SMSF Auditor Liable for 90% of Investment Value Loss!

Cam & Bear V McGoldrick – (NSW Court of Appeal 23 May 2018)

Why the shock?

Firstly, if you want to know the facts and form an opinion you need to read the case transcript.

(Don’t go googling this case as you will get a lot of media drivel that misses the point.)

Here is where you can read the case decision:

https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2018/110.html?context=1;query=cam%20&%20bear%20v%20mcgoldrick;mask_path

The bottom line is that the auditor was found negligent and was ordered to pay 90% of the investment loss to the trustee.

The auditor was negligent because he gave an unqualified audit report, whereas he should have given a qualified audit report. He was negligent on two counts in relation to the reporting in the Balance Sheet of one of the SMSF’s investments.

  • One error was that the investment was mis-describedand so there was a failure to meet Australian Accounting Standards (AAS 28 para 14.1) – definition of “cash”.
  • The other error, which was noted by the primary judge, “there was an inability to obtain sufficient and appropriate audit evidence in regard to the disclosure, existence or valuation of the “cash” entry.”

The foregoing is what the decision hangs on, it is where the negligence occurred.

The appeal judge agreed that the trustee could rely on the unqualified audit report to feel confident that the investment described in the balance sheet as ‘cash’ was in fact ‘cash’ and so the trustee could expect there was the usual low risk associated with cash, i.e. virtually no expectation of losing realisable value.

The rub and the risk for SMSF auditors, accountants and administrators

The financial statements of SMSF’s are by and large prepared by highly qualified and good quality professional accountants. But the preparers of the financial statements are NOT liable for any errors therein, the auditor is.

Q  Can an auditor be more confident of the correctness of the financial statements that are prepared by the best and most reputable accountants and administrators compared to, let’s say, the accounts prepared by a trustee without professional help?

A   NO.
There are many reasons for saying no, but the most important two from my view point are as follows:

  • Firstly, the auditor must always be cautious as a minimum, applying the same standards and processes to all situations.
  • Secondly, the human factor. Highly qualified and ethical people can and do occasionally become compromised, or just ‘stuff up’ due to human error/unusual circumstances. Systems also can stuff up and go undetected.

The Bottom Line

This case makes it absolutely clear that where there is negligence in conducting the audit resulting in a loss to the trustees then the SMSF auditor must take proportionate responsibility for the loss.

Opinion

This is as it should be.

BUT…

  • The industry is rapidly evolving IT & AI system sophistications, driving the functions of administration and auditing into a more commoditised environment.
  • This means that those individuals responsible for the administration & preparation of financial statements must become more highly trained and more vigilant in their work.
  • Similarly, the SMSF auditor must become more highly trained and more vigilant.
  • The sophistication of IT & AI systems opens the door for greater defalcation, misfeasance and error.
  • The industry and the Government must become cognisant of these facts and understand that the downward pressure on costs arising from this sophisticated technology will reach a point of price kick-back.
  • Those working as administrators and auditors will need to be more highly rewarded in order to counter these threats.

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