When we conduct audits we are guided by the SIS Act and Regulations, ATO guidance and court cases. There have been two recent litigation cases that see the SMSF auditor responsible for losses in the Fund. These cases highlight the inherent risks and importance of auditors providing a high standard of care when conducting audits.
In both cases, the SMSFs suffered losses due to the auditor failing to provide warnings about the recoverability of the assets in the Fund.
Mrs Jennifer Campbell and Dr. Lance Bear established an SMSF with a Corporate Trustee, the Cam & Bear Pty Ltd.
After the Fund was established, a close friend of Dr. Bear, Mr Anthony Lewis, suggested to the couple that he can manage the Fund’s investments. For a long period of time, Dr. Bear was under the impression that the Fund’s assets consist of cash and shares in Mr Lewis’s company.
However, the “unlisted shares” was in reality an unsecured loan to Mr Lewis’s company and the asset was incorrectly disclosed as cash. The auditor, Mr McGoldrick, questioned the nature of the asset in the Fund but did not directly confirm with the Trustees. Soon after, Mr Lewis’s company was liquidated and the loan was never recovered.
A lawsuit was brought upon the auditor, Mr McGoldrick, for failing to warn the Trustees that the investments may not be recoverable. The auditor was deemed to have acted in a negligent manner and failed to fulfill the purpose of protecting the Fund and its assets.
To access the complete case law, please click on the button below:
The sole director of an SMSF, Ms Trudy Crittle, sought financial advice from financial adviser Mr Moylan and invested over $7 million in accordance with Mr Moylan’s advice.
The financial advisor convinced the Trustee to invest in unsecured loans pursuant to a series of facility agreements. The unlisted unit trusts that the SMSF provided a loan to was declared bankrupt and placed into liquidation. As part of the steps taken to recover the losses, Ms Trudy Crittle filed a law suit against the auditor of the Fund, claiming that the auditor failed to prevent the losses suffered by the SMSF.
The auditor was aware of the high risk investments in the Fund but failed to bring this to the Trustee’s attention.
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In both cases, the Funds invested in high risks assets without the Trustees being fully aware of the potential consequences. While the auditors have a legal obligation to the Trustee, it is important for the Trustees to be aware of the risks involved when investing with their SMSFs. For more information on the duties and responsibilities of an SMSF Trustee, please click on the button below:
The increase in scrutiny by the Tax Office will affect our audit process. As such, we may charge a higher fee for more complex investments in an SMSF. For more information, please click on the button below: