YET another change was made to superannuation this week. Thankfully it did not involve increasing taxes on superannuation or reducing benefits (that more than likely will come in the next six months), but instead related to draft legislation for the audit of self-managed super funds.
The draft legislation, like many of the recent changes to superannuation, has come from a recommendation of the Cooper review of superannuation. One of the review's findings was a perceived problem with the competency of auditors of self-managed funds. Rather than fixing this problem, the draft legislation will tend to entrench it.
Under the current system, self-managed funds are regulated by the Tax Office. The two main requirements set out by the Tax Office for someone to audit an SMSF are that they must be a "fit and proper person", and the audit must be carried out in accordance with the auditing standards laid down by the professional bodies.
At the heart of the draft legislation will be the requirement for SMSF auditors to be registered. For a person to become a registered SMSF auditor they must:
Have completed a tertiary accounting qualification involving at least three years of study that included an audit component or studied auditing after having completed the tertiary study with a professional organisation.
Be a fit and proper person.
Hold appropriate professional indemnity insurance.
Have at least 300 hours of auditing SMSFs in the three years prior to applying for registration.
Have passed a competency test.
Transitional arrangements have also been inserted into the draft legislation that allow current SMSF auditors to apply for registration.
It is these arrangements that don't fix the perceived problem with the competency of auditors. This is because they allow anyone who has been previously auditing SMSFs, no matter how good or bad those audits have been conducted, to apply for SMSF auditor registration.
Belinda Aisbett, SMSF specialist auditor with Super Sphere, said: "The registration for existing auditors is quite low. If you have audited one super fund in the 12 months prior to registration you don't need to satisfy the practical experience requirements, and if you signed off on 20 audits in the 12 months prior to registration you don't need to sit the competency exam."
There is another area where the draft legislation also doesn't improve the current situation. This is the requirement for an SMSF audit to be conducted under the auditing standards. These standards apply equally to the audit of publicly listed companies as they do to SMSFs.
This often means the level of work required to meet the standards for an SMSF creates conflict and extra work for the auditor and extra cost for the trustees of the fund. These standards also do not specify the critical areas that SMSF auditors should concentrate on, such as accessing super incorrectly or purchasing investments barred by the SIS legislation.
At least the draft legislation will change the rules on when an auditor must sign off on the accounts of an SMSF.
Currently heavy penalties are imposed if the audit is not completed by the due date for lodgement of the fund's tax return. The rules will change so that an auditor must sign off on the audit within 28 days of receiving all of the information.
The Gillard government was given the opportunity to create certainty when it came to the auditing standard for SMSFs. If the draft legislation were an exam, the Gillard government has barely achieved a pass.
Frequently Asked Questions about this Article…
What is the proposed SMSF auditor registration legislation and why does it matter for everyday investors?
The draft legislation would require auditors of self-managed super funds (SMSFs) to be formally registered and meet specific criteria. It matters because it changes who can audit your fund, aims to respond to concerns from the Cooper review about auditor competency, and could affect audit quality, timing and costs for SMSF trustees.
Who currently regulates SMSF audits and what are the basic auditor requirements?
SMSF audits are currently regulated by the Tax Office. Under the existing system the Tax Office requires auditors to be a 'fit and proper person' and to carry out audits in accordance with the professional auditing standards set by industry bodies.
What are the specific requirements to become a registered SMSF auditor under the draft rules?
To become a registered SMSF auditor the draft legislation requires: a tertiary accounting qualification involving at least three years of study with an audit component (or auditing studied afterwards with a professional body); being a fit and proper person; holding appropriate professional indemnity insurance; having at least 300 hours of SMSF auditing in the three years before applying; and passing a competency test.
What are the transitional arrangements for existing SMSF auditors and why are they controversial?
The draft legislation allows current SMSF auditors to apply for registration under transitional arrangements. Critics say this is controversial because it lets anyone who has previously audited SMSFs qualify regardless of the quality of those audits. As pointed out by SMSF auditor Belinda Aisbett, the bar is low—auditing one fund in the prior 12 months can avoid practical experience requirements, and signing off on 20 audits in 12 months can avoid the competency exam.
How do professional auditing standards affect SMSF audits under the draft legislation?
The draft requires SMSF audits to be conducted under the same auditing standards that apply to publicly listed companies. That can increase the auditor's workload and trustee costs and does not specifically direct auditors to focus on SMSF‑specific risks like incorrect access to super or investments prohibited under SIS legislation.
Will the timing for auditor sign-off on SMSF accounts change?
Yes. The draft legislation would change the rules so an auditor must sign off on an SMSF audit within 28 days of receiving all required information. Currently there are heavy penalties tied to not completing the audit by the fund's tax return lodgement due date.
Does the draft legislation fix the perceived competency problems identified by the Cooper review?
According to the article, the draft legislation is unlikely to fix the perceived competency problem. While it introduces registration and competency tests, the transitional arrangements allowing existing auditors to register regardless of past audit quality risk entrenching the very problem the Cooper review highlighted.
What should SMSF trustees expect in terms of audit scope and costs if these changes pass?
Trustees should expect audits to follow broad professional auditing standards (the same ones used for listed companies), which can mean more work for auditors and higher costs for funds. The standards also don’t clearly prioritise SMSF‑specific issues, so trustees may still need to ensure auditors focus on key risks like incorrect benefit access or investments barred by the SIS rules.
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