SMSF – auditors and accountants liable for losses

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Written by Special Counsel Leigh Adams


It is easy for a self-managed superannuation fund member (SMSF member) to simply shrug their shoulders if their SMSF investments go belly-up. It can leave the members feeling “comme ci, comme ça ”.  But that is not necessarily the end of the matter.


Two recent cases have highlighted how a SMSF trustee has succeeded in suing its auditor or accountant for breach of their duties to the fund.


Cam & Bear – what the Court said


The first is the “Cam & Bear” Case [2018]  NSWCA 110. Cam & Bear Pty Ltd was the trustee of the SMSF   and the members were Dr Bear (a medical practitioner) and his wife.


In that case, the auditor (Mr McGoldrick) failed to qualify his audit reports by making reference to the fact that the assets described in the fund’s financial statements were at risk.


It was held that a competent auditor is required to make appropriate enquiries and undertake adequate procedures to ascertain the nature, existence and valuation of the items described as cash in the financial statements of the SMSF.


Mr McGoldrick did not do so. Had he done so, it would have alerted the trustee and the SMSF members to the risk associated with the so-called “cash” investment of the SMSF.


It was also held that Mr McGoldrick breached his duty by stating that the financial statements “presented fairly the financial position of the fund and the results of its operations and its cash flows” when they clearly did not.


What happened?


The SMSF’s problems began in about 2005 when the SMSF trustee began advancing money to a company (LS Holdings Pty Ltd) on the recommendation of a close friend of Dr Bear, Mr Lewis.


From conversations that Dr Bear had with Mr Lewis, Dr Bear understood that the fund’s advances would consist of “cash”. Dr Bear did not understand that  the advance was in fact a loan, and an unsecured one at that.


The court accepted that Dr Bear was a busy medical practitioner and not a sophisticated nor an experienced investor.


Dr Bear would scan the audit reports from year to year and at no time did he notice any special warning about the fund or any note that caused him concern.


Each year Mr McGoldrick signed and certified the audit reports without qualification.


In late 2008, Dr Bear told Mr Lewis that he wished to withdraw cash from the fund. The cash was never provided.


Dr Bear asserted that if the audit reports had made him aware that the cash reported in the financial statements either was not held in cash or was in the form of an unsecured loan that may not be able to be repaid then he would have taken immediate steps to get the money back


Court findings


The evidence established that if Mr McGoldrick had examined the financial statements of LS Holdings Pty Limited,  he would have discovered a growing deficiency in its assets from year to year which would have created sufficient concern and doubt in the mind of the auditor as to the recoverability of the balances before 2008.


The court found that Mr McGoldrick had breached his duty of care in not qualifying the audit certificates or providing a note as to the possibility that the cash would be unrealisable.


The court held that Mr McGoldrick’s breaches of duties included failure to qualify his audit report and failure to communicate to the trustee of the fund that there was uncertainty as to the recoverability of the amounts described as cash in the financial statements.


Contributory negligence


It was held that a more experienced and astute investor would have been concerned to know whether LS Holdings Pty Limited held the cash in a trust account and whether that company was in any event a safe repository of the funds. Dr Bear’s thinking was not at this level of sophistication, no doubt at least partly because he had great confidence in Mr Lewis. Nevertheless, the court concluded that Dr Bear also lacked the experience and expertise to grapple with the concepts involved. In the end, the Court held that even a person with Dr Bear’s lack of financial sophistication should reasonably have considered the prudence of supplying significant amounts of money to Mr Lewis’s company.


Taking these matters into account, the court considered that the responsibility of the loss should be apportioned 10% to Cam & Bear Pty Ltd (the SMSF trustee) and 90% to Mr McGoldrick.


Ryan Wealth Holdings Case


A second case was that of Ryan Wealth Holdings [2018] NSWSC 1502 where the sole director of the self-managed super fund (Ms Crittle) alleged that the auditor, Mr Baumgartner, had failed to detect irregularities in the accounts for many years and when they were ultimately discovered the opportunity to redeem money arising from a series of failed investments had been lost.


Over $7 million had been invested on the advice of a financial adviser, Mr Moylan, over a six year period from 2006.


In circumstances similar to the Cam & Bear Case above, Ms Crittle  entered into a series of investments by way of unsecured loans pursuant to a series of facility agreements.


By 2014 a number of persons and entities associated with the investments were placed into bankruptcy liquidation and Ms Crittle became aware of the potential inability to recover the monies lent from correspondence sent to her by another investor.


She engaged a forensic accountant, Ms Phillips, to assist her to discover what  had taken place. Ms Phillips unearthed the parties and the circumstances surrounding the loans and then the SMSF commenced legal proceedings to recover the loans and investments against the borrowers and guarantors that were still solvent and recovered about $3 million.


Proceedings against the SMSF Accountant and Auditor


The court held that the accountant of the SMSF – Moylan Business Solutions Pty Ltd (MBS) – owed the SMSF a duty to exercise reasonable care and skill in preparing the financial accounts.


But it also said that the auditors had had a significant ability to prevent loss because of a number of factors. The court noted that the auditor had recognised that the loans that had been made to the entities associated with  Mr Moylan were hazardous and speculative.


The auditor was also aware that the only source of income for Ms Crittle was her pension from the super fund.  


The Court also concluded that in undertaking the various annual audits, the auditor had never obtained enough material in any financial year to support the auditor’s unqualified statements that the SMSF’s financial reports were fairly presented in all material respects.


Further, the Court said that the material that the auditor had looked at in each financial year was not sufficient to enable to auditor to form an express and unqualified opinion that the financial statements complied with the Superannuation Industry (Supervision)  Act 1993 and its associated Regulations.

Importantly, the Court concluded that if the recovery action had been commenced in 2008 (and not later in 2014) there was a real prospect (not merely a speculative prospect) that the SMSF trustee would have fully recovered the advances.


The court ordered damages against the auditors in the sum of over $2 million plus interest and apportioned 10% liability  to the trustee (for contributory negligence) and 90% to the auditor with the accountants being ordered to pay 20% of that 90%.

What can you do?


See our Leigh Adams. He is our go-to person for claims against defaulting accountants and super fund auditors. Call him on 1800 770 780.

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