One of the key recommendations of the Cooper Review into superannuation related to self managed superannuation fund (SMSF) auditor registration.
The Regulatory Impact Statement into this measure stated that:
"SMSF auditor registration seeks to ensure that SMSF auditors have a minimum level of competency to perform SMSF audits, and can be relied upon to detect and report contraventions of the SIS legislation. However, implementation of this measure involves a trade-off between creating a level-playing field for SMSF auditors and minimising the compliance burden on highly competent auditors."
The importance of SMSF auditors arises from the strong growth in the SMSF area and in particular:
- At 30 June 2011, there were almost 460,000 SMSFs, representing 99 per cent of all superannuation funds. SMSFs hold over $418 billion or 31.2 per cent of total superannuation assets ($1.34 trillion).1
- The SMSF sector is also the fastest growing superannuation sector. The average asset balance of an SMSF has grown from around $476,000 in June 2004 to $888,000 in June 2010. In June 2004, 42.4 per cent of SMSFs had an asset value of less than $200,000 compared to only 24.2 per cent of all SMSFs in June 2010.2
The ATO simply does not have the resources to audit the almost half a million funds and must rely on the profession to protect the integrity of the SMSF system.
Following through on these recommedations, on 23 June 2012 the Minister for Financial Services and Superannuation, Bill Shorten, announced further details of self managed superannuation fund auditor registration.
The draft legislation, Superannuation Legislation Amendment (Stronger Super and Other Measures) Bill (No. 2) 2012: SMSF auditor registration will require auditors will need to meet the following requirements to be registered as a self managed superannuation fund auditor:
- be an Australian resident;
- hold a tertiary accounting qualification that includes an audit component or have successfully completed study in audit as part of a professional accounting body program;
- meet a fit and proper test;
- hold professional indemnity insurance;
- subject to transitional arrangements, have 300 hours of self managed superannuation fund audit experience in the three years prior to registration; and
- subject to transitional arrangements, pass a competency exam.
The phrase, 'fit and proper person' is not defined in the proposed legislation. However, the Explanatory Memorandum at paragraph 1.28 sets out a number of relevant considerations as follows:
- whether the applicant has been found to be dishonest in any other role;
- whether the applicant has been disqualified or deregistered from any other role, such as the trustee of a SMSF;
- whether the applicant has serviced a term of imprisonment;
- whether the applicant was or is an undischarged bankrupt; and
- whether the applicant has been convicted of an offence involving fraud or dishonesty.
Auditors will be able to apply for registration from 31 January 2013 and must be registered with Australian Securities and Investments Commission (ASIC) by 1 July 2013 to conduct self managed superannuation fund audits after this time. Auditors required to sit the competency exam can do so from 1 July 2013 and will have until 30 June 2014 to complete the exam and become fully registered.
The competency exam will be developed by ASIC in consultation with industry. An auditor will not be eligible for that year if they fail to pass the competency exam twice within a twelve month period.
In addition, the regulator may cancel an auditor's registration if they have not carried out any significant auditing work within a continuous five year period. In coming to their decision, ASIC may consider the following factors:
- the number of SMSF audits undertaken; and
- the value and nature of the SMSF's assets and arrangements as an indicator of the type of work and knowledge exercised by the auditor.
The regulator will keep a register of both approved and disqualified SMSF auditors. The regulation of auditors will be shared between ASIC and the Commissioner of Taxation.
From 31 January 2013, SMSF trustees will be required to appoint an approved auditor to provide the audit report needed each year under superannuation law. The audit report must be in the approved form and make a declaration as to the auditor's compliance with the auditor independence requirements in section 128F(d) of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
Transitional arrangements have been developed which recognise highly experienced and competent auditors. Auditors who sign off on 20 or more audits in the 12 month period prior to applying for registration will not be required to sit a competency exam to become registered as a self managed superannuation fund auditor.
Additionally, existing self managed superannuation fund auditors who have signed off a self managed superannuation fund audit within a 12 month period will be exempt from the hours based experience requirement when registering.
Registered auditors will be required to meet ongoing professional obligations including:
- undertaking a minimum amount of Continuing Professional Development training every three years;
- holding professional indemnity insurance at an appropriate level;
- complying with auditing and assurance standards prescribed by the Auditing and Assurance Stands Board;
- complying with the Accounting Professional and Ethical Standards Board's APES 110 – Code of Ethics for Professional Accountants; and
- providing the regulator with an annual statement within 30 days of the anniversary of their registration confirming the number of audits undertaken or signed and indicating whether the auditor has adhered to independence standards.
Auditors will be required to pay the fees specified in the Superannuation (Self Managed Superannuation Fund Auditors) Fees Imposition Act 2012 for applying for registration, undertaking the competency exam, providing the regulator with the required annual statement and advising the regulator of any change in circumstances.
The Australian Taxation Office's 2009 compliance activities identified that in approximately 29% of cases the SMSF's accountant was also auditing the SMSF despite having prepared a material part of the SMSF's financial statements. On this basis, the Government has determined that there is a serious risk of a conflict of interest occurring in relation to almost one third of all SMSFs.
The aim of the legislation is to ensure that the rapidly growing SMSF space is being managed appropriately by further regulating the competency standards and professional qualifications of the auditors of SMSFs.
The primary focus of the legislation is threefold:
- improve the independence of auditors and thus, aim to eliminate conflicts of interest;
- impose minimum competency standards; and
- introduce a consistent approach to enforcement action where required.
While the effectiveness of the proposed legislation in meeting these three aims cannot be determined until the legislation has been implemented and in operation for a sufficient period of time, the provisions predominately address the introduction of minimum competency standards and a systematic approach to enforcement actions. It is unclear at this stage how the provisions will ensure auditors are independent and thus, remove any actual or potential conflicts of interest. As currently drafted, the provisions simply require a declaration from an auditor as to their compliance with the independence standards contained within the SIS Act.
The broad brushstroke approach to the legislative provisions gives the regulator wide and all encompassing powers to determine competency standards for various situations or activities. In addition, ASIC is not limited as to the nature or type of conditions that may be placed on an auditor's registration. Any limitations will be determined on a case by case basis. This may give rise to complaints that auditors in similar circumstances are being treated unequally where different conditions are imposed on each auditor. However, a transparent approval process may elevate this issue.
Importantly, the draft provisions confer a wide discretion on the regulators to impose conditions on a case by case basis which may make it difficult for auditors to comply with the approved auditor requirements. In addition, the requirements under the draft legislation coupled with the wide discretion of the regulators may hinder the effectiveness of the legislation.
If the draft legislation is implemented in its current form, the efficient and effective implementation of the provisions will depend to a large extent on the approach adopted by the regulators, ASIC and the Commissioner of Taxation, in administering their respective jurisdiction over SMSF auditors and managing the division of power.
1 APRA Quarterly Superannuation Bulletin June 2011, p. 7, Available: http://www.apra.gov.au/Super/Documents/Super%20Quarterly%20Performance%2020110630.pdf
2 ATO SMSF Statistical Report June 2011, Available: http://www.ato.gov.au/superfunds/PrintFriendly.aspx?ms=superfunds&menuid=49554&doc=/content/00290021.htm&page=14&H14
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