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MEDIA RELEASE: 3 Year SMSF Audit Cycle Misses the Point

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The 2018 Federal Budget announcement proposed that the SMSF audit cycle be extended to three years for funds with good compliance history, starting from 1 July 2019. Is that crazy?

Mixed messages
On the one hand, the government is making a noise about SMSF compliance, financial sector integrity and genuine audit independence. On the other hand, it’s undermining the value of regular auditing and independent oversight on SMSFs through extending the audit cycle by 300%. So much more can go wrong in 3 years than in 1 year. 

So who do the new rules place at risk?
As we see it, there are three categories of SMSF trustees at risk:

  1. Those who intend to comply but unintentionally fall short of rapidly changing SMSF regulations. It is much more likely that a SMSF can fall into non-compliance if there is only independent oversight every 3 years. The costs of remediation - not to mention penalties - will grow exponentially over a 3 year period.
  2. Those who are lead astray by poor advice.  The Banking Royal Commission is revealing that our most prestigious institutions have given poor financial advice to investors. How much more poor advice is given by the full array of financial advisors in the marketplace? Quality auditors are invaluable to trustees and accountants in identifying and resolving situations where trustees' best interests are not met by advisors.  So much more can go wrong over three years… the damage may well be irreparable.
  3. Then there are those who don’t necessarily intend to comply. Allowing three years between audits creates the opportunity to abuse the system for a period of time and then get back in line at audit time. Ineffectual regulation is no regulation at all.

Who reports on who reports?
The Budget states that annual audit requirement for SMSFs will be extended to a three-yearly cycle for funds "with a history of good record-keeping and compliance". The measure will apply to SMSF trustees that have a "history of three consecutive years of clear audit reports" and that "have lodged the fund’s annual returns in a timely manner". Who and how will it be decided which funds meet this criteria.  Are we adding an additional layer of reporting? Are we widening the opportunity for not-so-intelligent automated audits to reconfigure the record-keeping process to slip between the gaps?

What about SMSF audit experts and the audit industry?
A reduction in audits to a three year cycle will cause consolidation in the SMSF audit industry. There will be fewer players, less specialised staff retained for complex work and all this will surely work against genuine audit independence. Is the ATO really supportive of SMSF audit consolidation?  

What do Accountants think?
The accounting industry is not happy either. Leading Accountant Darrel Causbrook, Principal of Causbrook & Associates anticipates the following fall-out from a 3-year audit cycle:

  • Loan backs will increase because they will not at the extreme be found out for 3 years
  • Contravention reports will increase as they did when annual audits were brought in to increase monitoring
  • 3 years later you will be trying to gain audit documents... a hopeless task
  • The same amount of work will be done but 3 years later
  • The rigour of doing audits will be lost on an annual basis
  • SMSF will be a disaster area of non-compliance making honest people dishonest
  • You have to assume that each year financial statements members reports and income tax returns will be prepared so that will remain the same
  • Financial Planners will have one less person to see what they are doing
  • More SMSFs will be wound up when the non-compliance is pointed out
  • Tax agents and accountants will have to be the gate keeper for the years 1 and 2 and that is passing the buck onto them to detect errors.

Consultation…. on government implementation or on their strategy?
The Government said it will undertake consultation to ensure "smooth implementation".  Perhaps firstly the government needs to undertake consultation on their audit strategy.  We question whether a three year audit cycle will be functional to ensure compliance, ensure genuine audit independence, as well as protect SMSF trustees from the costs and penalties associated with unintentional non-compliance from a complex Super Reform regime.  Most importantly, the issue of integrity in the financial sector is at stake. Have we learned anything from the Banking Royal Commission?

Audits are a value-centre, not a cost-centre
The Budget announcement suggests the government has misunderstood the concept of “audit": audits are not a cost centre, but a function of “protection"… protection for SMSF trustees, for accountants and advisors, indeed for the industry, and not to mention for taxpayers and the government.