On 23 May 2018, the New South Wales Court of Appeal (COA) gave its judgement in the case of Cam & Bear Pty Ltd v McGoldrick  NSWCA 110. The Court overturned the decision at first instance and found that an auditor's breach of duty had caused loss to the members of a self-managed superfund (SMSF). The key issues considered by the Court were:
A 'busy' medical practitioner, Dr Bear, and his wife Ms Campbell ran their own SMSF (Fund) from 1985. They relied extensively on their accountant and friend Mr Lewis (Accountant) for advice on the management of the Fund. Dr Bear and Ms Campbell were both directors of the Fund's corporate trustee, Cam & Bear Pty Ltd (Trustee).
The Accountant arranged for Mr McGoldrick (Auditor) to audit the Fund's accounts from 1 July 2002 to 30 June 2007. The Accountant also arranged for the Fund's cash and investments to be managed by two entities with which he was associated:
The evidence suggested that Dr Bear trusted the Accountant implicitly. He should not have.
The above listed companies did not simply hold Dr Bear's investment in cash at bank or invest it in listed equites. Instead, when Dr Bear deposited cash into the Fund's bank account (which was managed by LSL), LSL on-lent a majority of that money to a further entity associated with the Accountant, LSL Holdings Pty Ltd (Holdings). The Fund's financial statements said that amounts paid by LSL to Holdings were held by Holdings as 'Cash – LSL Holdings P/L'.
On 22 September 2008, Dr Bear asked that his cash be paid from the Fund to him. The Accountant tried to talk him out of this (alarm bells!). Before any such payment was made LSL and Holdings went into voluntary administration, and the house of cards fell down.
Because of the descriptions in the Auditor's reports and the Fund's financial statements, Dr Bear understood that the Fund's cash was held by Holdings. It wasn't – it was money lent to Holdings that should have been described as a loan in the Fund's financial statements. The Trustee sued the Auditor for signing off on the Fund's accounts.
At first instance, Rothman J found that the Auditor engaged in negligent and misleading and deceptive conduct by signing off on the Fund's accounts. The Auditor owed the Trustee a duty of care to appropriately 'qualify' the financial statements of the Fund and ensure that the financial reports he audited were a fair description of the actual circumstances. His Honour found that the Auditor breached this duty as he failed to qualify his report, and failed to make proper enquiries of the financial condition of Holdings which would have caused him to have doubts and concerns about the recoverability of the Fund's investment.
However, Rothman J dismissed the Trustee’s claim on the basis that the Auditor's conduct did not cause any loss. His Honour, in considering Dr Bear's evidence, was satisfied that as Dr Bear had a strong reliance on the Accountant, and a lack of understanding of the Fund's financial statements, the Trustee would not have acted any differently if the Auditor had not breached his duties to the Fund.
The Trustee appealed the first instance decision, particularly in respect of the quantification of the Trustee's loss, which the COA unanimously allowed. On the basis of the Auditor's duty, the COA found that had the audited report been qualified, Dr Bear would have withdrawn the Fund's investments. Because of the Auditor's actions, the Fund made payments it otherwise would not have made.
The COA did however reduce the portion of the Auditor's liability for damages by 10% on the basis of a finding of contributory negligence. The COA found Dr Bear and Ms Campbell to be unsophisticated and inexperienced investors who should have protected their own investment to a certain degree.
What is an auditor's duty?
As a result of this decision, the Court has identified an auditor's duty, in the context of an SMSF, to include ensuring that a fund's accounts are correctly described in the financial reports, and that the accounts are appropriately qualified where needed. Auditors need to be aware that they are often dealing with unsophisticated investors who will be relying heavily on the auditor to determine the suitability of their investments.
Should unsophisticated investors, running an SMSF, be the responsibility of the auditor?
The COA suggested that the Auditor should be responsible to the tune of 90% for the Fund's loss. It is not clear how the Accountant escaped sanction having regard to the fact he recommended the investment and prepared the financial statements that were presented to the Auditor. In any event, it seems to us that Dr Bear and Ms Campbell should have shouldered a larger part of the blame. Under section 52A(2)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) Act they had a duty to exercise a high degree of care, skill and diligence in their role as directors of the Trustee. They clearly fell short of that mark.
How might such an approach to auditor liability impact the industry?
The Accountant prepared the Fund's financial statements and provided them to the Auditor for audit. The Auditor charged $350 per audit. For this audit fee, the Auditor was held 90% responsible for the Fund's loss despite the actions of the Accountant, and the failure of Dr Bear and Ms Campbell to meet their own duties. One cannot see how decisions like this will result in anything other than increasing SMSF compliance costs.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to the Commercial team.
Qualifications: LLB, Deakin University
Stephen is a member of Maddocks Commercial team. He is a corporate and commercial lawyer, who assists clients across a diverse range of industries including financial services, consumer markets and manufacturing in a wide variety of legal matters.
His experience includes:
He focusses on drafting, advising on and negotiating contracts, transactions and agreements for clients and also assists with providing general corporate advice.
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