Can you sue your SMSF auditor if things don’t go to plan?


Peter Townsend

The NSW Court of Appeal has overturned the decision of the trial judge and held that an SMSF auditor was liable to pay damages for losses incurred by the SMSF.

The case of Cam & Bear Pty Ltd v McGoldrick 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.

The Cam & Bear fund and its corporate trustee were established for Dr Lance Bear and his wife, Ms Jennifer Campbell, who were directors of the trustee of the fund.
Mr McGoldrick was an accountant who audited the accounts of the fund, including for the financial years ended 30 June 2003 to 2007.

The Fund’s investments were managed by a finance business owned by a Mr Lewis, a close friend of Dr Bear. Contributions to the fund were managed by a company run by Lewis while another of Lewis’ companies did the accounts.

Dr Bear and his wife were not aware that Lewis’ management company was using the funds for unsecured loans. They thought the money was held in cash because the accounts described those assets as ‘cash – LSL Holdings’.

The auditor dealt solely with Lewis. He did not deal with Dr Bear or Ms Campbell, or ensure that the audited accounts were provided to them. He had been engaged by Lewis and his companies.

During his audits McGoldrick queried the description of the cash entries but Mr Lewis told him the SMSF trustee was happy with the description and McGoldrick accepted that assurance at face value without bringing it to the client’s attention.

Eventually Mr Lewis’ companies went into liquidation and Cam & Bear lost its money.

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.

The judge found that while Mr McGoldrick had been negligent and engaged in misleading and deceptive conduct, these defaults had not caused any loss to the appellant.

Even if the ‘cash’ had been correctly stated in the accounts, it would have made no difference to Dr Bear in terms of the future investments that were made because of the level of trust reposed by him in Lewis (together with his conceded lack of understanding as to the difference between the description ‘cash – LSL Holdings’ versus ‘loans – LSL Holdings’.

That level of trust meant that the description in the financial statements was not the cause of, nor a contributing factor to, the losses incurred. Rather, the losses were caused by the inappropriate level of trust in Lewis, which trust was misplaced and/or abused.

On appeal the three judges of the NSW Court of Appeal thought differently.

They said that the failure to tell Dr Bear that the loans might not be recoverable caused Dr Bear to continue to make contributions, which would not have been made otherwise.
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.
The lessons here are:
auditors have a duty to protect the fund from financial risk;
auditors need to advise the trustee about the recoverability of the investments;

  • trustees bear the ultimate responsibility for the fund but are entitled to rely on the appointed auditor to do the audit job properly;
  • 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 funds finances.

By Peter Townsend, Principal

You must be logged in to post or view comments.