In the case Cam & Bear Pty Ltd v McGoldrick, the NSW Court of Appeal was asked to consider where the actions of an SMSF auditor, John McGoldrick caused the losses suffered by an SMSF.
The trustee of the SMSF, Cam & Bear, was established for Dr Lance Bear and his wife, Ms Jennifer Campbell. Dr Bear and Ms Campbell were directors of the trustee for the SMSF.
Mr McGoldrick was an accountant who audited the accounts of the fund, including for the financial years ended 30 June 2003 to 2007.
Some years after the fund was established, a close friend of Dr Bear, Mr Anthony Lewis, who conducted a finance business, suggested that his company, Lewis Securities Ltd, manage the fund’s investments. Mr Lewis also suggested that another company in which he held a 35 per cent interest, Databank Investment Services Pty Ltd, undertake the fund’s administration, according to the evidence provided by Dr Bear.
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 amounts and shares.
In reality, the money was actually lent on an unsecured basis to Mr Lewis’ company LSL Holdings, DBA Layers senior associate David Oon explained in a webinar.
The investments were recorded as “cash – LSL Holdings P/L” in the SMSF’s financials.
Mr McGoldrick, the auditor, queried the description but Mr Lewis told him the SMSF trustee was happy with the description. Mr McGoldrick did not directly communicate with Dr Bear.
When Dr Bear went to withdraw cash from the SMSF to start a new medical practice, he was unable to, since the contributions had been used for unsecured loans. Mr Lewis’ companies went into voluntary administration soon after that.
“Dr Bear felt he had suffered loss at the fault of Mr McGoldrick who didn’t warn him that the investments may not be recoverable,” explained Mr Oon.
Cam & Bear Pty Ltd then sued Mr McGoldrick for damages for negligence and misleading and deceptive conduct.
The case was heard by a single judge in the Supreme Court of NSW with the court finding that while Mr McGoldrick had been negligent and engaged in misleading and deceptive conduct, these defaults had not caused any loss to the appellant.
An appeal was then brought by Cam & Bear Pty Ltd against Mr John McGoldrick which was heard by three judges of the NSW Court of Appeal, explained Mr Oon.
“The court said that failure to tell Dr Bear the loans might not be recoverable caused Dr Bear to continue to make contributions, which would not have been made otherwise,” said Mr Oon.
“Overturning the earlier decision, McGoldrick’s negligence was found to have caused the loss.”
In its judgement the court concluded that responsibility for the loss should be apportioned 10 per cent to Cam & Bear and 90 per cent to Mr McGoldrick.
The court found that the company which compiled the fund’s financial statements, Databank Pty Ltd, was not liable to Cam & Bear as there was no evidence as to the basis on which the company was engaged.
The court said that “Mr McGoldrick was a very experienced accountant and auditor who was engaged for the purpose of protecting the fund and its trustee against financial risks that included the very type of risk that eventuated”.
It also said that McGoldrick was “clearly negligent in failing to make proper enquiries as to the recoverability of the amounts held by LSL Holdings and failing to report the results of those enquiries to the appellant trustee”.
Mr Oon said the case makes it clear that “auditors are being held to a high standard by courts, especially when the clients are not financially sophisticated”.
Your report of this case is pathetic, the paucity of detail and information is unbelievably thin. Shameful journalism.
And so we see the path of least resistance taken yet again – Forget justice and taking responsibility for your actions. No doubt there would have been promises by the broker of fantastic returns which the greedy trustees took. That would appear to a logical person to be their risk to bear. the auditor comes in AFTER THE FACT. The auditor’s PI insurance was certainly an easy target for the conniving lawyers here. Between this and the licensing regime we have to deal with, I think auditor numbers are going to reduced, but then that’s what they want.
Please correct me if I am wrong.
I audit a fund, fund has invested in a fixed deposit with a bank, if the bank fails, I as an auditor will have to pay 90% of the trustees loss because, as an auditor, I did not tell him that the bank could fail. Without reading the case,either this article is incorrect or I am living in mad land
I was a player in this series of events and seriously believe that the facts as discussed in the commentary are completely wrong. Had I been called as a witness Dr Bear would never have got away unchallenged with his assertions!
If the loans to LSL Holdings breached the SIS Act, the auditor would indeed be responsible. If it didn’t breach the Act, I can’t see why auditors would have any responsibility at all. They audit compliance with SIS Act and confirm the accounts are a true and fair representation. They have no responsibility for investment decisions. They are not investment advisers. If the investment fits the investment strategy the auditor has no further responsibility, nor should they have any.
The worrying section is: “auditor who was engaged for the purpose of protecting the fund and its trustee against financial risks”. That is NOT the function of an auditor and in fact an auditor isn’t even qualified to do so, and even would get into strife with ASIC, as assessing investment risk of specific products and advising on that is investment advice and requires an AFSL! Can someone tell the judges…?
The trustees and their investment advisers should be responsible. Unless the reporting of the case is incomplete, the judgement doesn’t make sense.
Auditors are so important that trustees rely heavily upon. Auditing is also a red tape that should be reduced by 2/3. The Treasury should have a good conversation with those judges…..
Me thinks the auditors protest too much. They are quite happy to charge high fees but accept no responsibility when things go wrong. Why high an auditor if you don’t expect them to uncover irregularities.
How about the trustees take some responsibility for their very poor investment decisions.
Wow I’m not an auditor but this is simply ridiculous decision unless there are crucial facts missing in the article. What about trustee responsibilities?
The auditor’s negligence “caused” the loss? Seriously? This article provides insight into a key contributor to some of the problems with society; the attribution of responsibility. If Dr Bear is in medical practice (acknowledging Dr Bear may not be a medical doctor), I wonder if he’d readily admit to being the “cause” of a condition suffered by a patient if he had simply not diagnosed that condition. And furthermore, if that patient had brought upon themselves the condition because of their own choices. Still the fault of the doctor? I think not.
As an SMSF auditor an annual bug bear is having the trustees of the fund provide me with a representation letter that largely states the obvious. Likewise i provide an audit report to the trustees. The point is that the dialogue is between the auditor and trustees. The dialogue is not between the auditor and a third party administrator of the like. You have to think that had the auditor replied upon the trustees representations that the truth would have come out earlier. In that case the auditor would likely have not been found as a contributor to the loss. As a contributory negligence issue you have to wonder about the apportionment of blame between auditor and trustees. The trustees also have an obligation to review what they are signing off on and understand what it represents.
Any auditor who seeks a leg up in generating work by aligning with a financial planner or other service provider needs to keep in mind that the auditor is working for the trustees of the fund, not some other party who may have incompatible agendas and/or conflicts of interest.
This should serve as a timely reminder, not only to SMSF auditors but SMSF administrators as well. If a SMSF trustee wants to invest in a private company or unit trust in this way and asks your advice, they should be told BEFORE they proceed that at year end they will need to supply copies of financial statements and obtain evidence of a market value of the shares or units, and an examination of the ownership and relationship between the other investors is required annually.
All too often SMSF auditors are at the receiving end of whining and complaining from SMSF trustees/ their financial adviser or the investment promoter about supplying such information, as they dont have to supply it for non-SMSF investors, and trustees dont want to pay for the extra admin/audit time. This should be agreed up front.
Trustees should be advised to confirm in advance information availability with the promoter of such a scheme, and make it a condition of proceeding with the investment. In addition, SMSF trustees should be told that higher fund admin & audit fees should be expected, as an annual investigation and searches of unit holding/shareholding is also required to confirm the entity continues not to be a related party. Often that too is met with whinging and complaining by all those concerned.
Being able to invest in non-listed investments are a reality of SMSFs and also part of their attractiveness. But regardless of their wealth, one can never assume a SMSF trustee is “sophisticated” when it comes to investing, as most are decidedly not. The expectation gap of what an SMSF audit is about is also extremely wide, and we see here that the judge agreed with the trustees common sense view, an audit is an audit!
Audit reports on SMSFs with non-listed private investment entities that are not themselves audited, should ALWAYS form part of a financial qualification.
The rise of automated audit confirmation has seen SMSF audit fees plunge to record lows, but those auditors and the people that use them need to be aware that one-size DOES NOT fit all when it comes to private investments by an SMSF.
So, we can’t give advice on investments since we’re not licensed to give advice, our audit report says that we don’t report on the appropriateness of the investment strategy to the members, and auditors are held responsible? The trustee made the investment and only wear 10% of the blame? Heaven help auditors with the next client who has a capital loss at age 64…
Ouch, unfair jumps to mind.