In the McGoldrick and Baumgartner cases, both auditors failed to notify the trustees of issues within their funds and did not communicate with them.

The Baumgartner case, in particular, found that the auditor failed to investigate the nature of the fund's unsecured loans and unit trust investments, and did not enquire into the existence and verification of the assets. The auditor did not have any documentation on file regarding these investments and failed in their duty to communicate with the trustee.

The plaintiff claimed that the auditor was in breach of their duties in contract and in tort, contravened their obligations as an auditor under the SIS Act, engaged in misleading and deceptive conduct and breached Commonwealth and state legislation.

The auditor was found negligent for failing to bring serious misdescriptions, misstatements and other facts and circumstances to the plaintiff's attention by way of notation or qualification in the audit reports.

The Judge noted that even adopting a narrow form of qualification would have provoked serious concern and alarm to the trustee once communicated.

Expressing a qualified opinion on the fund's financial report, therefore, would have mitigated and/or negated the loss attributed to the auditor, notwithstanding whether or not the trustee understood the nature of the qualification or acted upon it.

It is also important to note that while qualifying Part A may mitigate litigation risk, each case will be tried on its own merits, with all relevant aspects of the audit and fund operations considered by a court.

Effective risk management of SMSFs through Part A qualifications cannot be underestimated, however, as the trustee in the Baumgartner case would have immediately acted on such a modified audit opinion and been able to recover fund monies sooner.

The ATO's Position

The ATO has previously stated that it will not take compliance action against an SMSF based solely on a Part A Qualification.

As this statement is no longer available on its website, the problem for SMSF accountants is explaining and justifying why a Part A qualification will not trigger an ATO review of the fund, given the lack of guidance.

Since then, Kellie Grant, Director of SMSF Approved Auditors at the ATO, has confirmed that the ATO generally does not select funds for audit solely on the basis of a Part A qualification reported in the SAR.

The main factors informing its selection of SMSF cases for audit are intelligence received, regulatory risks reported in ACRs and income tax risks.

Nevertheless, Part A qualifications contribute to the overall risk profile of a fund and are also investigated when it audits a fund.

The MIS Part A Qualification Problem

One of the most annoying Part A qualifications for SMSF professionals concerns fund assets held custodially in a managed investment scheme ("MIS").

Unfortunately, SMSF auditors are unable to independently verify that the SMSF holds title to those assets and in line with ASA 402, the SMSF auditor must qualify their opinion on the financial report and issue a Part A qualification.

Under the ATO's financial threshold reporting criteria, the auditor may also have to qualify Part B of the audit report under Reg 8.02B and report the breach to the ATO in an ACR.

The ATO has stated that SMSF auditors may use their professional judgment to determine if an ACR is required where the auditor:

1. Has obtained a Type 2 audit report for the investment

2. Concludes that the risk of a Reg 8.02B contravention is low, but is unable to obtain sufficient appropriate audit evidence

It is silent on whether the auditor can apply their professional judgement to modify Part A of the audit report. Still, it notes that ASA 402 is "relevant in determining the audit procedures required for this type of asset".

In September 2023, the Joint Accounting Bodies ("JAB") released an FAQ for auditors regarding SMSFs that outsource the management of their investments to a service organisation.

The guide identified that it may be possible for an auditor to obtain sufficient appropriate audit evidence through a combination of:

1. A Type 2 audit report

2. An annual investor statement (that may or may not be subject to assurance)

3. An external confirmation from the service organisation

4. Analytical review procedures of the SMSF's investment activity, e.g. a comparison of investment returns with market indices

5. Reconciling balances and transactions to records held by the SMSF, e.g. trade confirmations transactions to bank statements.

The bottom line is that a type 2 report alone is not enough, and the JAB also noted that it is not an exhaustive list, as alternative evidence may be available.

The problem for SMSF auditors is that while the first three sources of evidence are readily available, the last two are not. It means that the audit becomes increasingly time-consuming and expensive to undertake.

Avoiding a Part A qualification becomes difficult when fixed audit fees are involved, especially where SMSF trustees are unwilling to incur additional expenses to eliminate it.

As noted earlier, some SMSF advisers interpret this as a critique of their investment recommendations, given that they initially advised their clients to invest in the MIS.

The situation places all SMSF professionals in a challenging position, with SMSF auditors having to balance professional standards with practical constraints.

It can strain relationships among auditors, advisers, and trustees, underscoring the need for more explicit regulatory guidance and stronger information-sharing protocols across the industry.

Conclusion

While Part A qualifications represent a mixed result for the SMSF industry, their real value lies in safeguarding the retirement benefits of all SMSF members, as seen in the auditor cases, which is critical to maintaining the sector's integrity.

The ongoing commitment by SMSF auditors to rigorous audit procedures and transparent practices remains essential, even amid practical obstacles and cost pressures.

As the regulatory landscape continues to evolve, it is imperative to collaborate and adapt, ensuring SMSFs continue to serve their members' best interests while maintaining compliance and trust within the industry.

That is the real value behind Part A qualifications and the key to understanding them.