Caddick case reinforces professional standards: expert

“Based on evidence submitted to the Court in NSD 1220/2020: ASIC v Melissa Louise Caddick & Anor, Caddick used a bona fide CommSec account to fraudulently prepare year-end portfolio statements containing investments that did not exist in that account,” she said.

“Other irregularities included inconsistent dates on the portfolio statement, such as the statement's beginning and end date that covered a six-month period, while the portfolio statement was dated ‘2014-15 FY’.”

Ms Banton said that it is standard practice for auditors to query anomalies found in documents, as is obtaining evidence for listed shares in a broker statement including the HIN or SRN number and postcode, and searching the share registry websites to confirm the existence of the assets.

Other forms of audit evidence may include a dividend or distribution notice or CHESS holding statement within three months after 30 June.

The Caddick case involves a class action against five auditors alleging they failed in their duties, were negligent, engaged in misleading or deceptive conduct, and breached their contract and the Corporations Act.

“Unfortunately, it is not the first time that SMSF auditors have been in the firing line for failing to confirm the existence of assets held by an SMSF,” Ms Banton said.

“The Baumgartner and McGoldrick cases held both SMSF auditors liable for fund losses because they failed to identify irregularities during the audit and for engaging in misleading and deceptive conduct.”

However, in the Caddick case, the investments were listed shares, not high-risk unlisted entities and loans, which are typically more complex and difficult to verify.

“What is evident is that the Caddick case must finally end the mindset that a quality SMSF audit is of limited benefit,” she said.

Ms Banton said the APES 110 Code of Ethics identifies that a low fee is a self-interest threat to its fundamental principles as a low fee might make it difficult to perform the audit in accordance with applicable technical and professional standards for that price.

Although it is not known what the audit fee was in the Caddick class action, the ATO has identified that the median fee for an SMSF audit in the 2021 financial year was $550, which has remained the same since the 2017 financial year.

“The more interesting statistic is the distribution of SMSFs by audit fee range, which shows that 41.4 per cent of funds had an audit fee range of $0 to $499 in the 2021 financial year, up 37.6 per cent from the 2017 financial year,” she said.

“The question remains whether the SMSF trustees in the class action would have paid a higher fee to have the audit undertaken in line with professional standards that safeguarded their retirement wealth.”

She added that auditors work closely with accountants, SMSF administrators and financial planners to provide the necessary documents and information to facilitate the audit.

That means that if an SMSF professional is also a CAANZ, CPA or IPA member, they are subject to “The Code” which requires them to “have an inquiring mind, exercise professional judgement and use the reasonable and informed third-party test when applying the conceptual framework”.

Under paragraph 120.5 of the Code, an inquiring mind involves “considering the source, relevance and sufficiency of information obtained, whether there have been changes in facts and circumstances, whether there is reason to be concerned that information is missing and whether it provides a reasonable basis on which to reach a conclusion”.

“SMSF auditors must also meet ASA 200, which requires an ‘attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence’,” Ms Banton said.

“Interestingly, an AUASB bulletin dated August 2012 states that additional audit procedures are necessary to resolve matters where there is doubt about the reliability of information.”

Ms Banton said the general rule of business is that a service can be cheap, fast, or good, but it cannot be all three simultaneously.

“The Caddick case serves as a prime example of the crucial role that SMSF advisers and auditors must play in preventing and mitigating the risk of fraud in SMSFs,” she said.

“It is essential to work with respected and trusted SMSF professionals who promote best practices, comply with the relevant laws and regulations, maintain clear and transparent communication, and promote accountability.”