Auditor Independence When the Trustee Is a Referral Source
An approved SMSF auditor has audited a fund for four years. The trustee is a financial adviser who has referred 14 new SMSF clients to the auditor over the past two years, generating approximately $28,000 in audit fees. The auditor's firm also provides tax return preparation for the trustee's advisory business. The fund's assets are $2.2 million, including a residential property and listed shares. During the current audit, the auditor identified a $60,000 contribution that exceeded the member's cap and a $15,000 payment for the trustee's personal credit card. The trustee has asked the auditor to "keep it in-house" and has hinted that future referrals depend on a smooth audit.
1. Assess the threats to the auditor's independence and what safeguards, if any, could address them.
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The referral relationship creates a self-interest threat: the auditor has a financial interest in keeping the trustee satisfied, and 14 referrals worth $28,000 are material to the auditor's practice. The tax return preparation for the trustee's business creates a self-review and familiarity threat, because the auditor is providing services to the same person who is the audit client's trustee. The trustee's request to "keep it in-house" and the hint about future referrals create an intimidation threat.
Safeguards such as independent review of the audit file, rotation of the engagement partner, and disclosure of the relationship may reduce but not eliminate the threats. The auditor should assess whether the threats are so significant that the engagement must be declined or resigned. Given the direct financial interest and the explicit pressure, the auditor should consider whether a reasonable and informed third party would conclude the audit is independent.
The auditor should document the threats, the safeguards considered, and the conclusion. If the auditor cannot eliminate the threats, the auditor should resign and notify the trustee in writing. The auditor should also consider whether the tax services create a conflict that requires separate providers.
2. What should the auditor do about the excess contribution and the personal credit card payment?
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The $60,000 excess contribution is a breach of the contribution caps and must be reported. The auditor should quantify the excess, confirm the member's cap position, and determine whether the excess is subject to excess contributions tax or can be returned. The auditor should report the breach to the trustee and consider whether it is significant enough to report to the ATO.
The $15,000 credit card payment is a payment for the trustee's personal benefit, which is a breach of the sole purpose test and the prohibition on providing financial assistance to members. The auditor should obtain evidence of the payment, confirm it was not a legitimate fund expense, and report it as a contravention. The auditor should also consider whether the payment should be treated as a loan or a benefit, which raises separate issues under s 65 and the sole purpose test.
The auditor should not allow the trustee's request to influence the reporting. The auditor should document the evidence, the breaches, and the decision to report, and should communicate the findings in writing. If the trustee pressures the auditor, the auditor should record the pressure and consider whether to resign.
3. How should the auditor handle the conflict between the referral relationship and the duty to report?
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The auditor's duty to report is paramount. The auditor should not let the referral relationship affect the audit conclusion, and the auditor should not agree to "keep it in-house" if that means suppressing the breaches. The auditor should communicate the findings to the trustee in writing, explain the reporting obligations, and proceed with the report.
If the trustee threatens to withdraw referrals, the auditor should document the threat and consider whether it constitutes intimidation that compromises independence. The auditor should not retaliate or negotiate; the auditor should follow the professional and legal requirements.
The auditor should also review the firm's client acceptance and continuance policies to determine whether the referral relationship should have been disclosed and managed. If the firm's policies were not followed, the auditor should escalate the matter within the firm. The auditor should consider whether to resign from the engagement and, if so, should notify the trustee and the ATO as required.