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Reciprocity, referral sources and audit independence

Reciprocal auditing arrangements where SMSF firms enter into audit arrangements for one another risk breaching new independence requirements, the ATO has clarified. The restructured Independence Guide in the APES 110 Code of Ethics for Professional Accountants has caused many firms to restructure their businesses and make new audit arrangements. However some firms are unwittingly creating new independence issues while making this transition. ATO director Kellie Grant has clarified that firms “need to ensure that they don’t enter reciprocal auditing arrangements where two firms just end up auditing each other’s clients.” The issue is around the source of work and whether referrals for work can compromise genuine independence. Auditors need to have multiple sources of work and not rely on a few major referral sources.  Ms Grant went on to say that relying on a reciprocal arrangement or one referral source "can inappropriately influence the auditor’s judgement and behaviour if the auditing firm is solely dependent on those fees.” In these sorts of arrangements, Ms Grant said the auditor may be reluctant to issue adverse findings where there are risks, because they may feel they’ll lose their entire client base. “So, you need to be mindful of not entering into reciprocal auditing arrangements because they can create self-interest, familiarity and intimidation threats,” she cautioned. Splitting off divisions of a firm for audit? SMSF auditors are also not allowed to set up their own firm and accept audits from the firm at which they were previously a consultant, partner or employee. Ms Kellie said, “that’s because threats may exist that the auditor may not appropriately evaluate the judgements made or advice provided to clients of that firm from when the auditor was a partner of that firm." “Due to the previous relationship, there is a threat that the auditor might be too accepting of the work of the firm that they previously worked at.” How to comply with the new Code Firms can reduce threats to independence down to an acceptable level by putting in place appropriate safeguards. This may include:

  • Spreading out the referral of clients to a number of different SMSF auditors which minimises dependence on one source.

  • Appointing an appropriate reviewer to review key audit judgements, someone who did not take part in the audit or the tax work.

  • Wait at least 2 years before conducting audits for a firm that you have previously worked for as a consultant, partner or employee.

Ms Grant says, “if the circumstances creating those threats can’t be eliminated and appropriate safeguards can’t be applied, then really the auditor should look to decline that engagement.” ATO enforcing higher standards for auditors This comes as the ATO is rolling out a comprehensive review of SMSF audit firms.  A further two auditors were recently referred to ASIC for auditor independence breaches and audit quality deficiencies. ASIC has responded by imposing conditions on the registration of these auditors, which if breached may result in suspension or disqualification of their registration as an SMSF auditor. Want to talk? If your firm needs to reconsider audit arrangements in light of the new Code, we'd be happy to talk with you about how we can customise an audit solution to deliver quality outcomes for your clients and for your firm.

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