Approved auditors of self-managed superannuation funds (SMSFs) in Australia play a critical role in ensuring that funds operate within the legislation and that their financial reports are reliable. One fundamental requirement of the SMSF audit regime is that an auditor must be independent of the accounting work they are auditing. This requirement means that an SMSF auditor generally cannot prepare the financial statements for the same SMSF they audit. The reason lies in both professional ethics and regulatory standards designed to protect the integrity of the audit process.
1. Professional Ethics and the APES 110 Code
The APES 110 Code of Ethics, which governs auditor independence in Australia, prohibits auditors from providing certain services to audit clients that would impair their objectivity. Among these is preparing accounting records or financial statements that the auditor then audits.
The reason is straightforward: if an auditor audited financial statements they prepared, they would be reviewing their own work. This undermines the auditor’s ability to exercise professional skepticism, the mindset auditors must employ when evaluating evidence and forming opinions on financial information.
2. The Self-Review Threat
At the heart of the prohibition on auditors preparing financial statements for their own audit clients is a concept known in auditing as the self-review threat. Self-review occurs when an auditor is asked to audit work that they, or their firm, have produced.
In practice, this means: If an auditor (or staff in the auditor’s firm) prepares the financial statements and tax return for an SMSF, they are generally prevented from auditing that same fund, because auditing that work would require the auditor to review and validate their own outputs.
This reflects a fundamental principle of audit integrity: an auditor must be free from conflicts that could impair objectivity or create a perception that the audit is biased.
3. Practical Implications for SMSF Trustees and Advisors
The separation of accounting and audit functions in SMSFs has several practical implications:
-
SMSF trustees must engage separate parties for preparing financial statements and for carrying out the annual audit.
-
Accounting firms that prepare SMSF financials may need to outsource the audit to an independent auditor if they want to retain compliance with professional standards.
-
The audit must be conducted before the fund’s annual return is lodged, underscoring the importance of early engagement of an independent auditor.
The purpose of these requirements is to safeguard member interests and maintain trust in the SMSF regulatory system by ensuring audits are objective and can be relied on by trustees, regulators, and members alike.
Conclusion
SMSF auditors cannot prepare financial statements for the same fund they audit because doing so would compromise their independence and violate professional ethical standards. Independence is central to the audit’s role as an objective check on compliance with law and accuracy of records, and the regulatory framework in Australia reflects this by enforcing a clear separation between the functions of preparing accounting information and auditing it.