The trustees of quite a few funds could find themselves with a new auditor when they sign their letter of engagement to have their do-it-yourself super fund’s 2012-13 activities audited before the May 2014 deadline.
This could result in more probing questions being asked about the way they have run their funds.
This is a consequence of a new emphasis by DIY super regulators on funds having an auditor who is independent of the accountant, administrator or adviser that prepares their annual returns or gives them advice on super strategies.
Separating the roles of fund adviser and administrator and fund auditor is emerging as a DIY fund issue all trustees should understand, especially those who employ the same firm for advice, administration and auditing or who leave the decision on who will conduct their fund audit to their accountant or adviser.
This is very often the case where a DIY fund has been established under a discount service.
While the notion of DIY funds having an independent auditor has been talked about for years, it’s only since July 1 – with the introduction of a stricter DIY fund auditing regime – that the preferred way this should happen is for the auditor to be an external party has been more widely discussed. But even an external auditor may not be as independent as some think.
For many DIY funds, having an auditor who is described as independent from the fund accountant or administrator hasn’t necessarily meant they come from different firms, says Darren Kingdon of Kingdon Financial Group, an adviser that conducts independent reviews of DIY funds.
It has meant they could also have come from a different division within the same firm, which is separated by what are described as Chinese walls. These are invisible barriers that claim to be able to avoid potential conflicts of interest in the same firm.
There is growing pressure on firms with internal auditors to separate these roles, and many are doing so by outsourcing, says Paul Bellas, of Bellas Super, a national SMSF audit firm.
Whether they do or don’t, says Kingdon, is often not the issue, although it could be.
It’s more the perception there could be a potential conflict of interest that is becoming the major question.
Avoiding potential conflicts of interest between the advice and administration sides of DIY super and the audit side is definitely being recognised as crucially important, says prominent DIY super auditor Belinda Aisbett of specialist audit firm Super Sphere.
Her business is getting inquiries from firms that have had in-house audit divisions, which are saying that with the increased focus on auditor independence, this is less appropriate.
The DIY super regulator, the Australian Taxation Office, has had an issue with firms that perform both administration and audit functions.
Aisbett says the independence question has been expanded beyond the internal auditor to situations where some specialist auditors are feeling obliged to refuse work from large administration firms if the volume of work represents a significant proportion of their income.
There is no restriction in the super rules that forbids auditors from accepting a large volume of work from major administrators, but there are ethical standards set down by professional accounting bodies that require auditors to consider whether being dependent on the fees from one organisation might impair their independence and objectivity on the audits they conduct.
If an audit firm, for instance, gets 20 per cent of its income from one client, says Aisbett, it should consider whether this might jeopardise their objectivity because they don’t want to risk losing a major part of their business.
Aisbett says some audit firms with large clients deal with this issue by having external reviews conducted of these particular audit files to make sure they are up to scratch and satisfy quality controls they set down.
Trustees of DIY funds need to be aware, says Aisbett, they have an overall responsibility to not only appoint their auditor every year but also be confident the auditor does what is expected of them and does it thoroughly.
There are compliance risks with potential penalties if audits are not up to standard.
Kingdon says there are standards set down by all major accounting bodies that state an auditor can’t audit a fund where they have prepared the accounts, not even for their own fund.
Nor can they audit a fund where staff reporting directly to them have prepared the accounts.
Similarly, they must avoid funds where a partner within their firm is a member/trustee or where a relative or a related party or someone with a close personal or business relationship is a member/trustee.
Bellas says while the accounting bodies believe larger firms might find it easier to put in place appropriate Chinese walls safeguards compared to smaller firms with two or three partners, there is a growing view that if an accountancy or advisory firm offers financial advice or even general tax planning services that are charged for, any Chinese walls risk can become paper thin.
Where a firm is receiving remuneration under structures such as commissions or asset-based remuneration, having appropriate safeguards becomes more difficult.
Additionally, if an auditor is asked to assess the compliance or validity of a particular investment arrangement suggested by an advisory firm that has been recommended or implemented, it may be perceived this would not be independent. For example, if a limited recourse borrowing arrangement has been recommended and set up for a DIY fund client of a firm, the auditor may not be independent in making an assessment of whether the arrangement is compliant or been correctly set up.
Kingdon says trustees should be aware that for the past four years, the annual DIY fund return asks whether the auditor has provided any services to the fund as a tax agent, accountant, financial adviser or administrator.
This question should be regarded as a major flag to what the lawmakers think about this issue.
In addition, the audit report now requires an auditor to include a specific commitment they have complied with independence requirements prescribed by super regulations.