Court decisions a sharp reminder of SMSF trustee responsibilities

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Court decisions a sharp reminder of SMSF trustee responsibilities

Written by John Maroney, CEO, SMSF Association

First published in The Australian Financial Review on 02 January 2019. Licensed by Copyright Agency. 

The outcome of two court cases involving self-managed superannuation fund (SMSF) auditors will have long-term consequences for SMSF advisers and trustees.

The cases – Cam & Bear Pty Ltd v McGoldrick and Ryan Wealth Holdings Pty Ltd v Baumgartner – highlight the obligation of SMSF auditors to verify asset values in financial statements. But they also reinforce an important message to trustees: the ultimate responsibility for the fund lies in your hands.

In essence, the court verdicts will require both SMSF advisers and their trustee clients to be far more aware of the value of any investment and the importance of regularly checking its financial health. Locking an investment away in the bottom drawer is not an option.

The first case involved the trustee of the SMSF, Cam & Bear, and its auditor John McGoldrick, who audited the fund from 2003 to 2007. Directors of the SMSF trustee (Lance Bear and his wife Jennifer Campbell) understood from the investment manager, a close friend, that from 1996 to 2008 the fund consisted of cash and shares. The money was lent, however, by the investment manager on an unsecured basis to companies he owned.

McGoldrick queried the description of the assets with the accountant who assured him the SMSF trustee was satisfied. The auditor never communicated with the trustee, and each year signed and certified the audit report. When Bear went to withdraw cash from the SMSF, he was unable to do so because the money had been used for unsecured loans that were worthless when the companies went into voluntary administration.

Cam & Bear sued the auditor for damages for negligence and misleading and deceptive conduct. The court concurred and apportioned 90 per cent of the loss to the auditor. The court said that the failure to inform Cam & Bear that the loans might not be recoverable caused the trustee to continue with this investment that otherwise it would not have been done.


Unsecured loans

In the second case, Baumgarter Partners undertook audits for an SMSF for the financial years 2007 to 2009. In 2006, the trustee entered into a series of unsecured loan investments. In 2014, many of the entities associated with these investments went into liquidation.

The SMSF trustee said that because of the failure of the auditor, irregularities with the loans went undetected for many years and, when discovered, the opportunity to recover the money was lost. The trustee said that if the auditor had qualified the fund’s audit reports the loans would have been called in – and the court agreed.

In both cases, the auditors were found to have fallen short of their professional duties. Under the SIS Regulations, these duties are clearly stated. Assets must be valued at market value and auditors need to obtain sufficient evidence from trustees to verify the value of an investment. While it’s not the auditor’s role to do a valuation, he or she should seek evidence that shows how the asset was valued.

If the auditor is unable to obtain sufficient verification that material assets are valued at market value, they should qualify their audit, stating they have been unable to obtain sufficient evidence to verify asset values. An auditor/actuary contravention report should also be lodged, and the trustees notified in a management letter.

But the obligations of auditors to their clients underlined by these court cases is only part of the story. They also remind trustees that any investment they make must be, as far as possible, genuine and recoverable. Further, as part of this process, trustees must provide detailed information on all investments to auditors.

High-risk category

Assets such as unsecured loans, related party arrangements and unlisted assets, which are often difficult to value, typically fall into the high-risk category, demanding extra attention to ascertain their true value. Trustees need to read any financial statements and loan documentation, as well as making regular inquiries about the “health” of the investment.

SMSF trustees should also be aware of more detailed requests from advisers and auditors as they seek to ensure their services meet the highest professional standards, especially in a post-royal commission world. When documentation or confirmation of the value of an asset is lacking, auditors must inform SMSF trustees and potentially qualify the audit report.

If you find yourself with a qualified audit report, it is not cause for panic. But it is a flag for trustees to look at the underlying cause of the qualification and seek assistance from the auditor and advisers on how to rectify any breaches.

Another lesson from these court cases for SMSF trustees is the potential danger of having all advice services – accounting, auditing, administration and investment advice – with the same or even closely-related advisory firms. If trustees believe this is the most cost-effective and efficient solution, there is an even greater need for them to do due diligence to ensure their fund is compliant.

Remember, the ultimate responsibility for the fund lies with the trustee. That’s both the spirit and letter of the law.