Bryce Figot, special counsel for DBA Lawyers, said the case involved the disqualification of an auditor by ASIC and the subsequent appeal, and highlighted the importance of auditors understanding the concept of “fit and proper” person, as well as their obligations to adhere to the relevant regulations.
The case concerns Mr H, who in 2013 was registered as an approved SMSF auditor. He was also a member and director of his own SMSF.
“Mr H’s SMSF lodged its SMSF annual return for the 2020-21 income year on 14 October 2021 and reported that the audit was completed by Mr C on 4 October 2021. In truth, however, Mr C was not engaged by Mr H’s SMSF and did not audit it for the 2020-21 year,” Mr Figot said.
“Mr H became aware that Mr C (who Mr H identified as a friend) was no longer registered as an approved SMSF auditor.”
In June 2022, Mr H’s SMSF lodged an amendment to its 2020-21 SMSF annual return, updating the auditor details to himself, which as a director and a member of his own SMSF, he was prohibited from doing under s128F(d) of the SIS Act, regulation 9A.06 of the SIS Regulations and APES 110.
The ATO subsequently contacted Mr H who advised the ATO that “no one audited the fund”.
Mr Figot said Mr H told the ATO that the fund was no longer operating and he didn’t want to pay $450 to have his own fund audited “as there is nothing in it”.
Mr H continued that he had put the auditor’s name on the annual return and then found out he was no longer auditing funds, so changed the auditor details.
“Ten days later, the ATO sent Mr H a letter and a position paper notifying him it was considering referring him to ASIC,” Mr Figot said.
“In response, Mr H wrote to the ATO stating that the SMSF has been inoperative since 2019, his SMSF auditor had retired, that he was aware that as a SMSF auditor he was unable to audit his own fund, and claimed that since the laws change he had checked online to see if this was still the case and couldn’t find that it was.”
Mr H admitted in that correspondence that he realised after the fact that this was incorrect and had appointed a different, approved SMSF auditor as the registered SMSF auditor.
Mr Figot said in October 2022, the ATO referred Mr H to ASIC and the following December ASIC wrote to Mr H setting out its concerns.
Mr H responded to ASIC admitting he made a mistake, claiming that “as laws constantly change I looked but failed to find one’s own SMSF audit signoff details online”. The response also claimed that when he became aware of the error he immediately appointed a new approved SMSF auditor and the audit was signed off on 4 November 2022.
However, in January 2023, ASIC disqualified Mr H from being an approved SMSF auditor stating that “in order to be an approved SMSF auditor a person must be, among other things, a fit and proper person”.
Mr Figot said Mr H appealed the decision and in March 2023 requested an AAT review of the decision.
“The AAT wrote that ‘Mr H’s conduct indicated dishonesty both as a SMSF auditor and in his capacity as director of a trustee and a lack of competence. Mr H also showed no insight as to the seriousness of his conduct’, “ Mr Figot said.
He added that according to the case facts, Mr H had sent an email to ASIC in March 2023 in which he stated that the “audit of my dormant SMSF was successfully completed, without incident, before the ASIC investigation was commenced”.
“He also said in the email that there were no compliance issues found during the audit and that no third party was adversely impacted by the slight delay in reappointing an independent auditor,” Mr Figot said.
“However, the AAT noted in its decision that Mr H ‘repeatedly sought to downplay his conduct as a mistake and, in doing so failed to acknowledge that he had not once, but twice, deliberately given false information to the ATO’.”
The decision continued that Mr H had “claimed to have ‘fixed it’ even before ASIC became involved but conveniently overlooked the fact that he appointed a new auditor only after the ATO had alerted him to their investigation”.
“Accordingly, the AAT was satisfied that Mr H was not a fit and proper person to be an approved SMSF auditor as he failed to demonstrate diligence, competence and integrity commensurate with the importance of the role of a SMSF auditor,” Mr Figot said.
“It is worth noting that all of Mr H’s correspondence appear to have found their way to the AAT. Naturally, there is an importance in ensuring that information is not false. The false information appears to have been exacerbated by then seeking to ‘downplay’ the conduct.”
He concluded that it is vital for any practitioner who is responding in writing to the ATO or ASIC to take care as the wording and tone can matter and be relevant in any potential subsequent AAT decision.
The independence requirements are an acknowledgement that unconscious (as well as conscious) bias persist. They are a part of the human condition and no controls can avert them.
An audit of a SMSF provides a level of integrity to the sector given they are a closely held vehicle.
The need for a financial statement audit (however) does seem to be more than should be required. If an independent auditor was able to provide a clear audit opinion on a compliance audit, that should be enough to provide confidence in the overall integrity of a particular SMSF.
Bryce
The irony is that a Trustee of an SMSF – who is either a tax agent or an SMSF auditor or an SMSF lawyer like you – can lodge their personal and their business ITR without an audit under the self assessment regime – but have to get their F return and financials audited by a stranger to the fund, however must be an SMSF auditor.
I think qualified and respected professionals eg. Tax agents and SMSF auditors should be exempted from audit and should be allowed to lodge their own returns on self assessment basis.
Police is policing the police. Interesting!