Auditor hit with damages following breach of obligation

Self-managed superannuation fund (SMSF) trustees can now sue their SMSF auditors should they experience loss from the latter failing to meet their obligations, thanks to a decision from the New South Wales Court of Appeal.

Overturning the trial judge’s decision, the Court found that an auditor can be held liable to pay damages for losses incurred to trustees for failing to meet their obligation to protect the fund and its trustee against financial risk.

In the matter in question, Cam & Bear Pty Ltd v McGoldrick, the respondent was an accountant hired to audit the SMSF of which Lance Bear and Jennifer Campbell, a couple, were trustees. The fund’s investments were managed by a finance business owned by a friend of Bear’s, a Mr Lewis, who also owned the company that did the fund’s accounts.

Lewis’ management company was using the SMSF’s funds for unsecured loans, the money for which Bear and Campbell presumed was held in cash as the accounts described those assets as “cash – LSL Holdings”.

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When auditing, McGoldrick queried the description of the cash entries to Lewis, but accepted Lewis’ response that the trustees were happy with that investment at face value and did not bring the issue to either Bear or Campbell’s attention.

McGoldrick only dealt with Lewis. He did not deal directly with Bear or Campbell nor did he ensure that the audited accounts were provided to him.

The Court of Appeal found that Bear would not have continued making contributions that fell under the description “cash – LSL Holdings” but for the failure to tell him that the loans may not be recoverable.

Furthermore, McGoldrick was an experienced auditor engaged to protect the fund and trustee against financial risk. As such, the Court said he ought to 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.

According to Peter Townsend, principal at Townsends Business and Corporate Lawyers, auditors should learn the following from this case:

1. auditors have a duty to protect the fund from financial risk;
2. auditors need to advise the trustee about the recoverability of the investments;
3. trustees bear the ultimate responsibility for the fund but are entitled to rely on the appointed auditor to do the audit job properly; and
4. wrapping all the fund’s assets with the same corporate group which handles the investment, the accounting and (indirectly) the audit is a bad idea and trustees should ensure the auditor is independent of the people managing the fund’s finances.