According to DBA Lawyers special counsel Bryce Figot, SMSF auditors looking to understand what these breaches look like in practice should take note of the Sidhu case.

The decision relates to SMSF auditor David Sidhu, who the ATO referred to ASIC following an audit.

ASIC subsequently disqualified Sidhu, who sought a review from the Administrative Review Tribunal (ART), which recently affirmed the regulator’s decision.

Given the compliance issues that the ATO outlined earlier this month, Figot said the Sidhu decision “can serve as illustrative examples”.

In the ART decision, the tribunal found it was “satisfied there was a failure to obtain sufficient, appropriate audit evidence to show that the Fund’s properties were maintained on an arm-length basis”.

“There were a number of reasons for this,” Figot said.

“However, one reason is that ‘in relation to one of the properties, Mr Sidhu’s evidence was that he did not have a copy of the lease agreement on the audit file but was ‘pretty sure’ he knew who the tenant was’.

“Accordingly, there is merit in considering ensuring that an approved SMSF auditor always has full back-to-back leases on file, examines them, and makes appropriate notations on the file.”

The ART was also satisfied that Sidhu did not obtain “sufficient, appropriate audit evidence” to back up that the fund’s investment properties were recorded at market value.

Specifically, it said that Sidhu’s evidence had displayed his “knowledge of the history of the property’s value, despite this, he did not document that knowledge but relied on an appraisal letter from a real estate agent; representations from the trustees that they believed the value had not changed; and a search of the property’s sale history which included its listing price”.

He also ran into issues related to failing to do a title search to ensure there weren’t any charges over the fund’s assets.

“Mr Sidhu’s evidence was that he relied on his knowledge of his client’s affairs and, knowing that nothing had changed, he did not do a title search,” the ART decision said.

According to Figot, a course of action that “might assist in quickly satisfying the ATO if the ATO reviews/audits an approved SMSF auditor’s files is if the auditor performs a title search for each title each year; reviews those title searches for charges; and makes appropriate notations and retain on the audit file those notations along with the title searches”.
“Again, I stress the above is not necessarily my view of the law or industry practice,” he said.
“Indeed, there might at times be alternative ways for an approved SMSF auditor to satisfy him or herself of compliance with reg 13.14. However, in light of Sidhu, and my experience with my auditor clients, I feel that there is merit in adopting the above as a typical ‘rule of thumb’.”

The ART decision also found failures in Sidhu’s process regarding LRBAs, with the tribunal noting that auditor’s evidence during the hearing “displays his inadequacies in obtaining sufficient audit evidence”.

Broadly, Sidhu did not provide a copy of the LRBA with the relevant bank in the audit file provided to the ATO because “he did have them and didn’t think that it was needed to be forwarded to the ATO”.

Alongside the LRBA not being on the audit file, the ART said the LRBA was kept on a different file at IPS, Sidhu sighted it and “saw no need to make a copy and put in on the audit file”, and he did not “proactively check to see if changes had occurred, but instead relied on being notified or it being raised by the IPS accountant who did other work for the trustee”.

“Therefore, [the ART] accept [ASIC’s] submission that reliance on assumptions made only possible because of Mr Sidhu’s familiarity with the Fund demonstrates a misunderstanding of his extent of his obligations as an SMSF auditor,” it said.

Figot added: “Naturally, retaining a full copy of these documents on file can be important step for an approved SMSF auditor to evidence such a check.

“The Sidhu decision highlights practically what an approved SMSF auditor’s files might need to look like in order to satisfy the ATO and ASIC. As regulatory scrutiny continues, adopting a thorough approach is essential to satisfy an approved SMSF auditor’s obligations.”