Why an accountant cannot audit funds their firm prepared
An explanation for accounting professionals of the independence rule that prevents a firm from auditing the SMSF financial statements it prepared, and what the narrow exception allows.
By Tash ·
One of the most misunderstood rules in SMSF practice is the restriction on auditing financial statements your own firm has prepared. It catches firms out regularly, and it is a focus of regulatory attention. This article explains the rule, why it exists, the narrow exception, and the arrangements that try to sidestep it and fail.
The self-review problem
The code of ethics requires an auditor to be independent of the fund they audit, both in fact and in appearance. When a firm prepares an SMSF’s financial statements and then audits them, the firm is checking its own work. This is a self-review threat: the auditor is reviewing the judgements and figures that the same firm produced, and cannot bring an independent eye to them. The audit is supposed to be an external check, and it cannot be external if the same firm did the work being checked.
The narrow routine or mechanical exception
The rule is not an absolute ban on any involvement in the accounts. There is a narrow exception for services that are routine or mechanical, meaning work that involves little or no professional judgement. Posting transactions from source documents the trustees have classified, or preparing financial statements from a trial balance the trustees have approved, may fall within this exception, provided adequate safeguards are in place.
The line is professional judgement. Where preparing the accounts involved the firm making accounting decisions, exercising judgement on how items are treated, or determining values, the work is not routine or mechanical, the self-review threat cannot be reduced to an acceptable level, and the firm cannot audit those statements. In most real SMSF engagements, the preparation involves enough judgement that the firm should not audit its own work.
Reciprocal arrangements do not solve it
A common attempt to work around the rule is a reciprocal arrangement: two firms agree to audit each other’s funds, so that neither audits its own. This does not achieve independence. The arrangement creates a mutual interest, and each firm has an incentive to go easy on the other’s funds to preserve the arrangement. Reciprocal or mutual auditing arrangements are treated as failing the independence requirements, and they are a known target of regulatory action.
Why this matters more than ever
The regulators have made auditor independence a priority. Reviews have identified large numbers of auditors who continued to audit funds their own firm prepared, or who operated reciprocal arrangements, and enforcement action has followed, including conditions on registration, cancellations and disqualifications. An auditor who breaches the independence rules risks their registration, and a firm that relies on a non-independent audit has not met the fund’s statutory audit obligation.
What firms should do
The practical answer for most accounting firms is to separate preparation from audit. Where your firm prepares the SMSF accounts and that preparation involves professional judgement, refer the audit to a genuinely independent auditor with no connection to your firm. Avoid reciprocal arrangements entirely. Where you believe your involvement was genuinely routine or mechanical, document the basis for that conclusion and the safeguards applied, because the burden is on the firm to show the exception applies.
The bottom line
A firm generally cannot audit the SMSF financial statements it prepared, because doing so means reviewing its own work. The only exception is for genuinely routine or mechanical services with adequate safeguards, and reciprocal arrangements do not cure the problem. The safest course, and the one most firms take, is to refer the audit to an independent auditor.
This article is general information for professional readers and is not advice on any specific fund. The superannuation legislation and the applicable auditing and ethical standards govern in each case.
Common questions
- Can an accountant audit an SMSF their own firm prepared the financial statements for?
- Generally no. Preparing the financial statements and then auditing them creates a self-review threat, because the firm is checking its own work, and the audit cannot be an external check if the same firm did the work being checked.
- What is the routine or mechanical exception?
- It is a narrow exception for work that involves little or no professional judgement, such as posting transactions the trustees have classified or preparing statements from a trial balance the trustees have approved, provided adequate safeguards are in place.
- Do reciprocal auditing arrangements satisfy independence?
- No. A reciprocal arrangement, where two firms agree to audit each other's funds, creates a mutual interest and is treated as failing the independence requirements. It is a known target of regulatory action.
- What should firms do to stay independent?
- Separate preparation from audit. Where preparation involves professional judgement, refer the audit to a genuinely independent auditor with no connection to the firm, and avoid reciprocal arrangements entirely.