Author: Emma Partenza, Manager, TAG Financial Services
Changes to the APES 110 Code of Ethics became effective on 1 January 2020 for all Professional Accountants and SMSF Auditors. The new independence standards become compulsory and will need to be complied with, from 1 July 2021.
The ATO has recently released guidance on the independence standards to the industry detailing what it means to be compliant – the framework identifies, evaluates and addresses independence threats.
What the guidance covers
The guidelines cover general independence requirements and specific issues of concern in the industry. All firms and network firms who provide both non-assurance and auditing services must use their professional judgement to assess their specific arrangements and whether they comply with the standards in the code.
The ATO advised threats to independence generally fall into one or more of the following categories:
- Self-interest – the threat that a financial or other interest will inappropriately influence an auditor’s judgement or behaviour.
- Self-review – the threat that an auditor will not appropriately evaluate the results of a previous judgement made, or an activity performed by the auditor or another member of their firm (or employing organisation), or which the auditor will rely on when forming a judgement as part of performing an audit.
- Advocacy – the threat that an auditor will promote a client’s or employing organisation’s position to the point that the auditor’s objectivity is compromised.
- Familiarity – the threat that due to a long or close relationship with a client, or employing organisation, an auditor will be too sympathetic to their interests or too accepting of their work.
- Intimidation – the threat that an auditor will be deterred from acting objectively because of actual or perceived pressures (including attempts to exercise undue influence over the auditor).
Auditors are required to address any threats that are not at an acceptable level by either:
- Eliminating the circumstances (including interests or relationships) that are creating the threats;
- Applying safeguards (where available and capable of being applied) to reduce the threats to an acceptable level;
- Declining or ending the audit engagement (or the engagement of other services that is creating the threats).
Example of Conflict
There will be several scenarios that will always give rise to independence threats and where these threats cannot be eliminated or no safeguards can be applied to reduce the threat to an acceptable level, the auditor must cease or decline their engagements.
For example, accounting and bookkeeping services cannot be provided by SMSF audit firms unless they are routine or mechanical in nature. A firm cannot undertake the management of the fund where the audit is performed in-house. This is even the case where data feeds have been established to automate the financial statement preparation, as there are still decisions and judgements to be made regarding the data and maintenance of the feeds.
Where a firm is providing both services, now is the time to re-review current practices to assess independence threats and make necessary changes to avoid any potential breaches.
Reciprocal arrangements are an area of concern for the ATO. They advise an appropriate safeguard would be to refer clients to several different auditors to minimise dependence on one source.
Audit pooling arrangements will continue to be scrutinised by the ATO as they potentially bring a higher level of threats and a higher risk of non-compliance.
Breaches will be referred to ASIC
The auditor independence guidelines impact audits being completed from 1 July 2021 for FY2020-21 audits onwards; as well as any prior year audits that have yet to be finalised.
We have had the past year to consider engagements and adjust or re-structure procedures and systems to be compliant with the new standards. As always, the ATO’s approach during this time has been educational to assist firms to become compliant by 1 July 2021, at which time the code becomes enforceable. Auditors must continually use their professional judgement to assess all engagements are in line with the code.
The ATO advises for any breach of APES 110 the SMSF Auditor may be referred to ASIC for further action.
If you have any questions, please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.