SMSF auditors should be certain their professional indemnity (PI) insurance extends to dealing with legal action brought by clients, as well as regulators, with the latter being a far more likely scenario, an SMSF legal specialist has advised.
DBA Lawyers special counsel Bryce Figot said auditors were legally obligated to hold PI insurance, but from his experience in dealing with cases involving these practitioners, the contents of insurance cover should be reviewed by those purchasing it.
“If you get audited or reviewed by the ATO, and you may potentially also be referred to the Australian Securities and Investments Commission, you will want a proper legal defence or you may want to do it yourself,” Figot told attendees at the recent Auditor’s Institute SMSF Auditors Day in Melbourne.
“To conduct that defence properly throws up costs and legal costs and fees will be high. Will your PI insurance cover this type of event as some do and some do not.
“Check your PI insurance policy to see if it does cover you for fees for advice and a defence if you get an ATO audit and review, and not just for being sued by a client.
“We focus on cases like the Baumgartner decision or the McGoldrick decision where the auditor was sued, but statistically what is far more likely to happen to SMSF auditors is an ATO review.”
He added the extent of cover auditors should have for a legal defence inside their PI insurance was dependent on a number of factors, but legal fees were more often based on the complexity of the issues under review.
“There are some clients who I can look at and quickly decide they have no chance and I can take their money and fight it and the legal fees will be cheap, but it’s not the outcome they want, but where it’s more of a line ball is where it gets expensive and can go into the tens of thousands,” he said.
“So, check your PI insurance does allow you to mount a proper and fulsome defence because everyone wants the option to do that, and if you’ve got to have a PI insurance policy anyway, do you also want it to have those additional whistles and bells?”
