Caddick Case Reinforces Professional Standards

In a class action that will most likely never go to trial, the Caddick Case reinforces the importance of professional standards within the SMSF industry.

It is a timely reminder of how all the elements of trust, legal compliance, financial integrity, quality services, and risk management must work together to protect the interests of SMSF members.

Caddick v ASIC Case

Based on evidence submitted to the Court in NSD 1220/2020: ASIC v Melissa Louise Caddick & Anor (“the ASIC case”), Caddick used a bona fide CommSec account to fraudulently prepare year-end portfolio statements containing investments that did not exist in that account.

Other irregularities included inconsistent dates on the portfolio statement, such as the statement’s beginning and end date that covered a six-month period, while the portfolio statement was dated “2014-15 FY”.

Querying anomalies found in documents is standard audit practice, as is obtaining evidence for listed shares in a broker statement, which includes the HIN or SRN number and postcode, and searching the share registry websites to confirm the existence of the assets.

Other forms of audit evidence may include a dividend or distribution notice or CHESS holding statement within three months post-30 June.

SMSF Auditor Cases

Since the ASIC case, a new class action against five (5) SMSF auditors alleges they failed in their duties, were negligent, engaged in misleading or deceptive conduct, and breached their contract and the Corporations Act.

Unfortunately, it is not the first time that SMSF auditors have been in the firing line for failing to confirm the existence of assets held by an SMSF.

The Baumgartner and McGoldrick cases held both SMSF auditors liable for fund losses because they failed to identify irregularities during the audit and for engaging in misleading and deceptive conduct.

The difference in the Caddick case is that the investments were listed shares, not high-risk unlisted entities and loans, which are typically more complex and difficult to verify.

What is evident is that the Caddick Case must finally end the mindset that a quality SMSF audit is of limited benefit and a ‘grudge purchase’.

Low Audit Fees

APES 110 Code of Ethics (“The Code”) identifies that a low fee is a self-interest threat to the fundamental principles of the Code of Ethics. The reason is that a low fee might make it difficult to perform the audit in accordance with applicable technical and professional standards for that price.

While the audit fee paid by the SMSF trustees in the class action is unknown, the ATO has identified that the median fee for an SMSF audit in the 2021 financial year was $550, which has remained the same since the 2017 financial year.

The more interesting statistic is the distribution of SMSFs by audit fee range, which shows that 41.4% of funds had an audit fee range of $0 to $499 in the 2021 financial year, up from 37.6% in the 2017 FY.

The question remains whether the SMSF trustees in the class action would have paid a higher fee to have the audit undertaken in line with professional standards that safeguarded their retirement wealth.

Code of Ethics

Accountants, SMSF administrators and financial planners play a unique role in the administration of SMSFs by working closely with auditors and providing the necessary documents and information to facilitate the audit.

Where an SMSF professional is also a CAANZ, CPA or IPA member, they are subject to The Code, which requires them to have an inquiring mind, exercise professional judgement and use the reasonable and informed third-party test when applying the conceptual framework.

Under paragraph 120.5 of The Code, an inquiring mind involves considering the source, relevance and sufficiency of information obtained, whether there have been changes in facts and circumstances, whether there is reason to be concerned that information is missing and whether it provides a reasonable basis on which to reach a conclusion.

SMSF auditors must also meet ASA 200, which requires an “attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence”.

Interestingly, an AUASB bulletin dated August 2012 states that additional audit procedures are necessary to resolve matters where there is doubt about the reliability of information.

It further states that “the issue of difficulty, time or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative”.

Conclusion

The general rule of business is that a service can be cheap, fast, or good, but it cannot be all three simultaneously.

The Caddick case serves as a prime example of the crucial role that SMSF advisers and auditors must play in preventing and mitigating the risk of fraud in SMSFs.

It is essential to work with respected and trusted SMSF professionals who promote best practices, comply with the relevant laws and regulations, maintain clear and transparent communication, and promote accountability.

Reinforcing professional standards undoubtedly enables a positive outcome for clients’ financial, personal, and legal outcomes.

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