The Running Shoe and The Importance of a quality SMSF Auditor

It was late February 2021 and almost 12 months into a rotten thing called Covid, when news broke of a grizzly find on the beautiful South Coast of NSW. A group of people discovered a running shoe containing human remains while walking along the shores of Bournda Beach, near Tathra.

Like many, I was in utter disbelief when I learned that the shoe and its contents, had travelled some 450 kms from its residence of Dover Heights, Sydney. In short succession, Police used the human foot to make a DNA match to the Sydney businesswoman, Melissa Caddick.

It was reported that Caddick vanished in November 2020, a day after ASIC and Police raided her Wallangra Road home on suspicion that she had misappropriated some $20 - $30 million dollars from clients in a Ponzi scheme that ran from 2012.

On 27 October 2023, the renowned journalist Kate McClymont, published an article titled “Melissa Caddick’s victims launch class action against super fund auditors”. This followed the lawsuit filed by a Melbourne Law Firm (“Mackay Chapman”) for 24 impacted investors who allege multiple SMSF auditors were negligent, engaged in misleading conduct and breached the Corporations Act.

Over the years 2012 to 2020, it appears that Melissa Caddick falsely presented herself as a licenced financial advisor and fraudulently produced CommSec documents to paint a picture of financial health for investors, including self-managed super funds (“SMSFs”).

It is no secret the law requires an SMSF to have an annual audit to confirm the validity and accuracy of financial reports, as well as its compliance with the Superannuation Industry (Supervision) Act 1993 & Regulations (“SIS”). Not only is “an audit required,” but it must be independent. Unarguably a quality audit is a financial health check for the SMSF and protection for the weakest members of any SMSF.

The lawsuit alleges the SMSF auditors engaged to review the annual financial reports for the SMSFs, failed to identify fraudulent documents prepared by Caddick, and that they failed to confirm the shares held (in the SMSFs) actually existed (quote – Kate McClymont, 27 October 2023).

With the rise of AI, smart technology, and plenty of willing virtual players?“ready to create” fraudulent documents with astonishing authenticity,?it is no wonder we are facing a world of?increased risk?regardless of how conservative an SMSF’s investments may appear to be.

One only needs to think of examples, like the Centra Tech case (as documented in?“Bitconned” by Brian Storkel, Netflix). To quote a principal participant (Ray Trapani):

“We didn’t know anything about this &%$# business. But it didn’t matter at all … We lied, we cheated, we made millions of dollars.”

I am not without empathy?for the position of the auditors now entangled in the class action.

As raised by Shelly Banton, in Todd Will’s article of 20 December 2023 (“Caddick Case Not Just a Lesson for Auditors”), there were opportunities to identify potential compliance issues before reaching the audit stage.

For example, why didn’t investors?check her AFSL number??Was there even a ready means (between 2012 and 2020) for investors to?check Caddick’s AFSL number?

There is also the possibility of Superannuation Auditor Number (SAN) misuse. Which means the professional auditor registration numbers of auditor have been illegally used on Superannuation Annual Returns to record Part A and Part B Unqualified – without the knowledge of the auditor.

We must not rush to judgement about the auditors and let the case run its natural course.

Any SMSF auditor knows there are fundamentals that underpin every audit. These include EXISTENCE, VALUATION, COMPLETENESS, MARKET VALUE and RECOVERABILITY. The auditor has an obligation to maintain evidence of procedures performed and how they arrived at their ‘Clean Bill of Heath Opinion.’

For example, performing HIN searches on share investments can have quickly identify whether investments are really owned by the fund or not.

The last few years has seen big increases in the cost of living, so it is no wonder firms and clients are trying to trim costs in every area – including the cost of an SMSF audit.?This is an extremely dangerous practice.

The need to carefully choose a quality auditor is essential and should be seen?a value add and compliment to the brand of the Accountant, Administrator and Financial Planner.

Too often the SMSF audit is regarded as an inconvenience or a commodity to be carved up like sponge cake. But in reality, we are talking about real people and their retirement savings. In other words “their retirement dreams” – which is very personal to them.

The whole Caddick affair has reminded me of the importance of choosing a quality SMSF Auditor.?

Here are some important reasons:

1. Compliance with Regulations: A quality auditor will ensure the SMSF works towards compliance with SISA, reducing the risk of penalties and legal issues.
2. Risk Mitigation: A thorough SMSF audit helps identify any potential risks or non-compliance issues, protecting the fund's assets.
3. Trustee Confidence: Engaging a reputable auditor enhances the confidence of the fund's trustees and members in the SMSF's operations, reducing the potential for Trustee conflict.
4. Financial Accuracy: Is essential for making informed decisions about the fund's investments and financial strategies.
5. Independence and Objectivity: A quality SMSF auditor provides an unbiased evaluation of the fund's financial statements and operations.
6. Professional Expertise: Reputable SMSF auditors possess the necessary expertise and knowledge of superannuation laws and auditing standards.
7. Audit Quality and Assurance: A high-quality SMSF auditor follows rigorous audit procedures, providing assurance that the financial statements are free from material misstatements.
8. Timely Reporting: Timely reporting allows the fund to meet regulatory deadlines and that any issues are addressed promptly.
9. Educational Support: A good auditor may provide educational support to trustees, helping them understand their Duties and Responsibilities and stay informed about changes in superannuation laws and regulations.
10. Protection of Members' Interests: A quality SMSF auditor plays a crucial role in protecting the interests of the fund's members, especially the weakest.

When choosing an SMSF auditor, it is important to consider their qualifications, experience, reputation, and adherence to professional standards. Engaging a quality auditor is an investment in the overall health, compliance of the SMSF and brand protection of the Accountant, Administrator and Financial Planner.