SMSF Association cautions APESB on referral fees

Costly unintended consequences may flow from the Accounting Professional and Ethical Standard Board’s (APESB’s) proposed amendments to its code of ethics impacting auditor referral fees, according to the SMSF Association.

The Association is urging caution on introducing a 20% threshold for auditor referral fees as outlined in the draft amendments.

SMSF Association chief executive, John Maroney said his organisation concerned that introducing a threshold would become a dominant focus of the draft amendments and might have unintended consequences.”

He said that after consulting widely with members, the Association’s view is that:

The current framework and standards should be retained and supplemented by Regulator guidance to address industry specific issues and concerns;

If a threshold test must apply, a 30% threshold should apply in respect of total fees from multiple audit clients referred from one source, ensuring a consistent approach to other proposed amendments; and

Introduce a two-year period in which auditors must consider audit fees from a single referral source.

Maroney said the ASPESB’s exposure draft did not address at what point in time the threshold test must be considered or applied, resulting in a vastly different outcome when applied at different points across a financial year.

“We are concerned that an auditor may take genuine steps to comply with the standards, yet still fall foul of these provisions if a regulator or a court were to apply the threshold at a different point in time,” he said. “An auditor may, in good faith, undertake an assessment of their likely fee income and sources for the year at the start of a new financial year. Although fees, including referral fees, for the previous year may assist in a budgeting or planning process, there are no guarantees that the same level of work will be received the following year.

“There are various external factors that will impact the referral of audits that may not be known by the auditor. An unexpected increase or decrease in referrals may occur during the year. Indeed, fluctuations are not uncommon. It is the extent or degree that often cannot be determined.”

Maroney said members also raised concerns about how they are to assess a proposed new referral of audit fees. “In practice, these are not guaranteed to come to fruition. A new referral partner may indicate at the start of the relationship to submit, for example, 100 SMSFs for audit. However, only a small fraction of these may be received.”

He adds that the Association’s members are concerned that introducing a codified threshold will become a hard test requiring them to decline some, if not all the audits referred to them from a particular referral source.

“The concern is that the Regulator’s intent for these proposed changes, and industry’s interpretation of them, may differ to any further interpretive guidance contained in a future version of the Independence Guide.  Future guidance may result in any thresholds that are codified, evolving into a hard threshold test.

“Concerns were also raised around the potential increase to compliance costs and the costs to SMSF trustees.”

He concluded that the proposed measures have added complexity. For some firms, due to their size and structure, the threshold test will need to be applied at multiple levels. “If the test is applied at the firm level, accounting for firm wide income, this could result in audit fees from one referral source falling well below a prescribed threshold. However, when we distil that down further to the individual auditor, the outcomes can be very different.”