ATO compliance activity showed 29% of auditors who were the SMSF’s accountant had prepared a material part of its financial statements and 28% of auditors showed evidence of a relationship or conflict of interest that might impact the auditor’s ability to be independent and had no safeguards to mitigate that risk

The Panel believing that unless independence standards can be reliably enforced auditor behaviour will not change and hence specific audit independence requirements form part of the approved auditor registration process.



The Cooper Review strongly believed that mandatory independence, including a full independence model was critical to the regulation of the SMSF sector. However, due to effective lobbying by SPAA (and other industry representatives), Minister Shorten softened the Governments response to the Cooper Review recommendation.

SPAA argued that the full independence model would create a bias by placing more stringent regulation on SMSF auditors than those applied to registered company auditors who were responsible for auditing Australia’s largest corporations.

There were also commercial factors to consider as the number of self managed funds continues to increase whereby the pool of SMSF auditors (estimated at approximately 11,500) would potentially decrease post registration. It was acknowledged that there are a number of specialist firms that only provide SMSF audit services however they were too few in number and capacity to cope with the number of SMSF audits.

Ultimately the Governments response to the Cooper Review on auditor independence recommendation (see below) reflected these sentiments.

The Super System Review recommended that ASIC should develop approved auditor independence standards, which SMSF auditors must meet as part of their ongoing registration requirements. The Review suggested that the independence standards should include that the auditor and auditing firm should not provide non-audit services to the SMSF.

The Government considers that prescriptive standards are not appropriate because an assessment of auditor independence requires a holistic assessment of the individual circumstances surrounding an audit engagement. Prescriptive standards cannot address all situations and can lose relevance over time as services evolve. Instead, the principle-based approach used in the Accounting Professional and Ethical Standards Board's (APESB) APES 110 — Code of Ethics for Professional Accountants is more appropriate because it allows the individual circumstances of an audit engagement to be taken into account and requires auditors to be independent both in fact and in appearance.

The Government will legislate to require SMSF auditors to comply with APES 110 as a condition on their registration and will request the APESB to develop guidance for SMSF auditors on how APES 110 applies in the SMSF context. Guidance will assist with SMSF auditors understanding of independence. 2

At this point the APESB formed a SMSF taskforce to address the Governments request in regard to SMSF audit specific guidelines. Much of the discussion within that Taskforce is confidential, but the main focus was on the following:

2 Stronger Super Information Pack — Government decision on the key design aspects of the Stronger Super reforms issued on 21 September 2011 by the Hon Bill Shorten MP


http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocType=

http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocType=

http://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/default.htm


3 The SIS Rules

3.1 SIS Section 128F(d)

Section 128F(d) of the SIS Act imposes the following statutory obligation on Approved SMSF Auditors.

An approved SMSF auditor must........

(d) comply with the auditor independence requirements prescribed by the regulations.

Section 128F is effective from 31 January 2013 and although auditors have until 1 July 2013 to become registered, if they do so earlier, they have an obligation to comply with the independence requirements from the date of their registration.

3.2 SIS Regulation 9A.06

SIS Regulation 9A.06 is effective from 31 January 2013.

For paragraph 128F(d) of the Act, the auditor independence requirements produced by the Accounting Professional and Ethical Standards Board Limited and set out in the APES 110 Code of Ethics for Professional Accountants are prescribed for all approved SMSF auditors.

Note:At the commencement of this regulation, a copy of the APES 110 Code of Ethics for Professional Accountants was available at www.apesb.org.au.



4 APES 110Code of Ethics for Professional Accountants

APES 110 Code of Ethics for Professional Accountants (the Code or APES 110) was originally issued in 2006 and last revised in December 2010, so that the current version applied from 1 January 2011.

APES 110 applies to “members” in public practice who are defined to be members of the professional bodies (namely the Institute of Chartered Accountants, CPA Australia and the Institute of Public Accountants, collectively known as the Joint Accounting Bodies (JAB)) that have adopted APES 110 as applicable to their membership.

The Code also defines members in public practice to be members, irrespective of their function classification (e.g. audit, tax or consulting) within a firm that provides professional services.

Once an auditor becomes an Approved SMSF Auditor under Section 128F of the SIS Act (registration has been available since 31 January 2013) the Approved SMSF Auditor has a mandatory obligation to comply with the requirements of APES 110. This requirement applies from the date of registration, not 1 July 2013 if the registration occurs prior to that date.

The independence requirements for audit engagements are addressed in Section 290 of the Code (see Appendix 2).

The conceptual framework relies on the premise that audit engagements are generally in the public interest, so it therefore follows that auditors should be independent of the clients that they are auditing. The public interest argument is more tangible when considering ASX listed companies or other operating enterprises that interact with external parties (such as shareholders, investors and suppliers).

In the case of self managed super funds it is the potential abuse of tax concessions that provides the connection to the public interest.

Following the recommendation of the Cooper Review and the Government’s response, the APESB formed a taskforce comprising representatives from the APESB, the JAB, SPAA, ASIC, the ATO and other industry groups to fulfil the request to develop guidance for SMSF auditors on how APES 110 applies in the SMSF context.

I was the SPAA representative on the APESB SMSF Independence Taskforce (the Taskforce) that considered the following four approaches in response to the Ministers request:

1. Development of a APESB standard;2. Development of an APESB guidance note;3. Updating the Code with SMSF specific paragraphs; or4. Adopting the JAB Independence Guide3.

3 Independence guide: interpretations in a co-regulatory environment, Version 3, June 2008



The Taskforce is still current, but it appears that option 4 is most likely, with amendments to the Code if there are deficiencies that do not adequately address the manner in which SMSF audits occur. Therefore the JAB Independence Guide last issued in June 2008 is in the process of being reviewed and is expected to be reissued in the near future.

The current version of the JAB Guide includes a Decision Tree (see Appendix 1) that provides an excellent summary of the process required to assess auditor independence.

The updated version is confidential until it is released by the JAB, and therefore the views I share here are based on the current version 3 of the JAB publication and are limited to my understanding of how additional guidance may be provided. These views are not necessarily those of the JAB and may not be reflected in the updated publication.

Comment is made in the existing publication that some auditors may think the Code doesn’t apply to self managed super fund audits as they are small entities.

Whereas the JAB does consider SMSFs to be “small clients”, it also highlights that close relationships are often more prevalent between small clients and their auditor and this can make for challenges in applying safeguards to reduce the threats to independence.

The Code would expressly exclude an auditor from undertaking an audit due to a lack of independence in the following circumstances:

An auditor cannot audit their own SMSF (APES 110, Section 290.102) An auditor cannot audit the SMSF where a partner within their own firm is a member/trustee of

that SMSF (APES 110, Section 290.124) An auditor cannot audit the SMSF where a relative or a related party of the auditor is a

member/trustee of that SMSF or where the auditor has a close personal relationship (APES 110, Section 290.127) or business relationship with a member/trustee of the SMSF (APES 110, Section 290.124)

An auditor cannot audit an SMSF where they have also materially prepared the accounts for the SMSF (APES 110, Section 290.168)

An auditor cannot audit an SMSF where their staff have prepared the accounts (APES 110, Section 290.162)

The first three exclusions above are straight forward and do not in my opinion require further explanation. However, the last two points are more subjective and will therefore require auditors to use their professional judgement to determine if they are truly independent.

It is likely that the proposed revised Guide will have examples covering a number of scenarios including the following that I have addressed in some detail below:

Provision of other services such as preparation of financial statements and acting as tax agent, and drawing a distinction between sole practitioners and multi partner firms

The relationships between auditors and referral sources Firms that offer financial advisory services



4.1 Provision of Non-audit Services

4.1.1 Preparation of the financial statements

This is a subjective and challenging issue that may lead to firms restructuring in order to take up their Approved SMSF Auditor registration or choosing to outsource their SMSF audits from 1 July 2013.

The Code addresses an audit firm providing accounting services in Section 290.167 to 290.171, these are summarised below.

Section 290.168 confirms that providing a SMSF with accounting and bookkeeping services, such as preparing accounting records or financial statements, creates a self-review threat when the firm subsequently audits the financial statements.

Section 290.169 states that the following functions are a normal part of the audit process that doesn’t generally create threats to Independence.

(a) the application of accounting standards or policies and financial statement disclosure requirements;

(b) the appropriateness of financial and accounting control and the methods used in determining the stated amounts of assets and liabilities; or

(c) proposing adjusting journal entries.

Section 290.170 provides that the client may also request technical assistance from the firm on matters such as resolving account reconciliation problems or analysing and accumulating information for regulatory reporting. In addition, the client may request technical advice on accounting issues and such services wouldn’t generally create threats to independence provided the firm does not assume any management responsibility for the client.

Section 290.171 allows a firm to provide services related to the preparation of accounting records and financial statements to an SMSF audit client where the services are of a routine or mechanical nature, so long as any self-review threat created is reduced to an acceptable level. Examples sighted in the Code include the following, which for the most part are unlikely to apply in the case of SMSFs:

Providing payroll services based on client-originated data; Recording transactions for which the client has determined or approved the appropriate account

classification; Posting transactions coded by the client to the general ledger; Posting client-approved entries to the trial balance; and Preparing Financial Statements based on information in the trial balance.

Although Section 290.171 specifically applies to non-public interest entities and therefore SMSFs, it is evident that it was written for much larger entities that have more complex financial reporting requirements, making it difficult to envisage how the examples would apply to SMSFs.



Therefore, in summary, a firm may be able to assist a SMSF audit client with some accounting services, but the firm must assess the services required for each client to determine the extent of any review threat. I have outlined the following general criteria that could be used to assess the potential conflict of interest:

The level of involvement the firm has in the preparation of the financial statements. This could range from extensive record keeping where independence would clearly be impaired to inputting a summary of the records prepared by the trustee and/or an independent reporting service in order to format the financial reports in which case independence may be achieved.

The level of knowledge and sophistication of the client/trustee/members and if they are accustomed to and accepting of financial reporting prepared by the firm with limited or no enquiry or review by them.

The more work and/or modifications that the firm needs to undertake on the primary records such as market value workings and entries, tax calculations and earnings allocations to members to strike the financial reports the great the self-review threat will be.

I also recommend that a scale approach be taken to the assessment of the threats, e.g. High, Moderate and Low or a numeric scale whereby 1 is low and 5 is extreme.

In addition, firms should develop and document agreed client acceptance procedures for various levels on risk tolerance.

Section 290.174 also provides for emergency or unusual situations whereby accounting and bookkeeping services that would otherwise not be permitted, may be provided when it is impractical for the audit client to make other arrangements. In my view this would have very limited application to SMSFs.

The most common question of independence arises where accounting and tax services are provided by a firm to a SMSF audit client, where responsibility for the two functions is assigned to different partners. It is understandable that larger firms will generally find it easier to put appropriate safeguards (often referred to as “Chinese Walls”) in place than smaller firms who will find this more challenging.

It is possible to carry out both the accounting/tax work and audit work for an SMSF client.

For the purpose of this question, I have split firms into sole practitioners, small firms and large firms.

Sole Practitioners

Sole practitioners would not be able to audit an SMSF for whom they have undertaken accounting and tax work as appropriate safeguards could not be put in place to avoid the self-review threat.

Sole practitioners have no opportunity to segregate ultimate responsibility for the audit engagement from the non-audit services. Arguments have been made that the independence requirements are satisfied where different staff carry out different functions or where a staff member prepares the accounts and they are then audited by the partner. However, this practice was partly curtailed when the JAB issued competency requirements for SMSF auditors, requiring them to hold a practising certificate in order to sign off on a SMSF audit. It is clear that the reporting mechanisms within a sole practitioner firm are such that all staff ultimately report to the sole practitioner who will be signing off on the audit.



Small Firms

Appropriate safeguards would need to include the client taking explicit responsibility for the financial statements and any adjustments that the firm makes.

In an SMSF context it is difficult to see how these safeguards could actually work in practice. The firm would need to be confident that the SMSF trustee had sufficient knowledge of the accounts and any changes, to truly be in a position to take responsibility for them.

Although not impossible, small firms with two or three partners will find it challenging to implement appropriate safeguards.

One practice that the JAB appears to oppose is where one partner takes responsibility for the accounts for his SMSF clients and his partner is the auditor and then the roles are reversed for the other partner. The interchanging between the accounting and audit functions depending on the client suggests a collaborative approach that doesn’t adequately address the risks to independence.

Therefore in order for the “Chinese Walls” to be effective within a small firm there needs to be clear allocation of responsibilities based on expertise and no comingling of functions.

Large Firms

Where a firm has separate business divisions carrying out the different roles with distinctly different reporting lines to partners within those divisions, it would be possible for this arrangement to establish an appropriate safeguard and for the auditor to be able to meet their professional obligations. Typically, this would involve a business services division (or SMSF administration services division) and a separate audit division. Staff within each division would carry out the work reporting to the partner of each of those divisions.

4.1.2 Valuation Services

The independence guidelines for valuation services provided to audit clients are contained in Sections 290.175 to 290.178 of APES 110. These requirements will become more relevant to Approved SMSF Auditors when self managed funds are required to value assets at market value from 1 July 2013 (Regulation 8.02B).

According to APES 110, a valuation comprises the making of assumptions regarding future developments, the application of appropriate methodologies and techniques and the combination of both to work out a certain value, or range of values, for an asset.

Section 290.176 states that performing valuation services for an audit client may create a self-review threat and outlines the following factors to determine the significance of any such threat:

Whether the valuation will have a material effect on the financial statements. The extent of the client‘s involvement in determining and approving the valuation methodology

and other significant matters of judgment. The availability of established methodologies and professional guidelines. For valuations involving standard or established methodologies, the degree of subjectivity

inherent in the item.



The reliability and extent of the underlying data. The degree of dependence on future events of a nature that could create significant volatility

inherent in the amounts involved. The extent and clarity of the disclosures in the financial statements.

Where a threat exists, safeguards such as segregation of responsibilities must be applied to eliminate the threat or reduce it to an acceptable level.

Section 290.179 requires that in the case of a SMSF audit client if the valuation service has a material effect on the financial statements and the valuation involves a significant degree of subjectivity, no safeguards could reduce the self-review threat to an acceptable level and the firm must not provide such the valuation service to the fund.

A valuation would not involve a significant degree of subjectivity where the underlying assumptions and/or method are established by law or regulation and are widely accepted as the results of these valuations undertaken by different parties are unlikely to differ materially.

Whereas the SMSF auditor would generally not consider he or she is undertaking valuation work, SMSF client’s and their accountants may seek greater assistance from auditors to interpret the ATO new valuation guidelines post 1 July 2013.

4.1.3 Tax Services

Sections 290.181 to 290.194 outline the independence requirements for firm providing tax services, which include the following professional services:

Tax return preparation; Tax calculations for the purpose of preparing the accounting entries; Tax planning and other tax advisory services; and Assistance in the resolution of tax disputes.

The Code states that performing certain tax services creates self-review and advocacy threats, the existence and significance of these threats will depend on factors such as:

(a) the system by which the tax authorities assess and administer the tax in question and the role of the firm in that process;

(b) the complexity of the relevant tax regime and the degree of judgment necessary in applying it; and

(c) the particular characteristics of the engagement; and (d) the level of tax expertise of the client‘s employees.

Section 290.183 states that where the client takes “responsibility” for the return, including any significant judgements made, it is generally not considered to create a threat to independence.

In my experience, although trustees of SMSFs may sign the annual return, they don’t necessarily understand the content or any judgements made by the accountant preparing the return. Therefore care needs to be taken so as not to create a position of over-reliance on this exception.



In cases were other tax services are provided this will generally create a self-review threat and auditors will need to consider a range of factors in determining whether appropriate safeguards can be put in place to overcome any risks including the complexity of any tax advice given and the level of tax expertise of the client’s employees receiving the advice.

4.2 Relationships between auditors and referral sources

Although engagement letters for SMSF audits are issued to the SMSF trustees, the arrangements, including the fee structure are often made with the administrator and/or an accounting firm. This can often involve a significant number of SMSFs which could be a considerable revenue source for the audit firm. Where this occurs, retention of the audit clients has the potential to create a self-interest or intimidation threat, in which case, the firm will need to evaluate any such threats and apply safeguards to eliminate or reduce them to acceptable levels.

Factors sighted in the Code include the following:

Reducing the dependency on the external accounting practice (source of audit client referrals); External quality control reviews; or External consultation on key audit judgements.

Sections 290.220 and 290.221 specifically address the issue of fees and the appropriate safeguards that could be put in place where a firm receives a large proportion of its fees from one source.

Section 290.220 outlines factors that will impact the extent of the self-interest or intimidation threat, including:

The operating structure of the audit firm; Whether the firm is well established or new; and The significance of the client qualitatively and/or quantitatively to the firm.

We may see an addition to APES 110.220 which will specifically refer to multiple audit referrals from one source as this is not contemplated in the current version of APES 110. However, the action required is the same for one major audit client where the fees are a significant percentage of the audit firm’s revenues.

In addition, the proposed revised JAB Guidelines are likely to address situations where the referral source is a former employer, in which case the threat to independence may be intensified. There may also be a self-review threat if the auditor provided non-audit services at a previous employer.

Also, a close personal or business relationship between the auditor and the referral source needs to be considered. This arrangement could lead to a self-interest or intimidation threat and it is possible for the perception of impaired auditor independence to arise.

SMSF auditors who find themselves in this situation may need to decline some of the audit work to either eliminate the threat or reduce it to an acceptable level.



4.3 Firms that offer financial advisory services

APES 110 doesn’t specifically address “financial advisory services”, but Section 290.157 states that where specific guidance is not included, the auditor must apply the conceptual framework.

Although the manner in which fees for financial advice will be charged in the future is currently changing, the current fee structure is a contributing factor in assessing the auditor’s compliance with Section 290 of APES 110:

If the remuneration comprises commissions or asset based fees, it would be difficult to apply appropriate safeguards as the auditor’s income is directly linked to the financial advice given.

Whereas, a “genuine” fee for service model may be an appropriate safeguard, however, the auditor would still need to approach independence in a similar manner as when the firm offers other services such as tax or accounting services.

Regardless of the remuneration structure, an assessment of the firms independence still needs to be made and appropriate safeguards will need to be implemented to eliminate or reduce the threats to an acceptable level before the firm can accept the audit engagement.

Firms must also consider situations where they have ceased to offer financial advisory services as the auditor may still be facing the same risks, effectively they would still be auditing the firms work in subsequent years while product recommendations and investment decisions remain in place.

There are numerous situations where the auditor could be reviewing and assessing the compliance of a particular product, transaction or investment arrangement recommended or implemented by the firm. Where the auditor is unable to implement sufficient safeguards to eliminate or reduce the threats to independence (both real and perceived) the auditor should decline the engagement.



5 Monitoring of Auditor IndependenceThe Financial Reporting Council (FRC) is a statutory body responsible for overseeing the effectiveness of the financial reporting framework in Australia. Until 27 June 2012 one of the FRC’s duties was the monitoring of and reporting on auditor independence as it applies under the Corporations Act 2001. Although the FRC had no jurisdiction over SMSF auditors, extracts from the FRC’s 2012 report provide some insights into auditor independence generally.

In publishing its report, the FRC relies on the most recent ASIC audit inspection program report.

During the period ending 30 June 2012, ASIC completed inspections of 11 firms: three were larger national firms, three were other national and network firms and five were smaller firms.

5.1 Summary of ASIC's inspection findings

ASIC has informed the FRC that the firms it had inspected previously continued to maintain or improve their quality control systems, demonstrating their commitment to auditor independence.

Firms have implemented quality control systems to ensure compliance with the independence requirements of the Corporations Act and professional quality control and ethical standards. The extent and complexity of these systems vary depending on the size and nature of the firm.

ASIC has also advised the FRC that it continues to have concerns about the number of findings at inspected firms about independence processes and about contraventions of the

rotation and other independence requirements of the Corporations Act.

5.1.1 Larger national firms

ASIC inspected three larger national firms during 2011-12. ASIC found two instances of potential perceived threats to independence at one larger national firm.

One instance concerned the decision to change the engagement partner for an ASX listed client and the provision of non-audit services to another ASX listed client. At a minimum, these cases raised concern at ASIC about the appearance of independence.

At another larger national firms ASIC was advised of two rotation breaches where the Engagement Quality Control Reviewer (EQCR) played a significant role for more than five years.

5.1.2 Other national and network firms

Three other national and network firms were inspected by ASIC during 2011-12. ASIC found that those firms that have been inspected more than once generally made improvements to their quality control systems. However, ASIC reports that it continues to have concerns about the number of findings at some firms in respect of their independence policies and processes.



In ASIC's opinion, independence is fundamental to the conduct of a quality audit and the leaders of these firms need to ensure that they give strong and clear messages about the

importance of independence to set an appropriate 'tone at the top'.

Specific observations made by ASIC as a result of these inspections include:

Independence policies and processes:

ASIC generally found that the other national and network firms it inspected have policies and processes in place to facilitate compliance with the independence requirements of the Corporations Act and professional standards. However, it noted that the completeness and adequacy of the independence policies and processes varied across the firms inspected, reflecting the nature or maturity of the network structure of some of these firms. ASIC has informed the FRC that the independence policies and processes of these firms need improvement to ensure that their policies and processes are consistent with the Corporations Act and professional standards and are applied consistently across the member firms. Specific observations made by ASIC as a result of its inspections of other national and network firms included that:

one firm needed to update the independence policies and procedures to ensure they reflect all the changes in the revised APES 110 issued in December 2010;

one firm did not have a clear process to document the factors (including independence) impacting on remuneration of its directors;

the member firms of one network do not have a consistent approach to independence oversight and in some cases do not have a dedicated independence monitoring resource;

one firm needs to improve its policies and practices to ensure that all member firms undertake and document independence consultations;

one firm should consider implementing a formal system to record relevant relationships and financial interests of partners and senior staff to enable testing of the accuracy and completeness of the annual independence declarations of partners and senior staff; and

one firm did not adequately document its consideration of the threats and safeguards to its appearance of independence where a director from the firm appeared at a public hearing, creating a potential advocacy threat which could impact upon the firm's independence.

Testing independence systems

One of the three other national and network firms inspected during the period did not test their independence systems and processes, including the declaration of financial interests, to ensure that they are meeting the requirements of the Corporations Act and professional standards.

ASIC has expressed the view that, without an appropriate testing program, firms can only place limited reliance on the effectiveness of their independence systems and processes. It is of the view that where firms are testing their independence systems and processes, the communication of the results of the testing process to all personnel can send a strong and clear message about the importance of independence.



5.1.3 Smaller firms

Five smaller firms were inspected by ASIC during the period. ASIC has also informed the FRC that, in conducting its inspections and in determining its observations and findings in respect of the smaller firms, it is conscious of their size and nature. However smaller firms undertaking audits are still required to comply with their legal and professional obligations.

ASIC found that most of the smaller firms inspected had a basic level of independence policies and processes in place. However, its inspections showed areas that could be improved to ensure that the firms are complying with the legal and professional independence requirements.

ASIC observed that one smaller firm had breached statutory auditor rotation requirements for two listed audit clients, where both the audit partner and the EQCR had acted in their roles for more than five years. For another three listed audit clients, the approaching deadline for rotation means the smaller firm was in danger of further breaches if action was not taken.

ASIC also observed that another smaller firm had not considered or put into place appropriate plans to prepare for impending auditor rotation in order to meet the requirements of the Corporations Act.

5.1.4 Conflicts of Interest

ASIC has also provided the FRC with information about other auditor independence issues that it became aware of outside its regular inspection program. In brief, these issues included:

ASIC has provided the FRC with an update on two conflicts of interest matters mentioned in its 2011 report to the FRC:

In one matter, immediate family members of an auditor (a partner of a smaller firm) held a substantial amount of shares in the company at the time that the auditor signed the audit report. ASIC has referred this matter to the Commonwealth Director of Public Prosecutions (CDPP).

In another matter, ASIC noted that an auditor from a smaller firm held financial interests in and owed amounts to an audited body. A brief of evidence on this matter has been provided to the CDPP in regard to auditor independence breaches and it is expected that charges will be laid against the auditor.

At one larger national firm, three auditor's independence declarations were qualified, each and separately due to the larger national firm remunerating a consultant who became a director of an audit client. Subsequent to the larger national firm entering into the consulting arrangements, the three respective individuals became directors of audit clients. These matters were disclosed in the firm's Transparency Report 2011 and reported to ASIC.

5.2 JAB quality review programs & disciplinary procedures

Under the ASIC Act, the FRC is required to monitor and assess:

the nature, overall adequacy and effectiveness of: the systems and processes used by the professional accounting bodies for planning and performing quality assurance reviews of audit



work undertaken by Australian auditors to the extent that those reviews relate to auditor independence requirements;

the action taken in response by auditors who have been subject to such reviews; and the action taken by the professional accounting bodies to ensure that auditors are responding

appropriately.

In addition, the FRC is required to monitor and assess the nature and overall adequacy of the investigation and disciplinary procedures of the professional accounting bodies as those procedures apply to Australian auditors.

Information provided by the ICAA indicates that during the year ended 30 June 2012, it completed reviews of 412 practices with 76% of total review reports recording either no departures from professional standards or departures from professional standards that are not classified as serious.

The ICAA reviews conducted during 2011-12 found that 2% of the practices that conduct Corporations Act audits had no departures from professional standards. All other practices of each type had departures from professional standards, although these departures were not classified as serious for 67% of the practices that conduct Corporations Act audits and 78% of the practices that undertake other types of audits.

The ICAA also has informed the FRC that, although overall compliance with the auditing standards continues to improve, its main concern continues to be a lack of documentation in relation to the audit opinion issued or insufficient documentation in a particular audit area.

In the area of auditor independence, the following areas of non-compliance with the requirements of APES 110 were noted:

no documentation or inadequate documentation when considering threats to independence (11 per cent of the 412 practices reviewed);

appropriate safeguards were not adequately applied when carrying out auditing and accounting functions for a client (10 per cent of practices reviewed); and

auditing the SMSF of a partner in their practice (2 per cent of practices reviewed).

CPA Australia has advised the FRC that as at 30 June 2012, 5,807 of its members held a CPA Australia Public Practice Certificate (PPC) while 1,076 held an ICAA Practice Certificate. All members who hold a PPC are subject to CPA Australia's Quality Assurance (QA) program. A total of 1,173 members are RCAs.

In 2011-12, the reviews conducted under CPA Australia's QA program found that 81% of those reviewed were either fully compliant or had only minor departures from professional standards.

During 2011-12, 58 breaches of auditor independence requirements were identified by the CPA, with the vast majority relating to audits of SMSFs.



6 The Cost of IndependenceI wanted to highlight the potential changes to the cost of audits due to independence.

The Cooper Review looked at this and concluded that the.....

Requiring true independence should not result in increased audit fees (unless cross‐subsidisation within the accounting industry is actually occurring). It would, however, likely result in more specialisation and this could assist to reduce audit costs. The following table illustrates that greater scale already reduces the average and median audit costs for auditors who perform a higher number of audits compared to auditors who only conduct a small number of audits.

Table 8.2: Average and median audit fees relative to the number of audits performed

No. of audits performedby an auditor (2008)

Average fee Median fee

1 fund $865 $5502 - 4 funds $951 $5705 - 10 funds $911 $60011 - 25 funds $810 $55026 - 50 funds $686 $51751 - 100 funds $602 $495101 - 250 funds $540 $440>250 funds $413 $380Total $664 $495Based on the 2008 SMSF Annual Return, Source: ATO unpublished data

A second table included in the report supports the view that the use of truly independent auditors is already a cheaper proposition for SMSF trustees.

Table 8.3: Auditor fees based on whether the auditor did or didn’t provide other services

SMSF Size Auditors providingother services

Auditors providingno other services

All auditors

Avg Median Avg Median Avg Median$0 to $50k $841 $550 $571 $440 $627 $440>$50k to $100k $732 $539 $519 $440 $556 $440>$100k to $200k

$772 $550 $541 $440 $580 $462

>$200k to $500k

$823 $550 $567 $462 $608 $495

>$500k to $1m $922 $600 $599 $489 $649 $495>$1m to $2m $1,105 $660 $645 $495 $717 $500>$2m to $5m $1,379 $800 $746 $528 $839 $550>$5m to $10m $2,050 $1,100 $913 $532 $1,079 $550>$10m $2,740 $1,400 $1,433 $695 $1,634 $750Total $954 $594 $608 $480 $664 $495



Based on the 2008 SMSF Annual Return, Source: ATO unpublished data

Time will tell if the findings of the Cooper Review will in actual fact repeat with the ne compulsory independence requirements.



Appendix 1 – JAB - Decision Tree for SMSFs4

4 Joint Accounting Bodies – Independence guide: interpretations in a co-regulatory environment - V3, June 2008



Appendix 2 – APES 110 Section 290


xx division - sharyn long chartered web viewinterestingly the word auditor comes from the latin ......

Documents