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Limelight Articles

Limelight 06/18

Court of Appeal redefines broadly the auditor’s duty of care and causation in the context of SMSFs

Authors, Katherine Czoch , Sonja Schoenborn

Introduction

On 23 May 2018, the NSW Court of Appeal in Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 unanimously overturned the trial judge’s decision that the auditor’s breach of duty did not cause the loss claimed. The key issues to be determined were the scope of the auditor’s duty and whether a breach of that duty caused the loss claimed.

Background

Dr Bear was a director of the corporate trustee of a self-managed superannuation fund (Fund), of which he was also a beneficiary. In 1990, Dr Bear engaged his friend, Mr Lewis, to manage the Fund. Mr Lewis owned various companies in which the Fund invested. Dr Bear understood that the Fund held assets consisting of cash and shares. Importantly, Dr Bear thought that his monetary contributions were made in cash for investments in secured products.

The Fund’s annual tax returns were completed by Dr Bear’s accountant and audited by Mr McGoldrick. Dr Bear had never met Mr McGoldrick nor discussed the Fund’s accounts with him; Mr McGoldrick only ever dealt with Mr Lewis. Dr Bear’s position was that, at no point, did Mr Lewis tell him that he used Dr Bear’s contributions for unsecured loans.

Indeed, the Fund’s financial reports recorded Dr Bear’s contributions as ‘cash contributions’ when in fact they were ‘moneys used for unsecured loans’. In September 2008, Dr Bear sought to withdraw cash from the Fund to establish a new medical practice, but was prevented from doing so, as his contributions had been used for unsecured loans.

Shortly after, Mr Lewis’ companies went into voluntary administration. Dr Bear, via the corporate trustee company, sued Mr McGoldrick for breach of duty of care for negligently recording and authorising his contributions as “cash” when in fact they should have been recorded as “unsecured loans”.

First Instance

Justice Rothman found that Mr McGoldrick owed the corporate trustee a duty of care to qualify the financial statements of the Fund. Mr McGoldrick should have made proper enquiries of the financial condition of Mr Lewis’ investment company which held the monies in unsecured loans. His Honour went on to say that, had Mr McGoldrick made proper enquiries, he would have been alerted to the risks involved, requiring him to inform Dr Bear. Mr McGoldrick was held to have made false and misleading statements in relation to the Fund’s accounts in breach of his duty of care.

However, his Honour dismissed the claim on the basis that Mr McGoldrick’s breaches were not causative of the loss suffered by the corporate trustee, as Dr Bear’s evidence was that he/the corporate trustee would not have acted any differently had the account entries been called “loans” instead of “cash”.

The corporate trustee appealed.

Appeal

The Court of Appeal unanimously allowed the appeal. While they agreed with the trial judge that Dr Bear/the corporate trustee would not have behaved differently had they known of the unsecured loans, their Honours believed that further regard must be given to Mr McGoldrick’s duty to qualify his audit certificate and identify any potential risks of monetary contributions not being able to be withdrawn if needed. His Honours held that had the audit certificates been qualified, Dr Bear/ the corporate trustee would have withdrawn the investments. Their Honours were satisfied that Mr McGoldrick’s breaches caused Dr Bear to continue to make contributions to Mr Lewis’ companies, which would otherwise not have been made.

Ultimately, the Court of Appeal was satisfied that Mr McGoldrick was liable for and caused the majority of the Fund’s loss. Liability was reduced to 90% due to the contributory negligence of the corporate trustee.

Implications

Whilst the trustee and/or its manager are responsible for preparing the financial reports for its self-managed superannuation fund, the fund’s auditor owes a duty of care to ensure that accounts are correctly described in the financial reports. Auditors and their insurers ought to anticipate a fairly high standard of care of auditors providing services to SMSF trustees, particularly when such trustees lack financial sophistication. The additional difficulty for auditors is that there is a general expectation that audits of SMSFs be carried out for a low fee, thereby creating more potential for risk due to the possibility of less care being undertaken.

 

Date: 5 June 2018

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.