AUDITOR INDEPENDENCE
Written by:
Sharyn Long
Managing Partner
Sharyn Long Chartered Accountants
© Author’s name, Company 2013
Disclaimer: The material and opinions in this paper are those of the author and not those of The SMSF Professionals
Association of Australia did not review the contents of this paper and does not have any view as to its accuracy. The
material and opinions in the paper should not be used or treated as professional advice and readers should rely on their
own enquiries in making any decisions concerning their own interests.
Auditor Independence
Sharyn Long
CONTENTS
1
Introduction .................................................................................................................................... 3
2
Greater Independence for SMSF Auditors .................................................................................. 5
3
The SIS Rules ................................................................................................................................. 7
4
3.1
SIS Section 128F(d) .................................................................................................................. 7
3.2
SIS Regulation 9A.06 ................................................................................................................ 7
APES 110 Code of Ethics for Professional Accountants ........................................................... 8
4.1
5
4.1.1
Preparation of the financial statements ........................................................................... 10
4.1.2
Valuation Services ........................................................................................................... 12
4.1.3
Tax Services .................................................................................................................... 13
4.2
Relationships between auditors and referral sources ............................................................. 14
4.3
Firms that offer financial advisory services ............................................................................. 15
Monitoring of Auditor Independence ......................................................................................... 16
5.1
Summary of ASIC's inspection findings .................................................................................. 16
5.1.1
Larger national firms ........................................................................................................ 16
5.1.2
Other national and network firms ..................................................................................... 16
5.1.3
Smaller firms .................................................................................................................... 18
5.1.4
Conflicts of Interest .......................................................................................................... 18
5.2
6
Provision of Non-audit Services .............................................................................................. 10
JAB quality review programs & disciplinary procedures ......................................................... 18
The Cost of Independence .......................................................................................................... 20
Appendix 1 – APES 110 Section 290 ................................................................................................. 21
Appendix 2 – JAB - Decision Tree for SMSFs .................................................................................. 21
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1 Introduction
When I looked up independence, the thesaurus produced words such as “self-governing”, “selfsufficiency”, “autonomy”, “impartiality”, “self-rule”, “freedom” and “liberty”. These words provide
images of an individual who are truly free of reliance on any other person or thing which in my view is
a very good “yard stick” by which to judge if an auditor is truly independent.
Throughout time great reliance has been placed on auditors to provide comfort to investors and in the
case of SMSFs, the members and the Regulator that things are as they should be.
In researching auditor independence, I discovered that the first auditors on record date back to circ
500BC and they were the spies of King Darius of ancient Persia. Apparently these auditors acted as
“the King’s ears” checking on the behaviour of provincial satraps. Interestingly the word auditor
comes from the Latin word “to hear” because in ancient times auditors listened to the oral reports of
responsible officials (stewards) to owners or those having authority, and confirmed the accuracy of the
reports. Over the centuries the role of auditors as verifiers of official reports evolved to include that of
verifying written records. In the 16th century double-entry bookkeeping had evolved to the point of
being documented by Luca Pacioli of Italy in the first known book on accounting. Pacioli was a very
insightful man because he also recommended that the accounting records be verified by auditors. By
the early 19th century auditors acting as independent outside experts were frequently called upon to
investigate and report on business failures or to settle business disputes.
Modern auditing began in the mid 1800s in Brittan when the parliament passed the Joint Stock
Companies Act, which for the first time required that company director’s report to shareholders via an
audited balance sheet. But at that time the auditor wasn’t required to be an accountant nor
independent, however in 1900 a new Companies Act was passed that required companies appoint an
independent auditor. 1
What that short history lesson tells us is that the concept of auditors being independent has been with
our profession for over a century, although in the early 20th century only balance sheets were provided
and auditing was transaction based relying almost exclusively on internal evidence.
As a profession we tend to question the role and practices of the auditor when a major catastrophic
event occurs. Inaccurate reporting practices contributed to the 1929 stock market crash and the world
depression that followed through the 1930s. Widespread changes were then enacted to require
companies listed in the US to lodge both balance sheet and profit and loss statements. The US led
the way with further developments following the McKesson and Robbin’s fraud case, where in 1938 it
was estimated that US$20million was wiped off the company’s reported US$87million in assets. The
developments included the requirement for audit committees to be formed with non-executive
directors and for auditor appointments to be approved by shareholders.
The next major shakeup happened in the 1970s, when after several business failures and alleged
auditor failings in the US further regulation pursued from the recommendations of the Cohen
Commission.
1
McGraw Hill Ebook, Introduction to Auditing – Chapter 1 - Professional Practice, Appendix 1B, Brief History of Auditing
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Those systems remained in place until the early part of this century when Sarbanes and Oxley
questioned audit practices including auditor independence after the collapse of Enron which led to the
demise of major accounting firm and the auditor of Enron, Arthur Andersen. Enron was considered a
highly innovative energy company that piloted new energy solutions, but its financial performance was
largely based on manipulating energy prices with related parties which hid liabilities and losses by
speculating on energy prices. Likened to a Ponzi scheme, Enron relied on new investors so that the
price of the Company’s shares continued to rise. The managing partner of Arthur Andersen tried to
explain the apparent audit failure by attributing the problems to the vagueness of accounting
standards and the complexity of Enron’s financial statements. However, Arthur Andersen had been
involved in designing these transactions as part of their consulting work for Enron, so Arthur Andersen
was effectively auditing its own work.
The Sarbanes–Oxley Act 2002 introduced widespread reforms including making company directors
more accountable for financial reports and increasing the independence requirements of external
auditors.
In this paper I have attempted to consider the issue of auditor independence more broadly and to
adapt research and experience from the commercial world and apply that, where appropriate, to the
self managed super sector.
I feel that there is general acknowledgement that SMSFs differ from commercial enterprises,
predominately due to the following:

SMSFs are closely held, as all the members must be trustees and therefore members have the
right to participate in major decisions impacting the fund. This differs from shareholders in a
company where the board of directors is charged with making decisions and with some limited
exceptions, shareholders generally have no opportunity to influence these outcomes.

There are very few commercial issues associated with most SMSFs, if an investment declines in
value the member absorbs that loss and there is no detriment to any external party, unlike
unsecured creditors exposed to an operating business who stand to lose if the entity defaults.
Self managed superannuation funds are however afforded tax concessions (as are all complying
funds in Australia) and for this reason they are subject to regulations to ensure that these concessions
are not abused.
Auditors play a major role in the regulation of SMSF by assisting the Regulator to police compliance.
Auditors also give trustees and members comfort that the assets actual exist and that the fund is
compliant as they have a statutory obligation to notify trustee of breaches of SIS. Auditors also help
trustees keep financial advisers, accountants and service others in check by confirming that the
service provider got it right.
A new regime applies from 1 July 2013 so that self managed super fund auditors will need to be
registered with ASIC and comply with mandatory independence requirements in order to retain their
“SMSF Approved Auditors” status and continue to be able to audit SMSFs.
This paper is limited to addressing the independence requirements, for details on SMSF Approved
Auditor registration refer to Concurrent Session 3A at the SPAA 2013 National Conference or
http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/SMSF%20auditor%20registration
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2 Greater Independence for SMSF Auditors
The review into the governance, efficiency, structure and operation of Australia’s Superannuation
System (the Cooper Review) made the following recommendations regarding SMSF Auditors in its
final report issued in July 2010:
Recommendation 8.8
Government should:
(a) appoint ASIC as the registration body for approved auditors and give ASIC the power to determine
the qualifications (including professional body memberships as appropriate) required for eligibility to
be registered, set competency standards, develop and apply a penalty regime including the ability to
deregister approved auditors. The registration requirements for approved auditors should be linked to
minimum ongoing competency and knowledge standard; and
(b) task the ATO to police the approved auditor standards and enable information to be appropriately
shared between ASIC and ATO so as to carry out their roles effectively.
Recommendation 8.9
Subject to the Government implementing recommendation 8.8, ASIC should develop approved
auditor independence standards, which auditors must meet as part of their ongoing registration
requirements, as outlined in recommendation 8.8.
Keys comments made in the Cooper Review Report to support recommendation 8.9 included:

The compliance audit is unequivocally the central component of the SMSF regulatory framework
and in this regard, government is arguably as much a stakeholder as individual SMSF trustees

SMSF auditors have a fundamental role in the regulatory framework
The Cooper Review Panel preferred full independence whereby the auditor or auditing firm has no
connection to services or advice provided to the individual member/trustees or their family businesses
(that is wider than just in relation to the SMSF itself). This was supported by numerous submissions
calling for legislated independence, whereby firms who audit an SMSF could not also provide
non‐audit services to that SMSF.
The Review had access to ATO data that showed the following:

Auditors auditing 18% of SMSFs provided some other services, such as acting as a tax agent,
accountant, financial adviser or administrator

ATO compliance activity showed 29% of auditors who were the SMSF’s accountant had prepared
a material part of its financial statements and 28% of auditors showed evidence of a relationship
or conflict of interest that might impact the auditor’s ability to be independent and had no
safeguards to mitigate that risk

The Panel believing that unless independence standards can be reliably enforced auditor
behaviour will not change and hence specific audit independence requirements form part of the
approved auditor registration process.
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The Cooper Review strongly believed that mandatory independence, including a full independence
model was critical to the regulation of the SMSF sector. However, due to effective lobbying by SPAA
(and other industry representatives), Minister Shorten softened the Governments response to the
Cooper Review recommendation.
SPAA argued that the full independence model would create a bias by placing more stringent
regulation on SMSF auditors than those applied to registered company auditors who were responsible
for auditing Australia’s largest corporations.
There were also commercial factors to consider as the number of self managed funds continues to
increase whereby the pool of SMSF auditors (estimated at approximately 11,500) would potentially
decrease post registration. It was acknowledged that there are a number of specialist firms that only
provide SMSF audit services however they were too few in number and capacity to cope with the
number of SMSF audits.
Ultimately the Governments response to the Cooper Review on auditor independence
recommendation (see below) reflected these sentiments.
The Super System Review recommended that ASIC should develop approved auditor independence
standards, which SMSF auditors must meet as part of their ongoing registration requirements. The
Review suggested that the independence standards should include that the auditor and auditing firm
should not provide non-audit services to the SMSF.
The Government considers that prescriptive standards are not appropriate because an assessment of
auditor independence requires a holistic assessment of the individual circumstances surrounding an
audit engagement. Prescriptive standards cannot address all situations and can lose relevance over
time as services evolve. Instead, the principle-based approach used in the Accounting Professional
and Ethical Standards Board's (APESB) APES 110 — Code of Ethics for Professional Accountants is
more appropriate because it allows the individual circumstances of an audit engagement to be taken
into account and requires auditors to be independent both in fact and in appearance.
The Government will legislate to require SMSF auditors to comply with APES 110 as a condition on
their registration and will request the APESB to develop guidance for SMSF auditors on how APES
110 applies in the SMSF context. Guidance will assist with SMSF auditors understanding of
independence. 2
At this point the APESB formed a SMSF taskforce to address the Governments request in regard to
SMSF audit specific guidelines. Much of the discussion within that Taskforce is confidential, but the
main focus was on the following:
Stronger Super Information Pack — Government decision on the key design aspects of the Stronger Super reforms issued on
21 September 2011 by the Hon Bill Shorten MP
2
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3 The SIS Rules
3.1 SIS Section 128F(d)
Section 128F(d) of the SIS Act imposes the following statutory obligation on Approved SMSF Auditors.
An approved SMSF auditor must........
(d) comply with the auditor independence requirements prescribed by the regulations.
Section 128F is effective from 31 January 2013 and although auditors have until 1 July 2013 to
become registered, if they do so earlier, they have an obligation to comply with the independence
requirements from the date of their registration.
3.2 SIS Regulation 9A.06
SIS Regulation 9A.06 is effective from 31 January 2013.
For paragraph 128F(d) of the Act, the auditor independence requirements produced by the
Accounting Professional and Ethical Standards Board Limited and set out in the APES 110 Code of
Ethics for Professional Accountants are prescribed for all approved SMSF auditors.
Note:
At the commencement of this regulation, a copy of the APES 110 Code of Ethics for Professional Accountants was available at
www.apesb.org.au.
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4 APES 110
Code of Ethics for Professional Accountants
APES 110 Code of Ethics for Professional Accountants (the Code or APES 110) was originally issued
in 2006 and last revised in December 2010, so that the current version applied from 1 January 2011.
APES 110 applies to “members” in public practice who are defined to be members of the professional
bodies (namely the Institute of Chartered Accountants, CPA Australia and the Institute of Public
Accountants, collectively known as the Joint Accounting Bodies (JAB)) that have adopted APES 110
as applicable to their membership.
The Code also defines members in public practice to be members, irrespective of their function
classification (e.g. audit, tax or consulting) within a firm that provides professional services.
Once an auditor becomes an Approved SMSF Auditor under Section 128F of the SIS Act (registration
has been available since 31 January 2013) the Approved SMSF Auditor has a mandatory obligation
to comply with the requirements of APES 110. This requirement applies from the date of registration,
not 1 July 2013 if the registration occurs prior to that date.
The independence requirements for audit engagements are addressed in Section 290 of the Code
(see Appendix 2).
The conceptual framework relies on the premise that audit engagements are generally in the public
interest, so it therefore follows that auditors should be independent of the clients that they are auditing.
The public interest argument is more tangible when considering ASX listed companies or other
operating enterprises that interact with external parties (such as shareholders, investors and
suppliers).
In the case of self managed super funds it is the potential abuse of tax concessions that provides the
connection to the public interest.
Following the recommendation of the Cooper Review and the Government’s response, the APESB
formed a taskforce comprising representatives from the APESB, the JAB, SPAA, ASIC, the ATO and
other industry groups to fulfil the request to develop guidance for SMSF auditors on how APES 110
applies in the SMSF context.
I was the SPAA representative on the APESB SMSF Independence Taskforce (the Taskforce) that
considered the following four approaches in response to the Ministers request:
1. Development of a APESB standard;
2. Development of an APESB guidance note;
3. Updating the Code with SMSF specific paragraphs; or
4. Adopting the JAB Independence Guide3.
3 Independence guide: interpretations in a co-regulatory environment, Version 3, June 2008
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The Taskforce is still current, but it appears that option 4 is most likely, with amendments to the Code
if there are deficiencies that do not adequately address the manner in which SMSF audits occur.
Therefore the JAB Independence Guide last issued in June 2008 is in the process of being reviewed
and is expected to be reissued in the near future.
The current version of the JAB Guide includes a Decision Tree (see Appendix 1) that provides an
excellent summary of the process required to assess auditor independence.
The updated version is confidential until it is released by the JAB, and therefore the views I share
here are based on the current version 3 of the JAB publication and are limited to my understanding of
how additional guidance may be provided. These views are not necessarily those of the JAB and
may not be reflected in the updated publication.
Comment is made in the existing publication that some auditors may think the Code doesn’t apply to
self managed super fund audits as they are small entities.
Whereas the JAB does consider SMSFs to be “small clients”, it also highlights that close relationships
are often more prevalent between small clients and their auditor and this can make for challenges in
applying safeguards to reduce the threats to independence.
The Code would expressly exclude an auditor from undertaking an audit due to a lack of
independence in the following circumstances:

An auditor cannot audit their own SMSF (APES 110, Section 290.102)

An auditor cannot audit the SMSF where a partner within their own firm is a member/trustee of
that SMSF (APES 110, Section 290.124)

An auditor cannot audit the SMSF where a relative or a related party of the auditor is a
member/trustee of that SMSF or where the auditor has a close personal relationship (APES 110,
Section 290.127) or business relationship with a member/trustee of the SMSF (APES 110,
Section 290.124)

An auditor cannot audit an SMSF where they have also materially prepared the accounts for the
SMSF (APES 110, Section 290.168)

An auditor cannot audit an SMSF where their staff have prepared the accounts (APES 110,
Section 290.162)
The first three exclusions above are straight forward and do not in my opinion require further
explanation. However, the last two points are more subjective and will therefore require auditors to
use their professional judgement to determine if they are truly independent.
It is likely that the proposed revised Guide will have examples covering a number of scenarios
including the following that I have addressed in some detail below:

Provision of other services such as preparation of financial statements and acting as tax agent,
and drawing a distinction between sole practitioners and multi partner firms

The relationships between auditors and referral sources

Firms that offer financial advisory services
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4.1 Provision of Non-audit Services
4.1.1 Preparation of the financial statements
This is a subjective and challenging issue that may lead to firms restructuring in order to take up their
Approved SMSF Auditor registration or choosing to outsource their SMSF audits from 1 July 2013.
The Code addresses an audit firm providing accounting services in Section 290.167 to 290.171, these
are summarised below.
Section 290.168 confirms that providing a SMSF with accounting and bookkeeping services, such as
preparing accounting records or financial statements, creates a self-review threat when the firm
subsequently audits the financial statements.
Section 290.169 states that the following functions are a normal part of the audit process that doesn’t
generally create threats to Independence.
(a) the application of accounting standards or policies and financial statement disclosure
requirements;
(b) the appropriateness of financial and accounting control and the methods used in determining the
stated amounts of assets and liabilities; or
(c) proposing adjusting journal entries.
Section 290.170 provides that the client may also request technical assistance from the firm on
matters such as resolving account reconciliation problems or analysing and accumulating information
for regulatory reporting. In addition, the client may request technical advice on accounting issues and
such services wouldn’t generally create threats to independence provided the firm does not assume
any management responsibility for the client.
Section 290.171 allows a firm to provide services related to the preparation of accounting records and
financial statements to an SMSF audit client where the services are of a routine or mechanical nature,
so long as any self-review threat created is reduced to an acceptable level. Examples sighted in the
Code include the following, which for the most part are unlikely to apply in the case of SMSFs:

Providing payroll services based on client-originated data;

Recording transactions for which the client has determined or approved the appropriate account
classification;

Posting transactions coded by the client to the general ledger;

Posting client-approved entries to the trial balance; and

Preparing Financial Statements based on information in the trial balance.
Although Section 290.171 specifically applies to non-public interest entities and therefore SMSFs, it is
evident that it was written for much larger entities that have more complex financial reporting
requirements, making it difficult to envisage how the examples would apply to SMSFs.
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Therefore, in summary, a firm may be able to assist a SMSF audit client with some accounting
services, but the firm must assess the services required for each client to determine the extent of any
review threat. I have outlined the following general criteria that could be used to assess the potential
conflict of interest:



The level of involvement the firm has in the preparation of the financial statements. This could
range from extensive record keeping where independence would clearly be impaired to inputting
a summary of the records prepared by the trustee and/or an independent reporting service in
order to format the financial reports in which case independence may be achieved.
The level of knowledge and sophistication of the client/trustee/members and if they are
accustomed to and accepting of financial reporting prepared by the firm with limited or no enquiry
or review by them.
The more work and/or modifications that the firm needs to undertake on the primary records such
as market value workings and entries, tax calculations and earnings allocations to members to
strike the financial reports the great the self-review threat will be.
I also recommend that a scale approach be taken to the assessment of the threats, e.g. High,
Moderate and Low or a numeric scale whereby 1 is low and 5 is extreme.
In addition, firms should develop and document agreed client acceptance procedures for various
levels on risk tolerance.
Section 290.174 also provides for emergency or unusual situations whereby accounting and
bookkeeping services that would otherwise not be permitted, may be provided when it is impractical
for the audit client to make other arrangements. In my view this would have very limited application to
SMSFs.
The most common question of independence arises where accounting and tax services are provided
by a firm to a SMSF audit client, where responsibility for the two functions is assigned to different
partners. It is understandable that larger firms will generally find it easier to put appropriate
safeguards (often referred to as “Chinese Walls”) in place than smaller firms who will find this more
challenging.
It is possible to carry out both the accounting/tax work and audit work for an SMSF client.
For the purpose of this question, I have split firms into sole practitioners, small firms and large firms.
Sole Practitioners
Sole practitioners would not be able to audit an SMSF for whom they have undertaken accounting
and tax work as appropriate safeguards could not be put in place to avoid the self-review threat.
Sole practitioners have no opportunity to segregate ultimate responsibility for the audit engagement
from the non-audit services. Arguments have been made that the independence requirements are
satisfied where different staff carry out different functions or where a staff member prepares the
accounts and they are then audited by the partner. However, this practice was partly curtailed when
the JAB issued competency requirements for SMSF auditors, requiring them to hold a practising
certificate in order to sign off on a SMSF audit. It is clear that the reporting mechanisms within a sole
practitioner firm are such that all staff ultimately report to the sole practitioner who will be signing off
on the audit.
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Small Firms
Appropriate safeguards would need to include the client taking explicit responsibility for the financial
statements and any adjustments that the firm makes.
In an SMSF context it is difficult to see how these safeguards could actually work in practice. The firm
would need to be confident that the SMSF trustee had sufficient knowledge of the accounts and any
changes, to truly be in a position to take responsibility for them.
Although not impossible, small firms with two or three partners will find it challenging to implement
appropriate safeguards.
One practice that the JAB appears to oppose is where one partner takes responsibility for the
accounts for his SMSF clients and his partner is the auditor and then the roles are reversed for the
other partner. The interchanging between the accounting and audit functions depending on the client
suggests a collaborative approach that doesn’t adequately address the risks to independence.
Therefore in order for the “Chinese Walls” to be effective within a small firm there needs to be clear
allocation of responsibilities based on expertise and no comingling of functions.
Large Firms
Where a firm has separate business divisions carrying out the different roles with distinctly different
reporting lines to partners within those divisions, it would be possible for this arrangement to establish
an appropriate safeguard and for the auditor to be able to meet their professional obligations.
Typically, this would involve a business services division (or SMSF administration services division)
and a separate audit division. Staff within each division would carry out the work reporting to the
partner of each of those divisions.
4.1.2 Valuation Services
The independence guidelines for valuation services provided to audit clients are contained in
Sections 290.175 to 290.178 of APES 110. These requirements will become more relevant to
Approved SMSF Auditors when self managed funds are required to value assets at market value from
1 July 2013 (Regulation 8.02B).
According to APES 110, a valuation comprises the making of assumptions regarding future
developments, the application of appropriate methodologies and techniques and the combination of
both to work out a certain value, or range of values, for an asset.
Section 290.176 states that performing valuation services for an audit client may create a self-review
threat and outlines the following factors to determine the significance of any such threat:

Whether the valuation will have a material effect on the financial statements.

The extent of the client‘s involvement in determining and approving the valuation methodology
and other significant matters of judgment.

The availability of established methodologies and professional guidelines.

For valuations involving standard or established methodologies, the degree of subjectivity
inherent in the item.
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
The reliability and extent of the underlying data.

The degree of dependence on future events of a nature that could create significant volatility
inherent in the amounts involved.

The extent and clarity of the disclosures in the financial statements.
Where a threat exists, safeguards such as segregation of responsibilities must be applied to eliminate
the threat or reduce it to an acceptable level.
Section 290.179 requires that in the case of a SMSF audit client if the valuation service has a material
effect on the financial statements and the valuation involves a significant degree of subjectivity, no
safeguards could reduce the self-review threat to an acceptable level and the firm must not provide
such the valuation service to the fund.
A valuation would not involve a significant degree of subjectivity where the underlying assumptions
and/or method are established by law or regulation and are widely accepted as the results of these
valuations undertaken by different parties are unlikely to differ materially.
Whereas the SMSF auditor would generally not consider he or she is undertaking valuation work,
SMSF client’s and their accountants may seek greater assistance from auditors to interpret the ATO
new valuation guidelines post 1 July 2013.
4.1.3 Tax Services
Sections 290.181 to 290.194 outline the independence requirements for firm providing tax services,
which include the following professional services:

Tax return preparation;

Tax calculations for the purpose of preparing the accounting entries;

Tax planning and other tax advisory services; and

Assistance in the resolution of tax disputes.
The Code states that performing certain tax services creates self-review and advocacy threats, the
existence and significance of these threats will depend on factors such as:
(a) the system by which the tax authorities assess and administer the tax in question and the role of
the firm in that process;
(b) the complexity of the relevant tax regime and the degree of judgment necessary in applying it;
and
(c) the particular characteristics of the engagement; and
(d) the level of tax expertise of the client‘s employees.
Section 290.183 states that where the client takes “responsibility” for the return, including any
significant judgements made, it is generally not considered to create a threat to independence.
In my experience, although trustees of SMSFs may sign the annual return, they don’t necessarily
understand the content or any judgements made by the accountant preparing the return. Therefore
care needs to be taken so as not to create a position of over-reliance on this exception.
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In cases were other tax services are provided this will generally create a self-review threat and
auditors will need to consider a range of factors in determining whether appropriate safeguards can
be put in place to overcome any risks including the complexity of any tax advice given and the level of
tax expertise of the client’s employees receiving the advice.
4.2 Relationships between auditors and referral sources
Although engagement letters for SMSF audits are issued to the SMSF trustees, the arrangements,
including the fee structure are often made with the administrator and/or an accounting firm. This can
often involve a significant number of SMSFs which could be a considerable revenue source for the
audit firm. Where this occurs, retention of the audit clients has the potential to create a self-interest or
intimidation threat, in which case, the firm will need to evaluate any such threats and apply
safeguards to eliminate or reduce them to acceptable levels.
Factors sighted in the Code include the following:

Reducing the dependency on the external accounting practice (source of audit client referrals);

External quality control reviews; or

External consultation on key audit judgements.
Sections 290.220 and 290.221 specifically address the issue of fees and the appropriate safeguards
that could be put in place where a firm receives a large proportion of its fees from one source.
Section 290.220 outlines factors that will impact the extent of the self-interest or intimidation threat,
including:

The operating structure of the audit firm;

Whether the firm is well established or new; and

The significance of the client qualitatively and/or quantitatively to the firm.
We may see an addition to APES 110.220 which will specifically refer to multiple audit referrals from
one source as this is not contemplated in the current version of APES 110. However, the action
required is the same for one major audit client where the fees are a significant percentage of the audit
firm’s revenues.
In addition, the proposed revised JAB Guidelines are likely to address situations where the referral
source is a former employer, in which case the threat to independence may be intensified. There may
also be a self-review threat if the auditor provided non-audit services at a previous employer.
Also, a close personal or business relationship between the auditor and the referral source needs to
be considered. This arrangement could lead to a self-interest or intimidation threat and it is possible
for the perception of impaired auditor independence to arise.
SMSF auditors who find themselves in this situation may need to decline some of the audit work to
either eliminate the threat or reduce it to an acceptable level.
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4.3 Firms that offer financial advisory services
APES 110 doesn’t specifically address “financial advisory services”, but Section 290.157 states that
where specific guidance is not included, the auditor must apply the conceptual framework.
Although the manner in which fees for financial advice will be charged in the future is currently
changing, the current fee structure is a contributing factor in assessing the auditor’s compliance with
Section 290 of APES 110:

If the remuneration comprises commissions or asset based fees, it would be difficult to apply
appropriate safeguards as the auditor’s income is directly linked to the financial advice given.

Whereas, a “genuine” fee for service model may be an appropriate safeguard, however, the
auditor would still need to approach independence in a similar manner as when the firm offers
other services such as tax or accounting services.
Regardless of the remuneration structure, an assessment of the firms independence still needs to be
made and appropriate safeguards will need to be implemented to eliminate or reduce the threats to an
acceptable level before the firm can accept the audit engagement.
Firms must also consider situations where they have ceased to offer financial advisory services as the
auditor may still be facing the same risks, effectively they would still be auditing the firms work in
subsequent years while product recommendations and investment decisions remain in place.
There are numerous situations where the auditor could be reviewing and assessing the compliance of
a particular product, transaction or investment arrangement recommended or implemented by the firm.
Where the auditor is unable to implement sufficient safeguards to eliminate or reduce the threats to
independence (both real and perceived) the auditor should decline the engagement.
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5 Monitoring of Auditor Independence
The Financial Reporting Council (FRC) is a statutory body responsible for overseeing the
effectiveness of the financial reporting framework in Australia. Until 27 June 2012 one of the FRC’s
duties was the monitoring of and reporting on auditor independence as it applies under the
Corporations Act 2001. Although the FRC had no jurisdiction over SMSF auditors, extracts from the
FRC’s 2012 report provide some insights into auditor independence generally.
In publishing its report, the FRC relies on the most recent ASIC audit inspection program report.
During the period ending 30 June 2012, ASIC completed inspections of 11 firms: three were larger
national firms, three were other national and network firms and five were smaller firms.
5.1 Summary of ASIC's inspection findings
ASIC has informed the FRC that the firms it had inspected previously continued to maintain or
improve their quality control systems, demonstrating their commitment to auditor independence.
Firms have implemented quality control systems to ensure compliance with the independence
requirements of the Corporations Act and professional quality control and ethical standards. The
extent and complexity of these systems vary depending on the size and nature of the firm.
ASIC has also advised the FRC that it continues to have concerns about the number of
findings at inspected firms about independence processes and about contraventions of the
rotation and other independence requirements of the Corporations Act.
5.1.1 Larger national firms
ASIC inspected three larger national firms during 2011-12. ASIC found two instances of potential
perceived threats to independence at one larger national firm.

One instance concerned the decision to change the engagement partner for an ASX listed client
and the provision of non-audit services to another ASX listed client. At a minimum, these cases
raised concern at ASIC about the appearance of independence.

At another larger national firms ASIC was advised of two rotation breaches where the
Engagement Quality Control Reviewer (EQCR) played a significant role for more than five years.
5.1.2 Other national and network firms
Three other national and network firms were inspected by ASIC during 2011-12. ASIC found that
those firms that have been inspected more than once generally made improvements to their quality
control systems. However, ASIC reports that it continues to have concerns about the number of
findings at some firms in respect of their independence policies and processes.
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In ASIC's opinion, independence is fundamental to the conduct of a quality audit and the
leaders of these firms need to ensure that they give strong and clear messages about the
importance of independence to set an appropriate 'tone at the top'.
Specific observations made by ASIC as a result of these inspections include:
Independence policies and processes:
ASIC generally found that the other national and network firms it inspected have policies and
processes in place to facilitate compliance with the independence requirements of the Corporations
Act and professional standards. However, it noted that the completeness and adequacy of the
independence policies and processes varied across the firms inspected, reflecting the nature or
maturity of the network structure of some of these firms. ASIC has informed the FRC that the
independence policies and processes of these firms need improvement to ensure that their policies
and processes are consistent with the Corporations Act and professional standards and are applied
consistently across the member firms. Specific observations made by ASIC as a result of its
inspections of other national and network firms included that:

one firm needed to update the independence policies and procedures to ensure they reflect all the
changes in the revised APES 110 issued in December 2010;

one firm did not have a clear process to document the factors (including independence) impacting
on remuneration of its directors;

the member firms of one network do not have a consistent approach to independence oversight
and in some cases do not have a dedicated independence monitoring resource;

one firm needs to improve its policies and practices to ensure that all member firms undertake
and document independence consultations;

one firm should consider implementing a formal system to record relevant relationships and
financial interests of partners and senior staff to enable testing of the accuracy and completeness
of the annual independence declarations of partners and senior staff; and

one firm did not adequately document its consideration of the threats and safeguards to its
appearance of independence where a director from the firm appeared at a public hearing,
creating a potential advocacy threat which could impact upon the firm's independence.
Testing independence systems
One of the three other national and network firms inspected during the period did not test their
independence systems and processes, including the declaration of financial interests, to ensure that
they are meeting the requirements of the Corporations Act and professional standards.
ASIC has expressed the view that, without an appropriate testing program, firms can only place
limited reliance on the effectiveness of their independence systems and processes. It is of the view
that where firms are testing their independence systems and processes, the communication of the
results of the testing process to all personnel can send a strong and clear message about the
importance of independence.
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5.1.3 Smaller firms
Five smaller firms were inspected by ASIC during the period. ASIC has also informed the FRC that,
in conducting its inspections and in determining its observations and findings in respect of the smaller
firms, it is conscious of their size and nature. However smaller firms undertaking audits are still
required to comply with their legal and professional obligations.
ASIC found that most of the smaller firms inspected had a basic level of independence policies and
processes in place. However, its inspections showed areas that could be improved to ensure that the
firms are complying with the legal and professional independence requirements.
ASIC observed that one smaller firm had breached statutory auditor rotation requirements for two
listed audit clients, where both the audit partner and the EQCR had acted in their roles for more than
five years. For another three listed audit clients, the approaching deadline for rotation means the
smaller firm was in danger of further breaches if action was not taken.
ASIC also observed that another smaller firm had not considered or put into place appropriate plans
to prepare for impending auditor rotation in order to meet the requirements of the Corporations Act.
5.1.4 Conflicts of Interest
ASIC has also provided the FRC with information about other auditor independence issues that it
became aware of outside its regular inspection program. In brief, these issues included:
ASIC has provided the FRC with an update on two conflicts of interest matters mentioned in its 2011
report to the FRC:

In one matter, immediate family members of an auditor (a partner of a smaller firm) held a
substantial amount of shares in the company at the time that the auditor signed the audit report.
ASIC has referred this matter to the Commonwealth Director of Public Prosecutions (CDPP).

In another matter, ASIC noted that an auditor from a smaller firm held financial interests in and
owed amounts to an audited body. A brief of evidence on this matter has been provided to the
CDPP in regard to auditor independence breaches and it is expected that charges will be laid
against the auditor.

At one larger national firm, three auditor's independence declarations were qualified, each and
separately due to the larger national firm remunerating a consultant who became a director of an
audit client. Subsequent to the larger national firm entering into the consulting arrangements, the
three respective individuals became directors of audit clients. These matters were disclosed in
the firm's Transparency Report 2011 and reported to ASIC.
5.2 JAB quality review programs & disciplinary procedures
Under the ASIC Act, the FRC is required to monitor and assess:

the nature, overall adequacy and effectiveness of: the systems and processes used by the
professional accounting bodies for planning and performing quality assurance reviews of audit
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work undertaken by Australian auditors to the extent that those reviews relate to auditor
independence requirements;

the action taken in response by auditors who have been subject to such reviews; and

the action taken by the professional accounting bodies to ensure that auditors are responding
appropriately.
In addition, the FRC is required to monitor and assess the nature and overall adequacy of the
investigation and disciplinary procedures of the professional accounting bodies as those procedures
apply to Australian auditors.
Information provided by the ICAA indicates that during the year ended 30 June 2012, it completed
reviews of 412 practices with 76% of total review reports recording either no departures from
professional standards or departures from professional standards that are not classified as serious.
The ICAA reviews conducted during 2011-12 found that 2% of the practices that conduct
Corporations Act audits had no departures from professional standards. All other practices of each
type had departures from professional standards, although these departures were not classified as
serious for 67% of the practices that conduct Corporations Act audits and 78% of the practices that
undertake other types of audits.
The ICAA also has informed the FRC that, although overall compliance with the auditing standards
continues to improve, its main concern continues to be a lack of documentation in relation to the audit
opinion issued or insufficient documentation in a particular audit area.
In the area of auditor independence, the following areas of non-compliance with the requirements of
APES 110 were noted:

no documentation or inadequate documentation when considering threats to independence (11
per cent of the 412 practices reviewed);

appropriate safeguards were not adequately applied when carrying out auditing and accounting
functions for a client (10 per cent of practices reviewed); and

auditing the SMSF of a partner in their practice (2 per cent of practices reviewed).
CPA Australia has advised the FRC that as at 30 June 2012, 5,807 of its members held a CPA
Australia Public Practice Certificate (PPC) while 1,076 held an ICAA Practice Certificate. All members
who hold a PPC are subject to CPA Australia's Quality Assurance (QA) program. A total of 1,173
members are RCAs.
In 2011-12, the reviews conducted under CPA Australia's QA program found that 81% of those
reviewed were either fully compliant or had only minor departures from professional standards.
During 2011-12, 58 breaches of auditor independence requirements were identified by the CPA, with
the vast majority relating to audits of SMSFs.
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6 The Cost of Independence
I wanted to highlight the potential changes to the cost of audits due to independence.
The Cooper Review looked at this and concluded that the.....
Requiring true independence should not result in increased audit fees (unless cross ‐subsidisation
within the accounting industry is actually occurring). It would, however, likely result in more
specialisation and this could assist to reduce audit costs. The following table illustrates that greater
scale already reduces the average and median audit costs for auditors who perform a higher number
of audits compared to auditors who only conduct a small number of audits.
Table 8.2: Average and median audit fees relative to the number of audits performed
No. of audits performed
by an auditor (2008)
Average fee
Median fee
1 fund
$865
$550
2 - 4 funds
$951
$570
5 - 10 funds
$911
$600
11 - 25 funds
$810
$550
26 - 50 funds
$686
$517
51 - 100 funds
$602
$495
101 - 250 funds
$540
$440
>250 funds
$413
$380
Total
$664
Based on the 2008 SMSF Annual Return, Source: ATO unpublished data
$495
A second table included in the report supports the view that the use of truly independent auditors is
already a cheaper proposition for SMSF trustees.
Table 8.3: Auditor fees based on whether the auditor did or didn’t provide other services
SMSF Size
Auditors providing
other services
Auditors providing
no other services
All auditors
Avg
Median
Avg
Median
Avg
Median
$0 to $50k
$841
$550
$571
$440
$627
$440
>$50k to $100k
$732
$539
$519
$440
$556
$440
>$100k to $200k
$772
$550
$541
$440
$580
$462
>$200k to $500k
$823
$550
$567
$462
$608
$495
>$500k to $1m
$922
$600
$599
$489
$649
$495
>$1m to $2m
$1,105
$660
$645
$495
$717
$500
>$2m to $5m
$1,379
$800
$746
$528
$839
$550
>$5m to $10m
$2,050
$1,100
$913
$532
$1,079
$550
>$10m
$2,740
$1,400
$1,433
$695
$1,634
$750
$608
$480
$664
$495
Total
$954
$594
Based on the 2008 SMSF Annual Return, Source: ATO unpublished data
Time will tell if the findings of the Cooper Review will in actual fact repeat with the ne compulsory
independence requirements.
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Appendix 1 – JAB - Decision Tree for SMSFs4
4
Joint Accounting Bodies – Independence guide: interpretations in a co-regulatory environment - V3, June 2008
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Appendix 2 – APES 110 Section 290
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