ASIC wins appeal against SMSF auditor in Federal Court

The SMSF auditor, John Gilliland had practiced as a registered tax agent since 1978 and was first registered as an approved SMSF auditor in June 2013.

In the years 2013, 2014 and 2015, Mr Gilliland breached his duties as an independent SMSF auditor by auditing the Fiscal Consultants Superannuation Fund (FCSF).

Mr Gilliland, his wife and his daughter held the positions of both trustee and a member of the FCSF.

On 3 August 2016 Mr Gilliland resigned from his role as auditor after determining he could no longer mitigate the threats to his independence.

Around December 2016 the ATO conducted a review of the audits prepared by Mr Gilliland and referred the information to ASIC on 26 February 2018.

In March 2018, ASIC informed Mr Gilliland that it was considering disqualifying or suspending him as a SMSF auditor given its concerns regarding his failure to comply with the independence obligations in the years ending 30 June 2014, 2015 and 2016. Mr Gilliland was invited to make submissions and did so on 16 April 2018.

A delegate of ASIC disqualified Mr Gilliland pursuant to s 130F (2) of the SIS Act on 15 August 2018. Mr Gilliland applied for reconsideration of that decision but the disqualification decision was confirmed by a second delegate of ASIC on 20 September 2018.

On 15 October 2018 Mr Gilliland challenged the decision of the second delegate in the Tribunal. Mr Gilliland was successful and on 5 August 2020 the Tribunal set aside ASIC’s decision to disqualify Mr Gilliland.

ASIC filed a notice of appeal from the decision of the Tribunal in the Federal Court.

In the Tribunal decision, the Tribunal found that Mr Gilliland had breached s 130F of the SIS Act because he had failed to comply with the independence requirements. Mr Gilliland accepted that these requirements were breached, and that in hindsight the threats could not be mitigated under the SIS Regulations.

However, in considering whether disqualification was appropriate, the Tribunal accepted that Mr Gilliland had attempted to comply with APES110 by reducing his financial interest to an immaterial amount, and withdrawing from decision making in the fund in an attempt to mitigate the threats to his independence.

In its appeal against the Tribunal decision, ASIC submitted that the Tribunal was required to take into account general deterrence principles as a mandatory consideration and that the Tribunal had failed to take these principles into account.

In her decision, Justice Collier noted that there is “little authority specifically addressing the relevance of general deterrence as a factor for consideration in respect of disqualification of SMSF auditors pursuant to s 130F of the SIS Act”.

Justice Collier stated that while s 130F of the SIS Act does not specifically mandate the issue of general deterrence as a factor requiring consideration by a decision-maker, she accepted ASIC’s argument that n view of the subject matter, scope and purpose of s 130F of the SIS Act, and the statutory scheme of the legislation, general deterrence is implicitly a relevant factor for the decision-maker to take into account.

She noted that the object of the SIS Act as set out in section 3 of that Act is to make provision for the prudent management of certain funds and for their regulatory supervision.

She also highlighted that section 4 of the SIS Act acknowledges the general responsibility of ASIC for protecting consumers from harm, market integrity, disclosure and record keeping.

“As I have already noted, section 128B of the SIS Act sets out circumstances where a regulator must grant an application for registration as an approved SMSF auditor, and in particular that the regulator is satisfied that the applicant is unlikely to contravene the obligations of an approved SMSF auditor under Subdivision B and is otherwise a fit and proper person to be an approved SMSF auditor,” she added.

“Section 130F (2) allows ASIC to make a disqualification order in circumstances including where a person has failed to carry out or perform adequately and properly the duties of an auditor under the SIS Act or the SIS regulations, or if the person has failed to comply with conditions on the person’s registration as an approved SMSF auditor.”

There are also limitations on the power of ASIC to revoke a disqualification, she stated.

“[This includes] section 130F (10) which prohibits it from revoking the order unless satisfied that the person concerned:

(a) is likely to carry out and perform adequately and properly the duties of an approved SMSF auditor under this Act or the regulations; and

(b) is otherwise a fit and proper person to be an approved SMSF auditor for the purposes of this Act,” she said.

“I am satisfied that, in light of these provisions, and authorities examining analogous legislation, the decision-maker must consider how making a disqualification order would serve principles of specific and general deterrence, and that such factors cannot be ignored.”

Justice Collier said that it was clear that general deterrence was raised as an issue before the Tribunal, but not taken into consideration by it.

“I am satisfied that the failure of the Tribunal to take into account principles of general deterrence in making its administrative decision was material within the meaning of those principles, such that there was a realistic possibility that a different outcome could have been reached by the Tribunal had it properly considered the matter.”

The Federal Court determined that the Tribunal erred in failing to take into account a relevant factor in deciding whether a person should be disqualified as an auditor, namely principles of general deterrence. 

“In doing so, I am also satisfied that the Tribunal failed to take into account clearly articulated submissions by ASIC to that effect,” stated Justice Collier.