In a recent SMSF Adviser podcast, Aaron Dunn, CEO of Smarter SMSF, said auditors and audits play an important role in the sector, and having the right professional standards and auditors in place concerning the ATO and ethics obligations is crucial.
“There’s a lot of debate about how much you should be paying for audits,” he said.
“It’s often referred to as the grudge purchase. [The Caddick case] is not simply a by-product of ‘How cheap can I get this done?’”
“Auditors are going to have to manage risk within their organisations, and this is the result of what could happen if the appropriate work isn’t completed in the audit process.”
Mr Dunn said there have been two other similar cases in the past few years.
The first case was Cam & Bear Pty Ltd v McGoldrick in 2018, where the NSW Court of Appeal was asked to consider whether the actions of an SMSF auditor, John McGoldrick, caused the losses suffered by an SMSF.
“Ultimately, the case centred around whether the assets that were inside the fund were adequately assessed,” Mr Dunn said.
The second case, Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, was heard by the NSW Supreme Court.
In this instance, the trustee of an SMSF, Ryan Wealth Holdings, initiated proceedings against auditor Baumgartner Partners, claiming that as a result of the failures of the auditor, David Keith Baumgartner, irregularities went undetected for many years.
When those irregularities were ultimately discovered, the opportunity to redeem money arising from a series of failed investments had been lost.
“We have here again in the Caddick case, a situation whereby we have trustees that have got a financial loss as a result of the activities of Melissa Caddick,” Mr Dunn said.
“In this situation, if the audit process had been done as robustly as the profession would attest it needed to be done, particularly in regard to unlisted investments, then there is an argument that the burden of proof for the evidence that should have been obtained, should have been probably better than what it was.”
Mr Dunn said, on the back of the previous two cases, auditors had an obligation to obtain sufficient appropriate audit evidence to verify assets, and in particular unlisted assets.
“Ultimately, the ATO said when you go through this process, you need to look at and observe, as part of that completion of the audit, what information has been requested,” he said.
“This includes any sort of agreements, rights, obligations, where there might be loans in place, requesting financial statements and details of entities that are linked to the financial statements of the SMSF.”
He continued that in the Caddick case, if the audit had been done appropriately it would have potentially highlighted the fact that there was an issue with the representation of the assets.
“This is why we continue to see the ATO making referrals to ASIC. The upholding of the standards in this industry needs to remain front and centre,” he said.
“I think these sorts of cases will continue to highlight the fact that the audit role is an important role.”
The whole Melissa Caddick fiasco is a sage reminder for all participants in the industry to be extremely vigilant as to who is handling your money. Melissa Caddick appeared to be an adviser, licenced to provide advice. The Trustees could have checked their documents themselves. The accountant could have checked the HIN and postcode just to be sure. Likewise, the auditors could have done better too. No one group is innocent here. Trustees need to be more involved and knowledgeable as much as any one in the scheme of things. Just because the auditors have professional indemnity insurance they are called on last in a court case. In Baumgartner’s, the case was filed 6 years and 360 days after the last audit was done in a last gasp attempt to get some more money back and if you read the case, you may come away with a different opinion to the learned Judge as to how much responsibility a trustee should take for their investments.
[quote=Kris Kitto]I was thinking the same thing!
100% agree with Aaron’s comments, but with the Caddick case, any auditor with ANY level of competence would have conducted testing to identify the Commsec accounts quickly were fakes.
Absolutely! The HIN is as at the top of the annual CommSec reports pdf and is not hidden. Any auditor or assistant who has ever seen a CommSec report would know that and it’s absence would be a red flag![/quote]
Without seeing any of evidence or the documentation Mr Dunn assumes that the appropriate work wasn’t completed. Just the sort of stuff that should be published in a gossip rag, rather than a professional newsletter.
It is unlikely that the matter will ever go to trial. There are apparently 24 SMSFs involved in the case and 5 auditors over a perion of 10 to 12 years. The Applicants, financiers & respondents will want to settle rather than drag the matter out in the courts.
The matter of proportioning the liability would need to be addressed.The fraudster, trustees & auditors must share blame. The trustees would have signed various documents confirming the accounts etc. The trustees must take responsibility for their own actions. After all they, without question, gave the fraudster the keys to the vault.
Labor’s $3M Super Tax will place even more emphasis on market values for SMSFs and their affect on Total Super Balance, with potentially every dollar of market value creating a real tax liability.
Those SMSF trustees who currently whinge & complain when asked for a market value for an unlisted property or investment trust will need to make a decision. Keep your SMSF or get out, & stop making the auditor’s life difficult! These trustees need to realise, the annual audit is not for them, it’s an annual outsourced ATO audit, so get used to it!
By the same token, investment fund managers and promoters of investment trusts need to know. Be prepared to formally value your fund annually or DO NOT accept money from SMSF investors, it’s that simple!
Perhaps a top tip for SMSF trustees would also be to only deal with financial advisors that hold an Australian Financial Services licence, is it too easy to become an SMSF trustee?
Were there unlisted investments in the Caddick case? I was under the impression they were listed shares (and using a fake CommSec account)?
I was thinking the same thing!
100% agree with Aaron’s comments, but with the Caddick case, any auditor with ANY level of competence would have conducted testing to identify the Commsec accounts quickly were fakes.