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The Role of Accountants in SMSFs

The Role of Accountants in SMSFs


by Chris Malkin, WHK Horwath

Released February 2009

ABOUT THIS PROGRAM

How can accountants increase their penetration of the expanding self managed super fund sector?

This program advances the view that increasing disenchantment with commission-driven advisors and ‘product’ providers - and the global financial crisis - have resulted in a significant business opportunity for Accountants practicing in superannuation.

Areas covered in the program include:

  • What Accountants can do for their clients’ SMSFs - how much value a pro-active accountant can add

  • The current approach and priorities of the ATO as regulator of self managed funds

  • New competency and reporting requirements

  • The FSRA regime as it applies to superannuation

Disclaimer:

The comments in this paper are intended to be general comments only and do not, nor are they intended to, constitute financial advice. The author, Chris Malkin and/or WHK Horwath and the WHK Group Ltd take no responsibility for any loss or adverse consequences arising from this paper.

The Role of the Accountant in SMSFs

What are expected of Accountants in the SMSF administrative environment? How should they fulfill their roles? How can they become more pro-active?

Preamble

Traditionally, accountants have been seen as finance professionals who assist clients in their compliance obligations for taxation, corporate law and regulation, accounting and reporting as well as provide advice in respect to investment decisions, business planning and growth, business advisory and audit.

Accountants are frequently blamed for being re-active and often on the back foot – exacerbated by the compliance needs of the increasing complex taxation and regulatory environment and the demands of business. They are seldom seen as being pro-active business advisers who have ample time to satisfactorily attend to their clients’ affairs in a way that results in client applause.

Superannuation, aided by compulsory superannuation savings, has become a core business activity for many accounting firms who provide licensed financial planning advice to their clients’ self managed superannuation funds which the firm also administers and often audits.

Many people have become bamboozled by the plethora of wealth creation spin-doctors who they see as being more concerned with feathering their own nests through the receipt of commissions earned by selling complex managed investment products than building long-term client wealth. The global financial crisis has lead people to question the integrity of many advisers, particularly as they monitor, with alarm, the decline in their superannuation and retirement investment portfolios.     

This uncertainty has resulted in a significant business opportunity for Accountants practicing in the field of superannuation.

The inherent conservativeness of the Accounting Profession is becoming one of its most significant benefits. People are again turning to qualified professional accounting practitioners for sound, independent and understandable superannuation, retirement planning and investing advice.

What does an Accountant do in relation to clients’ SMSFs?

Before we consider how an Accountant can improve the pro-activity of their services we must look at what roles accountants have traditionally played regarding their clients’ retirement planning and superannuation needs.

These roles include the provision of:

  • fund accounting services;

  • fund administration;

  • fund taxation services;

  • financial planning services;

  • trustee services, and

  • audit services.

Accounting services

These include the preparation of the superannuation fund’s financial statements, usually utilizing proprietary accounting software such as BGL or Supervisor.

They must be prepared with knowledge of the accounting standard applicable to superannuation funds – AAS25 (although a SMSF, not being a reporting entity, need not comply with the full standard – only the section relating to asset valuations at market).

The client trustee also expects the accountant to draft relevant minutes, members’ statements as well as the Annual Return which is now incorporated with the Income Tax return.

All of this is usually a once-in-the-year involvement. It should not be. Because of the importance of clients knowing and being able to monitor and drive their retirement savings, their accountant should pro-actively seize the opportunity to prepare quarterly, if not biannual accounts.

Administration services

If the accountant is not the fund’s administrator, they can play a value-added role in liaising between the fund’s trustee/s and the fund’s accountant. The Administrator will normally facilitate the purchase and redemption of the fund’s investments, and will usually hold the fund’s cheque book. Although this function is usually performed by the Accountant, in larger, APRA regulated funds, it is usually a specifically designated specialist role which will also involve the maintenance of members’ records.

Note: the Accountant cannot take any part in recommending on the investment process unless that person is qualified under the provisions of the FSRA.

Financial Advisory services

This advisor, who may be the same person providing the accounting and administration functions, must be licensed under the FSRA.

The Financial Advisor may advise the Trustees on their SMSF operations, draft the Fund’s Investment Strategy, make investment recommendations, prepare investment documentation and provide investment monitoring services (which may acquired from outsourced providers).

As some of these duties are those normally associated with a Financial Planner, the client will need to agree on the method of charging for the services provided – whether on the basis of time cost (fee for service) or commissions. The agreed fee will normally be determined based on what other services are provided by the service provider. The Accounting Profession normally encourages its members to charge on the basis of fee for service.

Trustee services

The Accountant is not usually engaged to perform the role of trustee unless the Fund is a Small APRA Superannuation Fund (SAF).  If the Fund was not a SAF, the Trustee/Accountant would be required to be a member of the Fund. Note that the Accountant could not be paid for trustee services provided.

Although it is unlikely that an Accountant will be employed to perform the role of trustee to a SMSF, they can give guidance to the Fund’s existing trustees on their duties as trustees, corporate governance of the SMSF, risk management, insurance, etc.

Audit services

All superannuation funds must be independently audited each financial year by an Approved Auditor.

The definition of an Approved Auditor is contained in the Superannuation Industry (Supervision) Act 1993 and its Regulations (SIS) under Regulation 1.04(2)(a).

For a SMSF, an Approved Auditor is either:

  • a Registered Auditor (Div. 2 Part 9.2 of the Corporations Law); or

  • a member of the CPA Australia; or

  • a member of The Institute of Chartered Accountants in Australia; or

  • a member of the National Institute of Accountants; or

  • a member or fellow of the Association of Taxation and Management Accountants; or

  • a fellow of the National Tax and Accountants Association Ltd; or

  • the Auditor-General of the Commonwealth, a State or a Territory.

It is noted that to audit a non-SMSF (a superannuation fund under the regulation of APRA), there is the further requirement that the auditor also be a Registered Auditor.

A SMSF must be audited at least annually. The audit must be completed by an approved auditor who can demonstrate independence in accordance with the Codes of Professional Conduct of the senior accounting bodies and is a person who cannot be part of the decision-making process relating to the fund or its investments. For this reason it is unlikely that the accountant who prepares the fund’s financial statements beyond trail balance stage can also act as Auditor. Clearly, the person who advises on the fund’s investments cannot audit that fund. 

The ATO as Regulator of SMSFs – What is their current approach?

Their aim is to be less visible to those superannuation funds who comply but highly visible to those who don’t.

There are now approximately 385,000 SMSF’s in Australia.

The ATO is increasing its audit surveillance of these funds.

All breaches and errors picked up during an external audit (whether rectified or not) must be reported to ATO in first year of a fund’s operation.

According to the ATO, there is increasing evidence that SMSF Trustees need focused training and increased knowledge of their responsibilities.

The ATO uses the information contained in an Auditor Contravention Report to initiate further ATO audit surveillance.

The ACR system provides the key indicator that SMSFs are complying with SIS.

ATO is also following up ACRs.

According to the ATO, major contraventions to date include:

  • loans made to a member or a relative – breach of SIS section 65

  • assets not in the name of the fund – breach of SIS section 52

  • breach of in-house asset rules – breach of SIS section 71

  • documents requested by auditor not provided

  • borrowings for purpose not allowed in SIS – breach of SIS section 67 

  • breach of sole purpose test – SIS section 62.

A pro-active accountant can provide valuable services to SMSF trustees by assisting the trustees to better understand their fund, their responsibilities as trustees and members, and their compliance obligations.

The ATO’s perception of the external auditor and the audit process

The ATO believes that financial audits are well conducted, however, are concerned that the compliance audits are lacking in depth. They are concerned with the deficient knowledge of the legislative requirements of some auditors.

They are also concerned that some auditors are not independent or are not auditing the fund in accordance with Australian Auditing Standards.

Many auditors are not using proper, well constructed auditing programs or are issuing management letters pointing out audit concerns to the fund’s trustees. Many are not issuing engagement letters or requesting representation letters.  

The ATO expects auditors to comply with Australian Auditing Standards, the independence criteria of the senior accounting bodies, maintain adequate audit working papers, report contraventions to the ATO and make working papers available to the Regulator.

The ATO is disciplining and penalizing auditors who do not comply with the legislation or expectations of the ATO.

Approved Auditor and the new Competency requirements

Effective 1 July 2008, the Approved Auditor and all staff performing an audit must meet the new competency standards of CPAA and the ICAA .

This entails completing 30 hours of structured training in superannuation over each 3 year period.

Public Practice Certificates and the Approved Auditor

Where the Approved Auditor is signing off an audit in their own right, they must hold a Public Practice Certificate as well as meet the new competency standards.

Where an Approved Auditor is signing off on behalf of the firm, the Principal responsible must hold a Public Practice Certificate.

Auditor’s Report

In summary, the Auditor’s Report applying to audits of SMSFs from 1 July 2008 has the following changes: Refer NAT11466.07.2008

  • Changes from 2006/07 audit report (new sections):

  • S.17A - definition of a SMSF

  • 4 or less members

  • Members and trustees must be the same people: members equal trustees, trustees equal members.

  • Single member Fund rules: A trustee cannot be an employee of a member (unless a they are a relative)

  • A trustee cannot be paid for trustee services.

  • S.35A - accounting records to be kept for 5 years

  • S35B - prepare P&L & B/S & if 2 or more trustees, accounts must be signed by 2 trustees.

  • S.35C(2) - Trustee to provide documents to the auditor within 14 days of the auditor’s request.

  • S.104A - 21 days for trustees to sign Trustee Declaration when they first become a trustee. (NAT 71089)

  • Several sections have been removed: S.106 (adverse events), S.111, S.112, S.113(1A) – the last 3 related to accounting and the keeping of records

Auditor Contravention Reports from 1 July 2008

  • ATO focus: contraventions, significant breaches and new funds.

  • New ACR form and instruction has been produced.

  • Can lodge the ACR by paper or via the electronic program.

  • ACR is event based. Auditors report contraventions for an event.  An event is something that may lead to, or has led to one or more contraventions.

  • Auditors are to apply tests which will determine the sections and regulations that must be reported.

  • Auditors are to report all prescribed contraventions for new funds (less than 15 months old) – the is no concept of materiality.

ACR Tests

TEST 1: Fund definition test – re S17A

TEST 2: New fund test – if SMSF is less than 15 months old, report all breaches

TEST 3: Trustee behaviour test - Has the trustee previously received advice of a contravention that they have breached again?

TEST 4: Trustee behaviour test – a contravention from a previous year that has not been rectified at the time of the audit

TEST 5: Trustee behaviour test – statutory time period failed by more than 14 days.

TEST 6: Financial threshold test – 5% in-house asset rule

TEST 7: Financial threshold test - $30,000 rule

TEST 8: Professional judgement

List of reportable SIS sections and regulations

The following is a listing of sections and regulations of the SIS legislation that must be reported via an ACR if the section of regulation has been breached:

  • S17A -  SMSF definition

  • S35C(2) - Trustee to provide documents to the auditor

  • S52(2)(D) - Separation of assets

  • S62 - Sole purpose test

  • S65 - Lending or providing financial assistance to members or their relatives

  • S66 - Acquisition of assets from related parties

  • S67 - Borrowing by the fund

  • S82 - In-house assets – exceeding in-house assets ratio

  • S83 - In-house assets – prohibition on further acquisition

  • S84 - In-house assets – reasonable steps

  • S85 - In-house assets – avoidance schemes

  • S103 - Minutes and records

  • S104A - Trustee declaration

  • S109 - Investments to be maintained on an arm’s length basis

  • S121 - Disqualified persons not to be trustees R4.09 Investment strategy

  • R5.08 - Minimum benefits

  • R6.17 - Restriction on payment of benefits

  • R7.04 - Acceptance of contributions

  • R13.14 - Charges over assets of the fund

New ITR and questions for the year ending 30 June 2008

The revised income tax return for the year ending 30 June 2008 contains questions that the trustee must answer. The following is a summary.

  • The date the audit was completed

  • $150 levy is part of ITR

  • Report contributions for members via new ITR

  • Has the SMSF had financial involvement with related parties?

  • Have "in-specie" contributions been made to the SMSF?

  • Has the SMSF lent money to members or relatives?

  • Have investments been on an arm's length basis?

  • Has the SMSF allowed members access to benefits before retirement?

  • Have the trustees paid themselves for their services?

  • Have any of the trustees become disqualified during the year?

  • Have all assets been secured through appropriate documentation as being owned by the SMSF?

  • Has the SMSF been engaged in selling goods and/or services?

  • Has the auditor provided services other than auditing the fund?

FSRA and Super

A person must be licensed in accordance with the requirements of the Financial Services Reform Act if they advise on, or recommend a financial product (which includes a self managed superannuation fund), advises a member of a superannuation fund to commence a pension stream or gives specific advice on investment strategies or retirement objectives.

Thus, Accountants who are licensed under the FSRA have the ability to provide a wider range of professional services than those who are not licensed. The general public is increasingly looking to the accounting profession to provide “one-stop-shop” advisory services, so increasingly, accountants are seeking licensing in order to provide investment advice.

Conclusion

The provision of accounting services to superannuation funds is involved and requires adherence to increasingly complex legislative and regulatory requirements. This opens significant opportunities for accountants who want to provide important and well appreciated accounting, auditing and financial planning services to their superannuation clients.  Pro-active accountants will benefit from providing valuable assistance to their and will derive considerable satisfaction from so doing.  

STUDY POINTS

  1. Explain at least 5 areas of services which accountants can provide to SMSF clients.

  2. In relation to what kind of small super fund can an accountant act as trustee - and subject to what constraints?

  3. Who can be the auditor of a self managed super fund?

  4. **“A SMSF auditor can be part of the decision-making process relating to the fund or its investments, so long as they absent themselves from decisions where they have a personal conflict.”**

True or false? Explain.

  1. What are the main areas of contravention which the ATO has identified to date regarding auditing of SMSFs?

  2. Explain the new competency standards of CPAA and the ICAA which the Approved Auditor and all staff performing an audit of a SMSF must meet.

  3. From 1 July 2008, the Auditor’s Report for audits of self managed funds is subject a number of changes.

Explain those changes.