CPA Australia Podcast Episode 20 SMSF auditor compliance program findings for 2016/2017

Transcription

1 CPA Australia Podcast Episode 20 SMSF auditor compliance program findings for 2016/2017 Transcript INTRO: Hello and welcome to the CPA Australia podcast your source for business, leadership and public practice accounting information. CLAIRE: Welcome to CPA Australia's Podcast on the Australian Taxation officers SMSF auditor inspection findings for 2016/2017. I'm Claire Grayston CPA Australia's Policy Adviser on audit and assurance and I'm very pleased to be joined by Craig Blair director of superannuation at the ATO responsible for oversight of SMSF auditors. Welcome Craig. CRAIG: Thank you Claire. It's good to be here again talking with the CPA. CLAIRE: So just to kick off when conducting the ATO's SMSF Auditor compliance program this year what were the ATO's focus areas? CRAIG: Yes, look just firstly Claire, I just wanted to set a bit of context for our any of our compliance programs in relation to the SMSF sector. Obviously including SMSF auditors our overall regulation of the SMSF sector. Our focus there is on good governance within the sector. Given the retirement savings that are in play there and the way that we look to do that is work with our stakeholders and try to foster willing participation by all of the players in the sector so that there is trust and confidence in the system which is vitally important in the super system overall but also in particular for SMSF. So within that the SMSF auditors plays an integral role with the regulatory framework and we have a co-regulatory role with ASIC in relation to SMSF auditors. So we have a range of focuses in addition to our compliance program we look to engage with the SMSF auditor sector we look to provide relevant guidance and support but clearly a main part of our regulatory oversight is our compliance program and reviewing auditors where we believe there may be some risks to make sure that there is a level playing field and that auditors are meeting their obligations appropriately. So I just wanted to set that scene first. So our focus areas for the last year 16/17 in part reflect an approach that we always take in this space which is that we look to identify where there may be risks or auditors as individuals where we may consider them to be at high risk of not meeting their obligations. So we do take that risk based approach to our compliance program. So there will always be auditors who for a variety of reasons we may identify as high risk but for 16/17 in particular we also had a couple of key focus areas as well which guided our regulatory oversight and our compliance program. One of them one of the key areas was low cost auditors. So we had had some concerns for a while there and certainly received feedback within the industry about whether auditors who may be charging what appears to be a low fee that could essentially be at the expense of appropriate audit quality. So we wanted to test risks in that area and get a feel for what may be happening there and the level of compliance in that part of the sector. So that was a key focus area for 16/17 and I'll talk a little bit later about some of the findings there. We also have had a focus on independents across a range of elements of independence but in particular in 16/17 where we saw that there may be some self-review threats and it's probably fair to say that that particularly played out with the sole practitioner type of arrangement where we may have an auditor who is also of themselves or their direct staff undertaking in accounting and taxation services for the fund as well as undertaking the audit. We had a range of concerns there about whether the independence requirements could be being met there. And we followed through on the number of auditors who we had previously contacted to understand a bit more about their business and undertaken some more comprehensive assessments of the situation with them in a compliance case to make an assessment of the situation and make a finding work with them about what may be possible to occur if there are concerns. But ultimately if there are some significant independence issues that aren't addressed

2 possible referral to ASIC as well. So the self-review element of independents and in particular those circumstances that was a focus area for 16/17 as well. CLAIRE: So how did you find the outcomes of those focus areas when you conducted the inspections? CRAIG: So with low-cost auditors we did an initial range of cases and this is a piece of ongoing work. But in terms of those initial cases we found that the majority had some level of deficiency. So we had a group where the deficiencies ranged from somewhat minor to perhaps more substantial but not quite substantial enough or significant enough to warrant a referral to ASIC. So within those within that group the types of issues that we saw with gaps in the audit evidence that was there to support the opinion perhaps at times a contravention had been identified but not reported to us. And a range of associated issues. So with that group we worked with them to provide education and make clear what the expectations are going forward. As I mentioned we're judged that the issues weren't significant enough at that point in time to warrant a referral to ASIC. But we certainly look to work with the auditor to get them back on track make clear the expectations and put them on notice for the future. There was a group where we did find significant issues and that has resulted in referrals to ASIC from this group. What we saw again I suppose were a range of things but we certainly saw instances where there was just failure to conduct an adequate audit in line with the audit standards across a range of elements of that. At times there we saw instances where there was no even written audit plan limited to no use of checklists perhaps lacking of key documentation like trustee representation letters etc. At times we saw just a general failure to retain relevant documentation which is an important part of the requirements of an auditor, anyone, another auditor or the us is the regulator should be able to pick up The audit file and see clearly how the audit was undertaken and the documentation to support that and the judgments that were made. There also failure to report contraventions that clearly should have been reported and at times if even a significant contravention and there were also failures to detect contraventions which I suppose goes back to a failure in the basic audit quality as well. And at times that seemed to be linked to a lack of appropriate knowledge about the [inaudible] and its obligations as well. We saw independence issues as well at times that there was some that we saw that had also prepared the financials as well. And a key issue that we saw as well was really a failure to do appropriate verification of ownership of fund assets and the existence of fund assets that were reported and at times also if a fund had a limited recourse borrowing arrangement and [inaudible] that there was really no adequate testing. The terms and the structures of that [inaudible] met the requirements. So that's I suppose a range of issues that were found in situations where from those compliance reviews of the low cost auditors we found that there were significant issues. And as I mentioned we have referred them to ASIC. There were actually some that we found there was a small number where we found no deficiencies at all. And I suppose there was also a group I mentioned earlier that maybe had some more minor deficiencies. So it clearly wasn't the case that every low cost auditor was problematic. And the ones that we where we saw that there weren't any problems of significance in terms of why they could offer it at low cost. We saw a range of things there. Some of them had undertaken audits for funds. They had fairly simple affairs and therefore able to the scope of the audit and how far it went it meant that costs could be kept down. There were some auditors who had operating with very low overheads out of the Home Office for example and perhaps with just spousal support in terms of undertaking the business and at times we also saw auditors where they appeared to be low cost from their initial data and perhaps even with a fixed fee at times. But once we went in there and had a look at their operations it was actually there was a sliding set of fees and that could increase depending on the complexity of the audit etc. So that's also relevant to note in terms of our findings with low-cost auditors. In terms of independence and the sole practitioners and the self-review threats, the cases that we undertook as reviews in 16/17 were probably primarily based on some previous interaction where we had established that it did appear that there was this threat. So it was a case of examining that a bit further. What we saw there at times was that there were perhaps staff

3 involved across both the audit services and the accounting services who were reporting to the one principal or the one practitioner and at times there was an argument put forward that there was a segregation of duties amongst the staff but ultimately they were all reporting directly to the one principal or partner or principal of the firm or practitioner. So the situations where the auditor was ultimately responsible for both the sign off of the accounts and the audit. We believe that independence is compromised in that situation. And that really is supported by the guidelines and the standards that are in APES 110. We put forward as well to the auditors in this situation not only what's in APES 110 but in the guidance statement GS009 and also the joint accounting bodies independence guide where it is in short essentially put forward in that situation, there was a clear threat to independence and that it really could not be mitigated unless there were different arrangements put in place or the audits or the accounting services one or the other not accept that as an engagement. So we're still going through some of those cases at the moment. We think where some where the independence has perhaps been quite a significant issue and perhaps there are some other issues surrounding the auditors we may well end up referring and I think we have referred some to ASIC for consideration by ASIC as the registrar. It's important to note that when we do make a referral to ASIC we're judging that there are significant issues. However, there are a range of options open to ASIC. If they're independent findings come to similar concerns that we had. And it may not. Does not automatically mean that there will be disqualification or deregistration by an auditor. ASIC have in a number of instances put conditions on registration as a way of sanction if you like but also in a way to get the auditor back on track and in line with some clear expectations about their ongoing registration. So where there have been significant independence breaches and perhaps in the context of our overall assessment of the auditor and perhaps their level of engagement with us and their willingness to address the issues. There may be some of these situations where there is a referral to ASIC. There may be others where the auditor has taken clear action and we're satisfied with that perhaps may not reach that point. But those are some of the key findings from our work with sole practitioners who may be providing accounting services and audit services as well Claire. CLAIRE: So in conducting your inspections did the ATO identify any new areas of concern with respect to compliance particularly that weren't necessarily in your focus areas. CRAIG: I think the findings in those two areas I've mentioned low cost auditors and the self-review threats with independence have sort of played out as I've mentioned. In some of our other general work, one thing that we saw perhaps a bit increasingly in cases that we were picking up around independence were where there were relatives involved of an auditor. Now we have taken action in the past and we continue to do where an auditor may audit the fund of a close relative but we also started to see some instances where the close relative, it may not be close relatives fund that has been audited. But a close relative of the auditor is actually undertaking the accounting work of the funds that are then being audited by the auditor and perhaps also as a referral source for the auditor. So that concerns us and we saw that a bit more during the year. So we'll continue to do work in that space to identify where that may be happening and also getting messages out to the auditor s sector that we have clear significant concerns where there is a close relative involved to that degree as well. The other issue that we saw during the year and as part of our work with low-cost auditors perhaps in particular but generally as well was we started to have a look as well in our full assessments of the auditors in terms of the CPD requirements which are part of the registration requirements. And given that there's been you know four years now since registration came in we thought it was timely to start to look at that as part of our assessments of auditors and perhaps a bit concerning for the ones and admittedly these are auditors we are identifying at risk. That's why we're reviewing them. But for that population there were some concerns around the meeting of CPD requirements and perhaps even the understanding of them. So that's something we'll continue to work on with the stakeholders in the sector. We have actually made some referrals to ASIC just on that issue for ASIC to address. But we'd be keen to work with the professional bodies and the

4 auditor sector overall to make sure that to reinforce it that's an important requirement of being registered an SMSF auditor. CLAIRE: Yes, absolutely. So you mentioned a couple of independence breaches that you were looking at during the inspection program. I do note that since SMSF auditor registration began back in 2013 that the ATO has reported a significant reduction in blatant independence breaches such as auditing your own SMSF. Are you seeing those sort of improvements continuing at least? CRAIG: Yes, we have. And for the situation again as blatant as it is of an auditor auditing their own fund as you as you mentioned that has been an issue over time. We have seen that decrease in terms of our detection of that occurring which is pleasing albeit still concerning that it's happening at all. Given that it's just so clearly a blatant breach but if we look back in the sort of 2014 income year we probably had close to 100 instances of that occurring back at that time but in more recent times in 2017 we're probably down to about 20 that we detect. So we take action on those. Clearly when we detect them and but we think that there has been the message perhaps started to finally get through and I think part of the increasing professionalism and specialization that comes with registration. One would have hoped that occurred as well but I think that our consistent compliance action in that regard and message in hopefully contributed to a decreased incidence of such a blatant breach of Independence. I mentioned before that we consider in a similar vein auditors who audit a close relatives fund so we're continuing to take action on that. That's something I think we still need to get on top of a little bit and perhaps less blatant but still of concern. Naturally the issues that I just mentioned where the auditor s close relative may be involved in the preparing the financials of funds that are being audited as well. CLAIRE: So how many registered SMSF auditors are you inspecting over the year? CRAIG: So in terms of 16/17 we took an approach where we undertook a compliance review or an auditor, it was essentially a full assurance review. In the past we perhaps complimented that with some specific issue audits if you like. But the approach we took in 16/17 was to do those full audit reviews and also generally undertaken out in the field where we could. The majority were undertaken in the field so we undertook around sort of around 160 of those cases with SMSF auditors. We complemented that as well with a mail out to a small group of auditors probably around 50 where we had some independence concerns and we were just seeking some further information from them before deciding whether there were any issues to pursue with them perhaps in a compliance review. So that was also complimented. But in terms of the full compliance reviews that we undertook it was around about 160. CLAIRE: So you mentioned that in selecting auditors it was a risk based approach. Is that always the case that all of your auditors inspected are based on risk assessment? CRAIG: Yes, that's generally the case and there can be a range of things that we take into consideration of that that goes to information that we have and the profiles that we have of auditors generally to if there are particular risk areas such as that emerge such as low-cost auditors. Then that factors into our approach as well. So we do get intelligence from time to time which may lead us to have some concerns about the risk profile of an auditor and that may lead to a compliance review. Clearly where we have a look at an SMSF in a compliance review as a fund and we may detect issues there that haven't necessarily been detected by the SMSF auditor. That would also interest us and make us assess the auditor as to whether there are concerns that we should look at in a compliance review. Independence is a focus as I mentioned, so we look at a range of information there that may tell us about the relationships that an auditor has that may present some threats to independence. We have I suppose a general profile of our auditors that we that we track and would feed into a risk picture for us. There can be things such as and there can be a whole range of things.

5 But that can include data around the number of auditor contravention reports that have been lodged. The nature of those, the size of the auditor s client base, perhaps the relationships with tax agents and others of the funds that they're auditing and that information is getting reported to us by funds so bringing all of that information together to allow us to have a risk profile in which we may select some auditors for review. CLAIRE: So to what extent is the ATO using data analytics then to identify those characteristics that you were speaking about to assist in following up with auditors? CRAIG: Yes, well we do that to some degree now to bring together some of those areas that I've mentioned such as some attributes or characteristics of the auditor themselves. Information around their funds and the profile of the funds that they're auditing and the relationships back to other providers such as tax agents does factor in now. But analytical work we're looking to advance even further and to drill down and be able to do it in a more sophisticated way I suppose to make those linkages across those risk areas between auditors and funds and tax agents to provide us with a more holistic and deeper and more refined view of the auditor risk. So we do some of that already in that space but we're looking to utilize those techniques even further. CLAIRE: You mentioned before that there were a number of matters where you were able to work with the auditors to rather than referring immediately to ASIC. So to what extent was the ATO able to deal with compliance issues identified through education or informal undertakings with the auditors? CRAIG: We probably end up doing that in the majority of cases of our compliance program. So we ended up in 2016/17 referring 22 auditors to ASIC. So I mentioned earlier that we undertook 160 approximately reviews and some I should say with 160 some of those are still in progress but more than half of those are cases that have been finalized. So whilst the referrals to ASIC do occur clearly where it's appropriate and that is a significant action to take, it is in the minority of cases that we undertake. And for the other cases there will be some instances where we've undertaken a review of the auditor and found that they're completely OK across the board in meeting their obligations but generally because we're selecting on a basis of risk we will generally find that even if an auditor doesn't have any issues that warrant a referral to ASIC at times they will have some deficiencies or improvements that they can make. So we'll work with them to provide education and provide real clarity around about what's needed to be done going forward to make sure that they meet the requirements and meet their obligations. The undertakings that we have with them that are informal in that sense are along those lines. They're not something of a nature of a written agreement that becomes a bit like an enforceable undertaking if we're getting into that territory then there may need to be liaison with ASIC. That's one of our six powers and goes to the conditions that they can put on someone's registration. But clearly if as part of that engagement and the education with the auditor they provide an undertaking to us of an informal nature about how they're going to improve and meet the requirements that we've set out. Clearly that's a positive thing and something that we would note on our files for the auditor so that it's certainly a situation where there's still scope for us to have that type of engagement with the auditor and particularly if they are of a positive attitude towards dialogue with us in terms of what areas where there could be improvement and how they could do that. CLAIRE: So I hear what you're saying that you were seeking very much a cooperative approach to regulation with the SMSF auditors and I note that in 2016 that the ATO introduced an early engagement and voluntary disclosure service which I understand was to provide an avenue for trustees and their advisers including auditors to engage with the ATO to rectify contraventions when they became aware of those. So I wondered if you might be able to explain how that service works and how successful it has been in the years since it was introduced.

6 CRAIG: Yes well in relation to SMSF trustees and their advisers our messages has always been that if you have an issue and detect an issue it's best to engage with us, work with us early and we take the approach of working with trustees and their advisers to rectify matters or to help them rectify matters as much as we can. Prevention is better than correction. So even though there may be an issue that's occurred with the fund in terms of a mistake it's much better to engage early and not put their head in the sand and address this issue as soon as possible because. We've seen many instances of where time has dragged on and things have become worse and harder to fix. So if we can work effectively with trustees to get them back on track in terms of their obligations we will do that as much as possible. So within that context we had had consistent feedback within the industry that where people were willing to come forward on such a basis at times it was a little bit hard to know where to go. So really this service is establishing a centralized one point of contact entry with the ATO to come forward on an early engagement basis and to make a voluntary disclosure and to work with us. So it's been put in place since May There is a link to the information on the Web site and there is a form that can be completed by anyone making a disclosure but it doesn't have to be in that form but if the right information is sent through as per the material on that web link then that will certainly help the process of engagement with us. What we aim with the service and what we think has been happening to date as well successfully is that it will allow for some more timely resolution of regulatory contravention where they have occurred and where people choose to undertake this disclosure and utilize this service. We believe that it also provides certainty to the trustees I think at times over the years why perhaps people have put their head in the sand where there has been an issue is that they're somewhat perhaps frightened of engaging with us but also uncertain as to what the outcome may be, uncertain about how they can go about rectifying the issue. So through engaging in this process, certainty is something that can be obtained. Part of that certainty is that there will also be an outcome where if it's successful in terms of working through an agreed rectification there will be no need for a more intrusive ATO compliance action in the future in relation to that contravention. So I think there's a degree of certainty for people and closure if you like on the issue if they engage in the service and get that outcome as well compared to not engaging and as well where people come forward with us and work with us, that is a key consideration for us in terms of whether there would be any compliance enforcement actions or remission of penalties. It's quite a positive factor for trustees if they come and engage with us in this regard. So the way the process works essentially is that the trustees need to come forward with obviously full and appropriate information about the contravention that has occurred. But an important element is the need to put forward a rectification plan that's a key step in terms of utilizing the service. We will then make contact with the trustees or their advisors, discuss next steps including whether there is any further information required or if the information is already there starting to get into discussions around the agreed rectification plan. So we've found that out of we've had about 230 come through since May of last year. Nearly half of those have been resolved with sort of any further information needing to be required or any further sort of intervention from us. About half of them are coming in via tax agents. Most of the rest of them coming directly from trustees to us. So we believe it's working quite well. We're finding that they're being turned around fairly quickly as well and getting those outcomes that I mentioned before about not only timely resolution but certainty as well. So I think I think it's important to note that this is clearly an optional service for trustees to utilize. It's not mandatory at all. There's no compulsion there and there's also been some questions about how that interacts with the role of the SMSF auditor and I think it certainly doesn't detract or take away at all from the auditor's role and obligations in relation to a particular fund even where they may have made a voluntary disclosure of this nature. It may well be that the audit has actually unearthed the issue. It could be that the issue has been unearthed during the year, but regardless it still doesn't change the obligations for the annual audit to be undertaken in the normal way. And equally for any matter that has been identified to be reported to us in line with the normal reporting guidelines that there are four auditor contravention reports. Clearly we've got it's not a situation where we're going to be relying upon voluntary disclosures. In

7 lieu of auditor contravention reports I mentioned we have had 230 since May We get eight to nine thousand auditor contraventions reports a year so you can see there's a whole range of other situations there where we rely upon the auditor to not only detect and report issues to the trustees but also to us as a regulator and we also are conscious as well that at times a trustee may be aware of an issue and become aware of an issue and make an early engagement voluntary disclosure to us. But there may well be other issues as well that they're not aware of at that time and the annual independent audit will pick those issues up in the process. So we think that this process and this service that is there for trustees sits alongside the annual independent audit process and doesn't unnecessarily detract from it or cut across it at all. CLAIRE: So do you suggest that SMSF auditors whilst they will be obliged to do an ACR if they discover a contravention that they nevertheless still encourage trustees to alongside that engage in this process? CRAIG: Yes, I think we certainly would like auditors to take that on board in terms of that as a possibility. I think the key is there is engagement with the trustees and the advisors. So it may well be that they are considering the trustees and the advisors utilize in this service and the auditor may be able to play a role in making sure that there is full information provided as part of that disclosure around the contraventions and perhaps even have some engagement dialogue with the trustees and advisors about what could be appropriate rectification. So there could be a role for the auditor there. The auditor may in some instances want to point out to the advisers and the trustees that there is this service there. I think it would be important though in that situation to note that that's not in lieu of there being the audit done or the auditor meeting their obligations to report perhaps even the same issue to us in contravention report. But clearly if there there's the auditor reports meets the reporting obligations and does report that issue to us even if it is coming through the voluntary disclosure service it may mean that when they report it to us that we is reporters rectified or that there is a rectification plan in place which is important information for us and it's also important to stress that if there is a voluntary disclosure made and where that activates that process between us and the trustees and their advisers certainly when the auditor if there is a related auditor contravention report that comes in that won't initiate a compliance action of its own accord because we will be conscious that we're already engaged in a voluntary disclosure on the same matter. CLAIRE: Right. So has the ATO observed any changes in behaviour by SMSF auditors as a result of your audit compliance inspection program? CRAIG: Well I think firstly perhaps not directly from a compliance program but overall from the framework that we now have with SMSF auditors and the introduction of registration and what that's meant for the structure for the sector and the requirements that registered auditors need to me to be part of the sector. That's clearly led to a fair degree of consolidation within the SMSF auditor profession. And we believe that that's been a positive contribution towards the professionalism of the sector. There's increased specialization etc. So we think that that's been a shift in the SMSF auditor sector over recent years. So our role in our compliance program is is also part of that overall context. It's perhaps difficult at times to say at a macro level the degree of influence that that has had we believe it has had a positive impact that goes in concert with the registration process with ASIC and the requirements that registered auditors need to meet each year. But having our regulatory oversight and our compliance monitoring program is an important part of that framework across the market. And clearly where we've undertaken cases we believe that that's if it's led to referrals where people may have been deregistered from the industry then and ASIC have made that decision then that's a positive outcome in terms of for the overall sector. It will also be other situations where between us and ASIC in terms of action that we've taken perhaps helped to get auditors back on track as well. I mentioned earlier that we have seen a decrease in the prevalence of the blatant independence breaches which I think is a positive outcome and I think with some of our

8 work now with low cost auditors which will be continuing and our focus on independence we're hopeful that over time we'll be able to see positive shifts there as well in terms of what that's meant for compliance within the SMSF auditors sector. CLAIRE: Looking ahead at the 2017/2018 inspection year, can you give any tips on how SMSF auditors can best prepare themselves for an ATO inspection? CRAIG: Yes, well I suppose my key message there would be that if you are contacted for a compliance review is to engage with us. We've mentioned in the discussion so far where we do engage with an auditor in a compliance view. We're looking to work with them as part of that as well. So if there are serious issues we may still end up having to take appropriate actions such as a referral to ASIC. But even in those instances where an auditor is engaged with us and interacts and is able to try and meet our requirements in a reasonable way and we obviously always attempt to be reasonable within our timeframes as well. That will lead to a more positive outcome not only in terms of the actual activity itself but perhaps in terms of what the outcome of the case may be. We have had some instances where we've had some concerns in relation to a particular auditor. We've haven't been able to fully establish the extent of those concerns because of their lack of engagement. And we have based on the information and that lack of engagement we've had to end up referring them to ASIC and then ASIC undertake their own independent review processes. And so the the auditor needs to engage with ASIC at that time anyway or they risk deregistration as a result of the lack of engagement. So I would just encourage that interaction and that engagement of any auditor who we contact as part of our compliance reviews. I'd also like to note that in line with my earlier comment is that we have tried to undertake most of our compliance reviews in the field. That's not always possible but we try to do that in most cases. And our approach now is to make contact with the auditor set up time that's suitable for them but also in the expectation that when we go out to review the audit process as part of that we'll be looking at naturally looking at some files but we're not nominating ahead of time necessarily which files they are. We expect that most of the files for recent periods will be available and for us to have a look at and when we're out there in the field we will then advise the auditor which files we'd like to have a look at and as part of that we do give that notice to the auditors so in case there is any issues around having them available they're able to make sure that they have files for relevant period available for our compliance review. So I have to say in most situations that's worked very well and there's been no issues at all in that regard. But I just wanted to point that out as part of an engagement with us it's important to have the information available there for our field visit. CLAIRE: Right. So what will the ATO's focus areas be for the coming 2017/2018 period? CRAIG: A focus in 17/18 will build upon the areas that we've already been focusing on. But we do in a at a higher level where we're certainly looking to continue to make sure we have an overall increased focus on the role of the SMSF auditor in the system because they are such an integral part of the regulatory framework. So in line with our approach to regulation overall it's not always about just about compliance reviews. So just to reiterate again we seek to have appropriate engagement across the sector both with professional bodies and auditors and look to make sure that we we ASIC and the bodies are also maximizing the guidance and the support that we can give to auditors to meet their obligations. We want to help people to comply rather than catch them out if you like but clearly in terms of the important role that our compliance program still does have in 17/18 we will still be having a strong focus on independence. We will build upon the work that we've already done around self-review threats and where that's been perhaps sole practitioners have been both tax agents and accountants. There is more for us to do in that space in terms of auditors who may be at risk there. We will always action the blatant independence cases auditing of an own fund, auditing of relative s fund that will always be done where we're interested to get in and have a look at a range of partner firms. We believe that there are some independence risks that are inherent in that

9 sort of business structure where each audit each partner may audit SMSF's that the other partner provides accounting or taxation services for. We have some concerns about the level of threats to independence that brings and the ability to mitigate that. That's an area where we haven't had a great deal of focus in the past and we do want to start to have a look at that in 17/18. So we'll be engaging with a range of auditors who are in that space. And to go through their processes and how they know what that means for the independence threats and how they may be managing those independence threats as well. We also are interested in the independence area where there may be heavy reliance on one referral source or limited referral sources or referral sources again that may be a close relative. So we're interested in testing some risks in that space as well. We'll be definitely continuing our work in the low cost auditor space and continuing to expand that and undertaking the checks that we need to take there and to address risks that are in that part of the sector which we think is very important. We'll also be engaging with high volume auditors in a relationship sense as well given that we don't necessarily see someone as high risk because they're a high volume auditor It's more of the consequence of the fact that if there are any issues they do audit a large number of SMSF's. But we'll be looking to engage with high volume auditors in that sense and part of that is we may take some undertake some assurance reviews of those auditors as well so that we have an appropriate level of assurance around their processes and the quality of the audits. And one thing I want to mention as well is that we in addition to their full assurance reviews that we undertake of auditors we identify risk we do want to as part of our expanded approach this year in 17/18 look to undertake some activities with a range of auditors who where the activity is an engagement or a light touch assurance. So it's not a full review of the auditor per se, but we may identify particular risks, now some of them may be the independence risks such as two partner firms and the selfinterest threat there that I mentioned earlier. There may be some others particular risks or issues that we want to test with a range of auditors and perhaps beyond the range of auditors that we would normally get to with our full assurance reviews. So we'll be looking to kick off that type of activity in a few months. So there may be some auditors who hear from us and we'll be looking to make it clear that it's that type of activity and as opposed to a full review. We as part of our activity want to have some engagement and dialogue with them on the particular issues that we want to talk to them about. But we do want to get a sense about how they are meeting the obligations in that particular area so that we do walk away from that engagement if you like with a level of assurance or a view about how we think that auditor's going. In particular, for that issue that we've been talking to them about but also perhaps just generally their practice. So that's a sort of new type of activity that we think will complement our full assurance reviews and audits as well and allow us to have a greater reach to a number of auditors about particular issues and risks. But do it in such a way that we are also providing guidance and support as part of that interaction with them. CLAIRE: Thanks Craig and finally, we see that there's a lot of new compliance requirements for SMSF's arising from the recent Super changes and whilst those most of those changes kick in from first of July this year, could you perhaps outline whether there's areas that the auditor should be focusing on for the 30 June 2017 audits to ensure that SMSF's are compliant or prepared for compliance with those changes. CRAIG: Yes. Well as you mentioned most of the new requirements commenced from 1 July 17 so they are not directly in line with the scope of the audits for 16/17. However, it's clear that trustees and we'll be taking action to prepare themselves if need be for to meet the new obligations going forward from 1 July 17 whether that be around the transfer balance cap measure or total super balance. And those two measures in particular where they have thresholds or caps do bring into play I think to a greater degree than ever before. The issue of the valuation of fund assets. So in terms of the obligations of trustees and also the testing of by an auditor of meeting those requirements in terms of valuations hasn't actually changed because of the new measures. It has been for some time now the requirement for funds to value assets at market value. And that's an area where auditors will already be testing appropriately as part of their audit engagement. So in a sense it will be no

10 different for 16/17 in terms of the scope. However, I think it is practical and appropriate for auditors to be conscious that trustees that may be around the areas of some of those thresholds going forward we transfer a balance cap or total super balance. That there is a pressure point perhaps there on valuations or a temptation if you like for manipulation of the valuation of fund assets that may be there for a trustee in order to be on a certain side of a cap or a threshold. So our message is we're we've been talking to auditors in the industry is just to essentially be cognizant of that. And I think that is material to the conduct of the audit. So there is still an obligation that's always been there and always been part of the testing of an auditor. But it's an area where there may be further pressures on trustees in terms of how they meet that obligations. For 16/17 the scope of the audit in relation to valuations doesn't change the obligations for trustees don't change. However, it's certainly material for auditors to see where trustees may have assets of values that interact with the new caps or thresholds going forward in 17/18 to include that in their assessment of the level of risk and the level of [inaudible] testing that may be appropriate in testing whether trustees have met the requirements to appropriately value assets at market value. Probably the other comment I'd make Claire is that just in general terms in terms of action that trustees may be taking to set themselves up for 17/18 action that they've taken in 16/17 that it may be prudent if an auditor sees an issue in the conduct naturally of the 16/17 audit that may prompt concern on their part in terms of how the trustees and members may be complying with requirements in 17/18 that it may just be prudent to bring that to the trustees attention as part of undertaking the 16/17 audit perhaps outlined in a management letter to the Trustees if that was appropriate. So I don't think there's any particular obligations in that regard with SMSF auditors. I just think that it's quite be reasonable that if if something is detected there of concern that's not directly within the scope of the 16/17 audit but it would be appropriate to mention to the trustees because it may highlight an issue for them for their 17/18 compliance and I think that that makes a lot of sense. CLAIRE: Well Craig thank you so much for joining us at CPA Australia to talk about the ATO's SMSF Auditor Inspection findings for 2016/2017. Hopefully we'll see in the coming year the continued improvements in the quality of SMSF audits. Thank you again. CRAIG: Thank you Claire. OUTRO: Thanks for listening to the CPA Australia podcast. Don't miss an episode by subscribing on itunes or Stitcher to download a transcript and find more information on today's episode visit