Auditing, Compliance, Regulation, SMSF

Review loans to avoid audit issues

SMSF auditors Loans Litigation SIS regulations Audit file

SMSF auditors must prepared to substantiate their audit file with sufficient evidence in situations where an SMSF has invested in a loan.

A specialist SMSF auditor has advised practitioners to thoroughly assess the integrity of loans a fund has invested in as courts will often require a rigorous standard of documentation in the event the loan defaults and litigation is brought against them.

“The litigation that we have seen suggests that auditors have a greater responsibility where a trustee has invested in loans,” Super Sphere director Belinda Aisbett told delegates at the recent SMSF Association National Conference 2024 in Brisbane.

“I do a little bit of expert witness work [and] I’ll often be engaged by lawyers to evaluate what [an] auditor’s file looks like.

“What we see from a lot of the expert reports is that they expect the auditor to go in and check if the guarantors actually have some financial backing and can guarantee the loan, or that we go in and we evaluate the value of the assets that might underpin the loan.

“As soon as you’ve got the loans [and] they’ve gone bad, there’s this assessment of what did you do in your audit file to get comfort that the loan was fairly valued and, of course, to get comfort that it’s fairly valued, you have to be pretty happy that it’s recoverable.

“So there’s these huge expectations on what auditors should be doing.”

To that end, Aisbett advised practitioners there are strategies they can incorporate into their practices to mitigate the risks of an unfavourable outcome in case of litigation.

“I’ve had a lot of people over the years saying ‘as soon as there’s a loan, I just straight qualify’. Why wouldn’t you? What’s your risk? Can they sue you if the loan is unrecoverable?” she said.

“Whereas if you don’t qualify [and] you say the loans are fairly stated and the loans go bad, you’ve kind of left yourself open.

“So maybe that’s not such a bad strategy. I see a loan and it’s material, so I’m qualifying part A. If you qualify part A, you also have to qualify part B because if you don’t think the value is quite right, you have to put in part B a potential contravention of Superannuation Industry (Supervision) Regulation 8.02B.

“Consider qualifying, especially if the loan is unsecured.

“I [also] use emphasis of matters. If I’ve got a secured loan, I’m comfortable that the asset value underpinning that loan is sufficient to cover the amount that the fund has lent [and] that there’s a formal loan agreement. I’ve got no alarm bells going off that this loan is going to be problematic.”

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