In the realm of superannuation, case law has a significant influence on how advisers, investors and auditors operate. In 2018, the outcomes of two court cases led many auditors to refocus their audit processes. Some still need to do so.
In Ryan Wealth Holdings Pty Ltd v Baumgartner, the Court assessed damages in the sum of $2,260,140. Responsibility for the loss was apportioned 90% to the auditor and 10% to the Fund trustee. Further, the Court determined that the Fund trustee’s loss should be apportioned to the accountant as to 20%. In Cam & Bear Pty Ltd v McGoldrick, the Court of Appeal again apportioned 90% of the loss to the fault of the auditor and 10% to the accountant, advising that the auditor’s negligence was “significantly greater importance” in causing the loss than the trustee
Whilst trustees and their advisors are responsible for preparing the financial statements for their SMSF, it is crucially the fund’s auditor who owes a duty of care to the trustee to ensure that the funds’ investments are correctly stated in the financial reports.
What’s required for an investment strategy?
SMSF trustees are required to prepare and implement an investment strategy, which sets out what the fund can invest in. Some of the key considerations for a fund’s investment strategy include:
- The investment objectives for the fund
- Diversification and the benefits of investing across a number of asset classes, such as fixed interest, property and shares)
- The fund’s liquidity, including its ability to pay member benefits and other fund expenses
- Whether to hold insurance cover for members
- The circumstances of each member, including their age, income needs and retirement goals.
The investment strategy should be in writing as this provides trustees with clear direction and assists the auditor when preparing the annual report. The investment strategy must be reviewed at least annually and whenever there is a change to the fund, such as if a new member joins or if an existing member commences a pension.
ATO’s response to the Baumgartner and McGoldrick cases
In response to both cases, the ATO released a statement reinforcing the obligations imposed on auditors, notably that the requirement to value assets at market value was the most common contravention not identified or reported by auditors who were referred to ASIC.
“SMSF auditors need to obtain sufficient appropriate audit evidence from SMSF trustees to verify the value of a fund’s investments. It is not the auditor’s job to undertake a valuation but they should seek evidence that shows how the asset was valued, including the method used and the data relied upon.
If the auditor is unable to obtain sufficient verification that material assets are valued at market value, they should qualify the financial and compliance report sections of their SMSF Independent auditor’s report stating they have been unable to obtain sufficient appropriate audit evidence to verify the asset values. They should also lodge an Auditor/actuary contravention report for the contravention and notify the trustees in a management letter.”
What key issues should SMSF auditors consider?
1. High risk investments can make valuations challenging
Assets such as unsecured loans, related party arrangements and unlisted assets, are often difficult to value. For this reason, they typically fall into the high-risk category, requiring an auditor to obtain sufficient and appropriate audit evidence as to the market value of the private investments or recoverability of private loans. Absence of sufficient evidence may lead to auditors in some part disclaiming their audit opinion with regard to the investment strategy, either in the audit report or in their report to the trustees.
2. Communication between the trustee and auditor is imperative
Most auditors will liaise with trustees via the SMSF accountant or administrator to obtain information and provide their final reports. This is usually done as a matter of expediency and to ensure the accountant or administrators relationship with their client is maintained. However, the auditor’s engagement is with the SMSF trustee. SMSF Auditors should have direct access to SMSF trustees, both to make appropriate enquiries and to present their final reports to the trustee, so they can ensure the trustee is aware of the audit outcome.
3. Separation of advisory services is advised
Another lesson from these court cases is the potential danger of having all advice services – accounting, auditing, administration and investment advice – with the same or even closely-related firms. If trustees believe this is the most cost-effective and efficient solution, there is an even greater need for them to do due diligence to ensure their fund is compliant.
It’s important to remember that SMSF auditors do not have the obligation to value SMSF assets. Their obligations also do not extend to the audit of any underlying investments but merely to obtain sufficient audit evidence.
Are your auditing processes up to date?
SMSF auditors need to ensure their processes include:
- Requesting and reviewing as much information as possible, such as the agreements, rights and obligations relating to the balance of unsecured loans.
- Requesting and reviewing the financial statements of entities connected with the unlisted investments or unsecured loans.
- Undertaking enquiries regarding any ‘red flags’ noted in the audit of these investments.
- Lodging an ACR within 28 days if they believe a reportable contravention of the SMSF has occurred,
For further information, visit https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Your-investment-strategy/
As an independent auditing firm, National Audits Group provides accountants, advisors and trustees with the confidence that their SMSF audits are being managed professionally with regard to all auditing requirements.
For further information, contact us directly at 1300 734 707.
Nathan Eid CA
SMSF Audit Manager