Auditors on notice to check SMSF assets line-up
Recent case law, combined with the ATO’s recent letter campaign, has underlined the importance of SMSF auditors checking that a fund’s investments are in line with its documented strategy, which should be a detailed written document, according to ASF Audits.
Speaking in a recent webinar hosted by Accurium, ASF Audits executive manager of technical services Shelly Banton said the ATO’s warning letters to almost 18,000 SMSFs and their auditors around investment strategy had come about due to a recent case which found an SMSF auditor liable for a trustee’s investment losses because of a breach of duty of care.
“Ryan v Baumgartner was the second case in 2018 where an auditor was found liable [for SMSF losses], and one of the three issues where the auditor failed was that the investments were not in line with the strategy,” Ms Banton said.
“In the liquidity paragraph of the strategy, it stated the investments should be of the type to be convertible to cash within 90 days, but the investments didn’t fit this and Mr Baumgartner didn’t query it and failed to advise the trustee that their investments were not in line with the strategy.”
She added that as the SMSF assets in the Baumgartner case were held in unsecured loans, the ATO was particularly concerned about leveraged funds and trustee understanding of these types of investments, hence its focus on funds that were undiversified and invested in LRBAs.
“The letters were only sent to the 3 per cent of all funds that had an LRBA in them, and the reason for the letter to those funds was because of the Baumgartner case, because the fund lost money and the assets were not in line with the investment strategy,” Ms Banton said.
She said the case and the campaign were a wake-up call to auditors to ensure trustees were properly and regularly reviewing their investment strategy, which should not be a “tick-box” exercise.
“The regulations say trustees should be reviewing their strategy regularly, so that should be at least once a year,” Ms Banton said.
“There is a standard minute in some of the investment strategy templates that says, ‘I’ve reviewed the investment strategy’, but often that flies in the face of what is in the fund when you take a look at it, they can be chalk and cheese.”
While some SMSF professionals had pointed out that SIS regulations did not specify the need for a written strategy document, Ms Banton said in order to properly cover themselves against legal action, auditors must ensure strategies were written down in sufficient detail.
“Some people would go back to the legislation and say there’s no requirement for [the strategy] to be written down, and that’s true, but how are we going to audit it? We don’t want to end up in court where it’s a ‘he said, she said’ situation,” she said.
“A good investment strategy could be a couple of pages long or it could be 10 pages, but with the type of information we want to see now in an investment strategy, they are going to be longer documents.”
