Auditor

Auditors will require more information on non-standard investments in future

Auditors require more information on investments as concerns about non-arm’s length income intensify following recent litigation cases.

Audit cases prompt fears with new NALI (non-arms’s length income) measures, SMSFAdviser by Miranda Brownlee 12th November 2018

Concerns about the new provisions for non-arm’s length income have intensified following the outcome of recent litigation cases, particularly in the SMSF auditor community, says an industry lawyer.

Speaking to SMSF Adviser, Argyle Lawyers managing principal Peter Bobbin said it is still unclear how the new non-arm’s length expense provisions will operate and recent litigation cases involving SMSF auditors have added further concern, because they have shown that where auditors don’t identify the problems, they will be found liable.

The Cam & Bear Pty Ltd v McGoldrick case was a decision by the NSW Court of Appeal, which ruled that the auditor was negligent in failing to make proper enquiries as to the recoverability of certain investments held in the fund and report back to the trustee.

There has also been a second case more recently, Ryan Wealth Holdings Pty Ltd v Baumgartner, which similarly found that the auditor’s failure to detect irregularities in the fund over a number of years and this meant that the SMSF trustee was unable to redeem money lost on a series of unsecured loans.

“What the Cam & Bear decision tells us is that it’s an issue for every style of investment. Any private investment is a problem, whether it’s a private loan, private mortgage, private company shares, they’re all problems for auditors,” said Mr Bobbin.

“Whereas before, the problem was limited to does the investment exist and does the carrying value appear reasonable, but now they’ve got to make deeper enquiries with personal professional risk as a threat.”

What is unclear with the new provisions for non-arm’s length expenses, he explained, is what expense will convert the whole investment into a non-arm’s length problem.

“The explanatory memorandum says that if an accountant does the books of the super fund for free that’s okay, but what if the accountant does the books for the unit trust for free? Is that okay, or is that a problem? What about the super fund member who mows the rental property lawn? Is that a problem? Does the business owner, with an LRBA trust have a problem?” he said.

“Again, where do the auditor’s responsibilities start and stop?”

Auditors have expressed a fair bit of concern about the Cam & Bear case, he said, and determining what will sufficiently reduce risk for the auditor is difficult because each case is dependent on specific facts.

“What it might do is kill the cheap audit. Auditors will need to extend their investigations and that’s time consuming. That is a big issue and a lot of people are talking about that,” he said.

“It is quite worrying for auditors and I think audits for the 2018 year are going to be quite problematic.”

SMSF Alliance practice principal David Busoli also agrees that these two recent court decisions may “herald a rise in SMSF audit fees”. In both cases, Mr Busoli said the trustees willingly entered into investments in private arrangements that they did not understand.

“The auditors were presented with accounts that did not adequately describe them. Because the auditors did not make sufficient enquiries as to the nature of these investments, and so did not qualify the accounts, they were held to be primarily liable for the losses incurred,” he said.

“No doubt auditors will require more information on non-standard investments in future and their professional indemnity insurers will be considering these developments with interest. We can also expect to see a significant increase in qualified audits.”

By |February 7th, 2019|Auditor, Self Managed Super Fund News|Comments Off on Auditors will require more information on non-standard investments in future

Quality controls flagged for auditors as regulator clamps down

Quality controls flagged for auditors as regulator clamps down

SMSF auditors should consider new quality controls in 2019, given the regulator’s ongoing focus and recent court battles holding auditors liable for investment losses. – Accountantsdaily, SMSF Miranda Brownlee 17 January 2019

Speaking in a webinar, DBA Lawyers special counsel Bryce Figot said that recent court cases, such as Cam & Bear Pty Ltd v McGoldrick and Ryan Wealth Holdings Pty Ltd v Baumgartner, have prompted SMSF audit firms to consider how to bolster their internal quality controls and protect their business from litigation risk.

Asking the right questions

One of the key questions that SMSF auditors should be asking when they take on clients is whether there are any loans in the SMSF, and whether there are any investments in entities associated with the accountant or financial adviser who looks after the member, Mr Figot said.

The presence of loans or these types of assets can be an indicator that there are higher risks for that particular SMSF.

If there are indicators that point to high investments, then the SMSF auditor may want to contact the trustee or directors of the SMSF and alert them to the risks of the investment and flag that it may not be fully recoverable, Mr Figot explained.

The auditor should keep following up with the trustees or directors of the SMSF, he said, until they receive confirmation from all the trustees if there are individual trustees, or at least two directors where it is a corporate trustee.

The engagement letter

Best practice is to ensure that the client for whom the audit is being conducted signs the audit engagement letter, Mr Figot said.

“It doesn’t always happen that way, however. In the Ryan Wealth Holdings v Baumgartner case, the engagement letter hadn’t been signed by the trustee,” he noted.

“The letter of engagement had a formal closing of ‘Yours Faithfully, Baumgartner Partners’ and provided a space for signature above the typed words ‘David Baumgartner’ and the letter was signed by Christopher Moylan, a financial adviser and accountant to the plaintiff.”

Still an agreement
It was still considered to be an agreement that was entered into, though, with the auditor retained to perform duties under the audit contract, he explained.

In order to address situations where the letter is unsigned, he recommended that audit firms address this by having a clause in the letter that states ‘you may accept this offer by continuing to give us instructions in this matter’.

“I would say you are the client, attached is the terms governing our engagement, if you want to bill someone else, get them to sign it and return it, but until they do it, you are client,” Mr Figot explained.

“Best practice is, of course, to get it signed, but this gives you a leg to stand on. So, I think you should have that line in your engagement letter.”

Mr Figot acknowledged that while there is a lot of case law that suggests a clause like this would be adequate in the context of a lawyer providing services, there isn’t really any case law which sheds light on whether it would stand up in court for auditors.

Scope
SMSF auditors should also be aware that accountants in their engagement letter will often make it clear that the scope of their retainer is merely to act as a supplier of information.

This means that the auditor may be found liable for the accuracy of financial statements.

“This is essentially how the accountant in Cam & Bear got off scot-free, whereas the auditor was found to be 90 per cent liable,” he cautioned.

Contact Trustees
The auditor should also make it clear that they may contact the trustees and directors directly and any additional fees or hourly rates that may apply if they do contact the trustees or directors and the correspondence exceeds a certain time limit.

One of the other items that should be explained, he said, is that if the auditor decides to engage another professional such as a lawyer or an actuary, whether they will provide that advice to the client or keep that advice confidential.

“You may want to have that eventuality covered off in your engagement letter,” he said.

Auditors may also want to make it clear that if the client decides to terminate their engagement, that the auditor may still feel obligated to lodge an audit contravention report and charge for their time.

By |January 29th, 2019|Auditor, retirement, Self Managed Super Fund News|Comments Off on Quality controls flagged for auditors as regulator clamps down

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