The New South Wales Court of Appeal’s recent move to overturn the decision of a trial judge and find an SMSF auditor liable to pay damages for losses incurred by the SMSF illustrates the importance of auditors adhering to their obligations, a lawyer has warned.
Townsends Business and Corporate Lawyers principal Peter Townsend cited the case of Cam & Bear Pty Ltd v McGoldrick, saying it highlights the obligation of the fund’s auditor to protect the fund and its trustees against financial risk.
Townsend said there are lessons to bear in mind from the case, including the need for auditors to advise trustees about the recoverability of investments.
He also said while trustees are ultimately responsible for the fund, they are entitled to rely on the appointed auditor to carry out their auditing role properly.
In this particular case, the Cam & Bear fund and its corporate trustee were established for Dr Lance Bear and his wife, Jennifer Campbell, who were the directors of the trustee of the fund.
McGoldrick was an accountant who audited the accounts of the fund, including for the financial years ended 30 June 2003 to 2007.
The fund’s investments were managed by a finance business owned by Bear’s close friend, Mr Lewis. Contributions to the fund were managed by a company run by Lewis, while another of his companies prepared the accounts.
Bear and his wife were unaware Lewis’s management company was using the funds for unsecured loans. They thought the money was held in cash because the financial statements described those assets as “cash – LSL Holdings”.
The auditor dealt only with Lewis and did not ensure the SMSF trustees were provided with the audited accounts. He had been engaged by Lewis and his companies.
During his audits, McGoldrick asked Lewis about the description of the cash entries, but Lewis told him the SMSF trustee was happy with the description. McGoldrick accepted this explanation and did not ask the client about it.
Lewis’s companies eventually went into liquidation and the super fund lost its money.
At the hearing, Bear argued he had suffered loss due to McGoldrick’s failure to represent the cash entry properly and warn him his investments may not be recoverable.
The judge found while McGoldrick had been negligent and engaged in misleading and deceptive conduct, these defaults had not caused any loss to the appellant.