Author: Jason Roccasalvo, Partner, TAG Financial Services
Following on from the Cam and Bear and “Ryan Wealth (Baumgartner)” cases a few years ago, auditors are again in the firing line of a class action lodged recently by SMSF victims of Melissa Caddick’s fraud.
This case again highlights the importance of auditors obtaining and making appropriate enquiries when receiving client information.
The class action implies that the auditor failed to make sufficient enquiry into the validity of documents provided and therefore provided assurance to the Trustees by virtue of “clean” audit opinions.
It is alleged that Ms Caddick falsified Commsec reports which were then relied upon by the auditors to verify the existence and ownership of assets.
It highlights the importance on obtaining direct independently verified evidence on assets. In the case of shares, direct confirmation via relevant share registries should be conducted at a minimum on a sample of shares. Noting the value that software providers such as BGL 360 provide in assisting auditors with obtaining direct verification with registries in a cost-effective manner.
Cam & Bear
As a reminder, Cam & Bear saw the Fund provide money to a friend of the member to manage the SMSF investments.
Further, this close friend, via a company he owned, also acted as accountant/administrator for the SMSF. The friend’s investment company invested the fund assets in “cash and shares”. The SMSF accounts disclosed the cash assets as “Cash – LSL Holdings” in the financials. This cash asset was in fact an unsecured loan to LSL Holdings – a company owned by the friend.
Not sounding very friendly, and certainly should not have passed a “smell test”.
The SMSF auditor queried the entries but was told, via the Trustees friend (as accountant) that the Trustees were happy with the description. There was no direct communication between the SMSF auditor and the Trustee.
When the Trustee went to withdraw cash, they were unable to as LSL went into voluntary administration.
The auditor was sued for negligence, and found, after appeal, that responsibility for the losses suffered by the Fund be apportioned 90% to the auditor, and 10% to the Trustee.
The court found that the auditor was “clearly negligent” in that they did not make sufficient enquiry on the recoverability of the amounts.
In Ryan Wealth, the courts again saw the auditor as being found negligent. In this case, the Trustee received financial advice from a licensed adviser. The adviser placed Fund monies into unsecured loans. Again, over a period of time a number of entities related to the adviser went into liquidation, with the ultimate result being the plaintiff suffered significant financial loss.
In both cases, the Trustees agreed to invest in private entities/loans with little or no understanding of the nature of the investments and provided significant reliance on others with respect to the investments.
What these cases highlight
It can be concluded that the auditors in each case did not make sufficient enquiry directly with the Trustees and it would appear they did not elevate their level of risk with respect to the investments.
Although it appears clear that in each case the SMSF was duped out of monies, this does not limit the culpability for loss to the fraudulent party – peripheral parties such as accountants and auditors are also capable of being assigned blame by the courts.
While these cases highlight that auditors face a heightened level of risk, the same inference can be made of accountants and advisers.”.
Practical Implementation – tips and traps
- Auditors and advisers should consider the appropriateness of their engagements.
- Where assets are unable to be easily valued or verified, a heightened level of risk should be applied.
- Trustees should be made aware of the uncertainty of peculiar assets (be it recoverability, value or returns) and advisers/auditors should document these discussions with Trustees.
- Courts place emphasis on “direct” contact with a Trustee, so ensuring the client is aware and has acknowledged is crucial to fulfill our duties.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2023. Please do not reproduce without the expressed written consent of the author.