Advisers and trustees often feel that the level of audit scrutiny is excessive and it’s true to say that it has become more “annoying” over the last year. There is a reason for this. The ATO have tightened their approach to SMSF compliance and have placed the burden substantially on SMSF auditors. If the ATO believe that an auditor is not performing satisfactorily they will report them to ASIC for remedial attention which can include imposition of conditions, reputational loss and cancellation of registration.

Auditors are required to take a more rigorous, evidence-driven approach. They must maintain workpapers that clearly show how material balances and transactions were tested and what evidence was obtained. The days of “trust me, I looked at the file” are gone. If it isn’t documented, the ATO assumes it wasn’t done.

The compliance audit is not a quick skim of the compliance checklist. Auditors are required to test compliance against key SIS Act and Regulations covering:

• financial statements
• loans or financial assistance to members or relatives
• borrowing and LRBA rules
• arm’s length terms
• disqualified trustees
• payment standards and preservation rules
• The ATO has singled out several risk areas where it expects auditors to be particularly vigilant. These include.
  illegal early access and prohibited loans – If this is not properly tested and, where relevant, reported via an ACR, the auditor can become part of the problem – and the target.
• Non-arm’s length income (NALI) and expenses – Even though the NALI rules are notoriously complex, the ATO expects auditors to raise red flags where arrangements are obviously off-market.
• Asset valuations – The ATO has already directly contacted auditors about funds reporting unchanged asset values for several years in a row without any ACRs being lodged. Auditors are expected to verify that year-end values for non-standard assets are current and based on reasonable evidence. Note that this can be problematic when it requires a look through into the assets and activities of “private” companies and trusts the SMSF has invested into.
• Disqualified trustees and trustee fitness – The ATO has said it will closely review auditors where its information indicates that a disqualified person has acted as trustee or director – and no ACR has been lodged.

Trustees might think all of this is just “auditor stuff”, but unfortunately that’s not how works.

Because the ATO is actively targeting high-risk auditors and low-quality audits, trustees need to be confident that their auditor:

• Is truly independent of the accountant/adviser
• Is ASIC-registered and in good standing
• Is not cutting corners with ultra-low, fixed audit fees for complex funds
• Has strong processes around documentation, valuations and contraventions.

If an auditor ends up in ASIC’s enforcement headlines, funds they audit will usually see increased scrutiny too.

The ATO’s stronger focus does raise the temperature, but it also reinforces an important message for trustees. A robust, independent audit:

• Helps catch issues before they snowball into penalties or disqualification
• Provides a level of comfort that the fund is run properly
• Supports trust between members, advisers and beneficiaries.

In short, a tough auditor is better than a lenient one followed by an ATO review.