The NSW Court of Appeal recently overturned the decision of the trial judge, holding the SMSF auditor in Cam & Bear v McGoldrick accountable.
“The case … highlights the obligation of the fund’s auditor to protect the fund and its trustee against financial risks – an obligation that the auditor can be held liable for failing to meet,” Townsends Business Lawyers principal Peter Townsend said.
The Cam & Bear fund was established for Dr Lance Bear and his wife Jennifer Campbell, who were directors of the corporate trustee of the fund, with the fund’s investments managed by Anthony Lewis, a close friend of Mr Bear and a finance business owner. Mr Lewis also managed contributions to the fund.
The McGoldrick in question is John McGoldrick, the accountant who audited the fund.
Unbeknownst to Mr Bear and Ms Campbell, Mr Lewis’ company was using the funds for unsecured loans rather than cash as they’d believed. The accounts described those assets as “cash – LSL Holdings”.
However, the auditor dealt with Mr Lewis alone and did not provide audited accounts to Mr Bear or Ms Campbell. This became a problem when Mr Lewis told Mr McGoldrick that the SMSF trustee was happy with the holdings, and Mr McGoldrick accepted it at face value.
Mr Lewis’ firms went into liquidation, with Cam & Bear going with them.
“At the hearing Dr Bear argued he had suffered loss as a result of the failure by McGoldrick to represent the cash entry adequately thereby warning him that the investments may not be recoverable,” Mr Townsend explained.
However, the judge said Mr McGoldrick had not caused any loss, despite engaging in misleading conduct.
He said the issue was due to undue trust in Mr Lewis.
However, this was overturned by the three judges in the NSW Court of Appeal, who said the failure to tell Mr Bear that the loans might not be recoverable led him to continue making contributions, which he would not have otherwise made.
“McGoldrick was an experienced auditor engaged for the purpose of protecting the fund and its trustee against financial risks. He should have made proper enquiries as to the recoverability of the amounts held by LSL Holdings and reported the results of those enquiries to the trustee,” Mr Townsend said.
“The lessons here are auditors have a duty to protect the fund from financial risk [and] need to advise the trustee about the recoverability of the investments,” Mr Townsend said.
“Trustees bear the ultimate responsibility for the fund but are entitled to rely on the appointed auditor to do the audit job properly.”
Finally, he said putting all the fund’s assets with the same group for investment management, accounting and auditing management is a “bad idea”, and trustees should take care to check the auditor is independent.