Recent findings highlight SMSF audit risk and provide highly useful, transferable lessons for accountants and lawyers.
The cases of Cam & Bear Pty Ltd v McGoldrick  NSWCA 110 and Ryan Wealth Holdings Pty Ltd v Baumgartner  NSWSC 1502 highlight SMSF audit risk and provide highly useful, transferable lessons for accountants and lawyers.
What you need to know:
The ‘auditor cases’ highlight some of the risks for SMSF advisers, and the implications from both a professional and financial standpoint.
The broader lessons for professional advisers that can be distilled from these cases are as follows:
- Ensure that the key contact for the client is specified in the retainer, and that the key contact is copied in on all communications, particularly where instructions are being provided by another adviser as agent for the client.
- Review the terms and conditions in client retainers, including the scope of the work to be undertaken and any exclusion or carve outs from the advice or services. Be alive to, and bring to the Fund trustee’s attention, any potential issues or risks, even if outside the scope of services to be provided.
- Expect mistakes and errors to occur, and critical issues to be overlooked when providing advice and services to Fund trustees. Plan for this by implementing processes and procedures to balance the risk of human error.
- Review professional indemnity insurance thresholds, terms and conditions, and check any applicable exclusions.
- Ensure client files contain all relevant information, and that detailed file notes are taken and retained.
- Ensure employees are trained to identify and manage conflict of interest scenarios. Further, run training sessions on key issues to be alive to when providing advice and services to clients, such as fraud and misuse of client funds.
- Advisers should ensure clients confirm in writing that the information provided is correct in all material respects.
- Supporting evidence is critical, particularly where an adviser is claiming contributory negligence.
Case 1: Cam & Bear Pty Ltd v McGoldrick  NSWCA 110
The trustee entrusted the Fund’s management to Mr Lewis. A Fund member, Dr Bear, was making regular contributions to the Fund by way of cheques payable, at Mr Lewis’ request, to Lewis Securities. According to Dr Bear, from about 1996 until 2008, he understood from his conversations with Mr Lewis, and from financial accounts that he received from time to time, that the Fund’s assets consisted of cash and shares.
Each year the auditor signed and certified the audit reports without qualification. They stated that the financial statements fairly reflected the financial position of the Fund. The auditor did not have any direct communication with Dr Bear.
On or about 22 September 2008, Dr Bear told Mr Lewis that he wished to withdraw cash from the Fund. Mr Lewis attempted to dissuade him from taking this course but Dr Bear insisted. The cash Dr Bear requested was not provided and in early November 2008 Lewis Securities went into voluntary administration. Its winding up followed some months later.
On appeal, the Court found for the Fund trustee. The Court noted that while even a person with Dr Bear’s lack of financial sophistication should reasonably have considered the prudence of depositing significant amounts of money with Mr Lewis’ company, the auditor’s negligence was of significantly greater importance in causing the Fund trustee’s loss, and responsibility for the loss should be apportioned 10% to the Fund trustee and 90% to the auditor.
The Court found that the auditor owed a duty of care to the Fund trustee to exercise reasonable care, skill and diligence to ensure that the audited financial report presents a fair description of the circumstances. If the financial statements did not give a fair representation of the affairs of the company, it was incumbent upon the auditor to either qualify the report or bring to the Fund trustee’s attention the basis upon which the view had been formed.
Case 2: Ryan Wealth Holdings Pty Ltd v Baumgartner  NSWSC 1502
This case was concerned with audits of the Ryan Holdings Retirement Fund in the financial years ending 30 June 2007, 30 June 2008 and 30 June 2009.
On the advice of a financial planner, the Ryan Holdings Retirement Fund was established, and the Fund trustee made several investments, being loans to various entities and investments in unit trusts (of which the adviser had a personal interest).
The Fund’s financial statements described several the Fund’s investments as ‘mortgage loans’. No mortgage loans existed, however, and the material provided to the auditor contained no basis upon which the auditor could conclude that any security in the form of a registered mortgage existed. The auditor also failed to obtain any evidence to substantiate the existence of a mortgage loan.
In each of the relevant financial years, an audit of the Fund’s financial statements was carried out and an audit report issued in which an unqualified audit opinion was expressed.
The Fund trustee argued the failures of the auditor resulted in irregularities going undetected for many years, and when those irregularities were ultimately discovered, the opportunity to redeem many of the loans and investments of the Fund, or to pursue recovery action against those on whose advice the loans and investments had initially been made, had been lost.
The Court held that the auditor failed to exercise reasonable care and skill to ensure that the investments were valued at net market value and failed to exercise judgement in assessing the reasonableness of the values disclosed.
The Court held that the auditor had a duty to report to the Fund trustee concerns about the obvious conflict of interest of the accountant and the high level of risk associated with the loans and investments.
The Court assessed damages in the sum of $2,260,140. Once the existence and loss of a chance to recover the relevant amounts have been established, damages are assessed by reference to the degree of likelihood that the commercial opportunity would have yielded success had it been pursued. Responsibility for the loss was apportioned 10% to the Fund trustee and 90% to the auditor. Further, the Court determined that the Fund trustee’s loss should be apportioned to the accountant as to 20%.