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Auditing, Regulation

Three-year audit cycle risks auditor liability

The federal government’s proposal for a three-year SMSF audit cycle could increase the risk of auditor liability, with each error potentially being of greater magnitude, according to a lawyer.

DBA Lawyers senior associate David Oon told selfmanagedsuper changing the audit cycle from one year to three years for well-run SMSFs would have at least a small impact on auditor liability should something go awry, with the longer audit period leaving the door open for more errors to potentially occur.

“If the auditor stuffs up a three-year audit, there might be more lost than if an auditor stuffs up a one-year audit. I think that’s why you might expect cases like [Cam & Bear] to become a little bit more common or to be worth a little bit more money,” Oon said.

“I think it’s a matter of the size of the stuff-up instead of the frequency of the stuff-up. The stuff-ups are likely to be bigger because the audits cover longer periods, but I don’t know the three-year audit cycle means the auditor will stuff up more or will be negligent more.

“I think when they actually are negligent, those negligent actions will be covering more dollars because the periods will be longer.”

It will be difficult to track an increase in cases against auditors because only a handful of cases appear in the public domain, he noted. Most cases between SMSF trustees and auditors settle before they reach the courts.

Oon made the comments after citing the Cam & Bear Pty Ltd v McGoldrick case during a recent DBA Lawyers webinar. In that case, the New South Wales Court of Appeals found SMSF auditor John McGoldrick’s negligence caused his SMSF trustee client to lose money.

On being asked whether this indicates a heightened risk for auditor liability under the proposed three-year audit cycle, Oon said it will slightly increase the risk only because any error will be exacerbated by the fact it accumulates over a three-year period.

“I don’t know whether there’s a way to run it that wouldn’t negatively impact auditor liability under a three-year audit cycle,” he said.

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