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Super News - Consequences of the Baumgartner and McGoldrick cases for the SMSF auditor & SMSF trustees

26 April 2019

Hardeep Athwal, Manager, Superannuation |
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In the realm of superannuation, case law has a significant influence on how advisers and investors operate. Last year, the outcomes of two court cases involving Self-Managed Superannuation Fund (SMSF) auditors were determined and has led many auditors to refocus their audit processes.

The vast majority SMSF auditors have always conducted SMSF audits in accordance with Australian Auditing Standards and their approach to SMSF audits is unlikely to change. However, it is expected that those who don’t follow such standards will either change or augment their audit procedures as a result of these cases.

Importantly, it should be noted that these case outcomes also present long term consequences for SMSF advisers and trustees, serving as a reminder of responsibilities regarding the operation and maintenance of an SMSF and SMSF records.

The cases

The two cases in point are Cam & Bear Pty Ltd v McGoldrick NSWCA [110] and Ryan Wealth Holdings Pty Ltd v Baumgartner NSWSC [1502]. Both highlighted the obligation of the SMSF auditors to verify that assets are held at market value in the financial statements of the SMSF at each year end. The cases also conveyed an important message to trustees: “That the responsibility of assessing market value ultimately lies in their hands”.

So what are the key learnings?

1. High risk investments can make valuations challenging

Assets such as unsecured loans, related party arrangements and unlisted assets, are often difficult to value. For this reason they typically fall into the high-risk category, requiring an auditor to obtain sufficient and appropriate audit evidence as to the market value of the private investments or recoverability of private loans.

This is necessary not because the auditor disbelieves the SMSF trustee’s assertions or representations, but because there is an inability to be able to independently obtain evidence to support those assertions or representations. This can lead to qualified audit reports and potentially an Auditor Contravention Report being lodged with the Australian Taxation Office (ATO).

Under Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994, these valuation duties are clearly stated. Assets must be valued at market value and the auditor must obtain sufficient evidence from the trustees to verify the value of an investment. In principle, the outcomes of the Baumgartner and McGoldrick cases will require both SMSF advisers and their trustee clients to be far more aware of the value of investments and the importance of regularly checking the financial health of these investments.

It is important that SMSF trustees can also adequately demonstrate how they arrived at market valuation for private investments, including the provision of information to the auditor about this. They need to demonstrate adequate consideration of what value the investment would realise on sale, as well as how they arrived at that value.

As the ATO had said, “If the auditor is unable to obtain sufficient verification that material assets are valued at market value, they should qualify the financial and compliance report sections of their SMSF independent auditor’s report stating they have been unable to obtain sufficient appropriate audit evidence to verify the asset values.”

If trustees are unsure about valuation they should obtain advice from their auditor or SMSF adviser for guidance on the type of information that will be requested.

2. An Investment Strategy can guide the way

A SMSF must have an Investment Strategy that the fund’s trustees regularly review and monitor investment performance against. This strategy is more than just a compliance obligation of trustees, if used correctly it will help trustees accumulate assets for their retirement.

The SMSF auditor’s obligation with regard to the Investment Strategy of an SMSF is to check compliance with Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994. This requires that the SMSF trustee:

  • Has an Investment Strategy (that the Investment Strategy exists and has been documented)
  • Ensures the Investment Strategy considers risk, return, diversification and liquidity
  • Ensures the Investment Strategy is reviewed regularly
  • Ensures the Investment Strategy considers personal insurances of members
  • Has invested the SMSFs assets in accordance with the Investment Strategy.

Many auditors have questioned whether it is their obligation, or even within their ability, to adequately comment on whether or not an SMSF’s Investment Strategy meets the needs of its members. The judgment in Ryan Wealth Pty Ltd v Baumgartner NSWSC [1502] will likely lead to auditors in some part disclaiming their audit opinion, either in the audit report or in their report to the trustees, with regard to the Investment Strategy.

It is important that SMSF trustees regularly review their Investment Strategy to ensure it is appropriate for members and in line with all legislative requirements.

3. Communicating with the auditor is imperative

A key criticism arising from both cases was the lack of direct communication between SMSF trustees and the auditor. Most auditors will liaise with trustees via the SMSF accountant or administrator, to obtain information and provide their final reports. This is usually done as a matter of expediency and to ensure the accountant or administrators relationship with their client is maintained. However, the auditor’s engagement is with the SMSF trustee. Many auditors will now require direct access to SMSF trustees, both to make appropriate enquiries and to present their final reports to the trustee, so they can ensure the SMSF trustee is aware of the audit outcome.

In both of these cases, the SMSFs invested in high risks assets without the trustees being fully aware of the potential consequences. While the auditors have a legal obligation to the trustee, it is important for trustees to be aware of the risks involved when investing with their SMSFs. The future will see the need for advisers and trustees to provide more thorough and comprehensive information in order to satisfy the auditor’s enquiries.
If you need help with your superannuation or financial planning get in touch with your local BDO Superannuation expert.

Disclaimer

Before making any investment or financial decisions you should consider, with or without the assistance of a professional adviser, your particular objectives, and financial circumstance or needs.

The information contained in this article is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. 

Further, the above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult your BDO advisor who will be able to assist you in their capacity as Australian Financial Services licensee.