In recent weeks we’ve heard a significant amount of noise from SMSF auditors who are unsurprisingly up in arms in regards to annual SMSF audits being changed to a three-yearly SMSF audit cycle for funds with a good compliance history.
I will not re-hash the arguments against this proposal. What I would like to do is provide an alternate perspective.
Put yourself in the shoes of the trustee
Most SMSF trustees are not sophisticated. This is not a criticism. They typically employ relatively simplistic investment strategies and investment in assets they are comfortable with – cash, shares, property and managed funds. The vast majority have a solid grasp of concepts like the sole-purpose test, in-house assets and acting on an arms-length basis even if they can’t articulate them as cleanly as the regulator would like.
Trustees also almost always act in the best interests of the members of their SMSFs because they are the members, so they are acting in their own self-interest. This also means they are incredibly engaged with their long-term savings – they’ve taken on the ultimate responsibility of providing for themselves in retirement by managing their own super.
SMSF trustees do it well. Their member balances are higher and their returns are either the same, or very close to those of their APRA counterparts depending on who you listen to. Adherence to the myriad tax and superannuation laws is extremely high.
Based on all the above, if you are a trustee who has shown they are capable running a fund and complying with the rules over a number of years, aren’t you due to some relief or relaxation from the compliance burden attached to having an SMSF?
Simplicity is needed
When it comes to SMSF compliance trustees and the advisers who assist them desire simplicity. Less is more.
It’s very rare for an SMSF trustee to seek out an SMSF auditor separately from the accountant or administrator to take care of the funds compliance obligations. They see them as one and the same. Part of this could be due to many accounting firms historically completing an SMSF audit in house behind Chinese walls.
Trustees want a single party to deal with and also see both the tax and audit compliance requirements as being ‘grudge purchases’ – i.e. it’s the price they have to pay to have direct control and ownership of their superannuation savings. Trustees also desire that single contact point to be able to provide them with access to advice. This is why surveys of trustees will show they want their adviser to deliver SMSF compliance services, or they want accountants to deliver SMSF advice services. Less is more – the fewer parties they have to deal with, the happier trustees will be.
Currently in the SMSF space there is too much complexity. You have institutions, financial advisers, accountants, auditors and the ATO all competing for the hearts and ears of SMSF trustees. Fragmentation is not just horizontal with many small businesses (accountants) looking after only a small number of SMSF clients, but also vertical with many different players in the value chain interacting with limited success to provide either or both product and service.
Each time there is an interaction between different parts of the SMSF value chain, there is the likelihood of friction. For example if a trustee makes an investment, this creates something an administrator has to record, and the auditor needs to determine compliance within regulations. Technology such as daily data feeds has begun to smooth some of this friction, but technology has only begun to scratch the surface.
But what does this have to do with a Budget proposal to provide certain SMSFs with a three-year audit cycle?
Change is inevitable, SMSF auditors are not exempt
The primary instigators of disruption in the SMSF space are Government, the regulators and technology (not necessarily in that order). As the 3-yearly SMSF audit proposal has shown, any business which is based on a regulated compliance based service is very vulnerable to changes in that regulation.
We’ve seen the same issue a few years ago when the idea of the removal of the need for actuarial certificates was floated. Another SMSF area which is vulnerable in my opinion are the businesses that solely focus on the ‘buy property with super’ (via an LRBA) strategy. Businesses need to provide value beyond a single service. This by itself creates a challenge as specialisation and focus are needed to competently undertake SMSF audits in a commercially realistic way, which in turn make SMSF auditors vulnerable.
Three-yearly SMSF audits don’t align to recent moves by the ATO
The introduction of events-based reporting (TBAR) to SMSFs shows the ATOs desire to obtain more detailed and frequent information to assist in regulation. Stretching the audit cycle out to 3 years is completely against this direction and if it became reality, the regulators job would become significantly more difficult.
Any changes that impact the regulator have a cost and it forces the ATO to re-engineer their already fragile technology infrastructure to accommodate the whims of Government. Funding would be better used bolstering and expanding the ATOs technology capabilities. A sad indictment of the state of the ATOs systems is that SMSF software providers like Class have more accurate, detailed and up to date data on SMSFs administered on their platforms than the regulator does.
SMSF auditors and SMSF audits in the future
Let’s face it – the proposal has been a wake-up call for SMSF auditors – but it shouldn’t have been. We’ve seen the threat of regulation change (which didn’t go ahead) impact actuaries, and accountants have been hit with the removal of the accountant’s exemption. SMSF accountants and administrators may well be next – we are slightly further up the value-chain, but thinking we are exempt from disruption is not realistic.
In addition to lobbying efforts, I see two potential directions specialist SMSF auditors can go: technician or technology.
Auditors can be seen as regulatory gatekeepers. They assist trustees (via their primary accountant or adviser relationship) with ensuring their funds are compliant and are obliged to report compliance breaches to the ATO in certain cases. Specialist auditors have a very high level of SMSF technical knowledge but with a practical twist.
As an administrator, our audit partners have been critical in our success and are always willing to assist when it comes to interpretation of the legislation and regulations. Good SMSF auditors educate the accountants and administrators they work with – so becoming technical trainers and educators will be a natural extension for many specialist auditors.
In addition to regulatory education, auditors are also uniquely placed to assist other businesses within the SMSF space with business systems and processes such as quality control and fraud detection (noting independence requirements). I see the SMSF audit process becoming even more intertwined with administration because close integration between the (independent) parties results in superior outcomes for all involved.
Another pivot I can see SMSF auditors doing in the future is towards the provision of technology driven compliance solutions. Regulatory technology – RegTech is technology used to help comply with regulations – and the SMSF space is filled with a significant amount of regulation.
This could involve auditors utilising machine learning to analyse huge quantities of data and identify potential suspect transactions that could indicate non-compliance and working with the trustees and their advisers proactively to solve compliance issues as they occur – rather than 3 years later. This is obviously an ambitious call to make and would require collaboration and co-operation of multiple parties including software platform providers, administrators and auditors – but the potential outcomes for the SMSF space would be massively beneficial.