Our compliance approach for independence
We investigate situations where SMSF auditors may not have complied with the independence standards in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (2018) (APES 110External Link).
On this page we highlight some independence threats that we have investigated in our compliance work.
The Accounting Professional & Ethical Standards Board (APESB) provides further details, standards and guidance about the independence threats described on this page in:
Your own or your relative's SMSF
You can't audit a fund where you, or your immediate family member (spouse or equivalent or dependant) is a trustee, director of a corporate trustee or member of the fund. There are no safeguards that would reduce independence threats to an acceptable level.
Independence threats will also arise if you audit a fund where a trustee, director of the corporate trustee or member is:
- a close family member (parent, child or sibling who is not an immediate family member)
- a person with whom you have a close personal relationship.
In each of these circumstances, you need to evaluate whether the independence threats are at an acceptable level and address those threats if possible.
Independence threats also arise if you audit an SMSF belonging to the auditor that audits your own SMSF. There are no safeguards that would reduce the threats created by this reciprocal auditing arrangement to an acceptable level.
In-house audits
The term 'in-house audit' is not defined in APES 110External Link. However, it's commonly used to refer to a situation where an auditor:
- conducts an SMSF audit, and
- works for a firm or network firm that provides non-assurance services to the SMSF.
Independence threats may be created when non-assurance services are provided to an audit client by the auditor's firm or a network firm. APES 110 describes specific standards in relation to several different types of non-assurance services including where an auditor's firm or network firm:
- assumes management responsibility for an SMSF audit client
- provides accounting or bookkeeping services to an audit client
- provides financial planning services to an audit client.
Assuming a management responsibility
A firm can't assume management responsibility for an SMSF audit client. This applies to all non-assurance services. If a firm assumes any management responsibility for an SMSF audit client, they can't audit the SMSF under any circumstances.
Management responsibilities involve controlling, leading and directing an entity, including making decisions on its behalf, such as setting strategic direction. They're typically activities that require a decision to be made or judgment to be exercised by the people responsible for managing the entity.
Providing financial planning services
Independence threats may be created when you assess the outcomes of financial planning advice provided by your own firm.
In many cases, the threats will not be at an acceptable level. You may need to decline or end the audit or non-assurance service engagement where:
- the circumstances creating the threats are not able to be eliminated, and
- there are no appropriate safeguards that can be applied to reduce the threats to an acceptable level.
Providing accounting and bookkeeping services
Accounting and bookkeeping services include:
- preparing financial statements and accounting records
- recording transactions
- payroll services.
An auditor's firm or network firm can only provide accounting and bookkeeping services to an audit client in limited circumstances. Auditors must comply with the following requirements when providing accounting and bookkeeping services to an audit client:
- A firm or network firm can't assume management responsibility for an SMSF audit client. If they do, they can't audit the fund under any circumstances.
- If a firm or network firm has not assumed management responsibility for an SMSF audit client but provides accounting or bookkeeping services to that client, they cannot audit the fund unless both the following apply:
- the services are routine or mechanical
- the firm addresses any independence threats created by providing the service that are not at an acceptable level.
If a firm cannot meet the above requirements, they will need to decline or remove themselves from the audit or non-assurance services engagement.
Routine or mechanical test
Accounting and bookkeeping services that are routine or mechanical services:
- involve information, data or material in relation to which the client has made any judgments or decisions that might be necessary
- require little or no professional judgment by the firm.
APES 110 provides the following examples of services involved in preparing the fund's financial statements that are considered routine or mechanical:
- posting transactions coded by the trustee(s) to the general ledger
- posting journal entries approved by the trustee(s) to the trial balance
- preparing financial statements based on a trustee approved trial balance
- preparing related notes based on records approved by the trustee(s).
During their independence assessment for a client that has received accounting or bookkeeping services from their firm or a network firm, an SMSF auditor must obtain evidence that all of the accounting or bookkeeping services are routine or mechanical. This evidence could consist of trustee-coded transactions and approved trustee entries in the trial balance that the firm then uses to prepare proforma financial statements. The SMSF auditor must retain that evidence with the documentation of their independence assessment.
The complexity of the fund’s investments (including the type and mix of assets) is not a sole determining factor when working out whether bookkeeping or accounting services are routine or mechanical. Even when a fund has simple investments (for example, term deposits and ASX listed shares), firms may still exercise professional judgment if they:
- code transactions and post them to the general ledger
- prepare the general ledger from source documents
- prepare journal entries and post them to the trial balance
- select accounting software for the client
- establish and maintain data feeds
- manage the fund's investments and compliance with the super laws.
Undertaking such activities are not routine or mechanical services. In many cases, they may also involve the firm assuming a management responsibility for the trustee(s).
Example 2 in Chapter 8 of the Independence Guide (PDF, 1.56MB)External Link describes how the complexity of fund investments affects the level of professional judgment required in preparing the fund's accounts.
Automating accounting services by using accounting software and data feeds isn't sufficient to make the services routine or mechanical. When establishing and maintaining data feeds or a client's accounts in accounting software, firms typically make decisions requiring:
- the exercise of professional judgment
- the assumption of management responsibilities.
Non-assurance services provided by other firms
In the following arrangements, the provision of non-assurance services may result in independence threats even though the non-assurance services are provided by a different firm.
Reciprocal arrangements (client swapping)
If your firm and another firm arrange to audit each other's SMSF administration, financial planning, accounting or bookkeeping clients, this may result in:
- fee dependence
- intimidation.
Audit pooling arrangements
Audit pooling arrangements involve a group of auditors entering into an arrangement to audit each other’s SMSF clients. Audit pooling arrangements may not be effective in addressing independence threats if they result in the creation of networks of firms. Even if a network is not created there could be independence threats as a result of reciprocal arrangements with other members of the audit pool, or dependence on fees from other members of the audit pool.
Network firms
Having separate entities for assurance and non-assurance services may not be effective in addressing in-house auditing independence threats if the new firms continue to be part of the same network because they share, for example, common ownership, control and management, use a common brand name or share a significant part of their professional resources.
Outsourcing
Independence issues may exist where accounting or bookkeeping services are outsourced to another firm (whether located in Australia or offshore) if the audit firm has the overall responsibility for the provision of these services to the SMSF.
Clients of a previous firm
If you take on clients of a firm where you were previously a partner or employee (within 2 years), you need to consider the potential self-review and familiarity threats that may arise in taking on those clients. This is the case even if you are no longer associated with the firm. These threats might prevent you from appropriately evaluating the results of previous judgments made, or advice provided, when you worked for the firm.
Fee dependence
Independence threats arise where the total fees from SMSF audits from one referral source represent a large proportion of the total fees of your firm. Independence threats of this kind may occur where an accountant or SMSF administrator refers a large number of SMSF audits to a single SMSF auditor.
The dependence on the referral source and concern about losing those clients creates a self-interest or intimidation threat. The close working relationship between the auditor and the referrer can also result in familiarity threats.
Self-interest or intimidation threats also arise where an SMSF auditor is a partner in a firm and the fees generated from an SMSF audit client represent a large proportion of the revenue attributable to the auditor.