Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, discusses how another SMSF auditor was found liable for investment losses suffered by a Self-Managed Superannuation Fund. The decision in Ryan Wealth Holdings Pty Ltd v Baumgartner has some similarities to a recent case, Cam & Bear Pty Ltd v McGoldrick, she writes.
For the second time this year, a SMSF auditor has been found liable for investment losses suffered by a self-managed superannuation fund. The case of Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, handed down on 8 October 2018, is not light reading with a length of some 262 pages.
The Ryan Wealth decision has similarities in some respects to another case a few months ago, Cam & Bear Pty Ltd v McGoldrick. Parallels can be drawn from both cases as they involved unlisted investments and loans to entities related to or connected with the SMSFs accountant or advisor.
This case relates to the 2007, 2008 and 2009 years of audit.
In 2006 following a family law settlement, Ms Crittle had a sum of money to invest. She sought advice from a financial adviser Mr Moylan based on a referral from her lawyer Mr Hill. A SMSF was established and sums of more than $7 million were transferred. These were to be invested per Mr Moylan’s advice.
A series of investments were made by way of five unsecured loans and two unit trust investments. The unit trusts then made significant loans to the parties to the unsecured loans. The loans were to entities connected with Mr Moylan and Mr Hill and their associates which were involved in various land development ventures. A significant portion of the $7 million transferred was invested in these arrangements.
Mr Moylan also acted as the accountant and tax agent for the SMSF from 2006 through his company Moylan Business Solutions Pty Ltd (“MBS”). For the 2006 financial year he was also the SMSF auditor!
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Over the period of 2012-2014, a number of individuals and entities associated with the property ventures in which the SMSF was ‘invested’ were placed into bankruptcy or liquidation.
Professional indemnity insurances for both the financial advisory and accounting businesses lapsed in 2013. The advice company was deregistered and MBS was liquidated.
In 2013, after receiving a concerning letter from another investor of one of the unit trusts, Ms Crittle engaged a forensic accountant and a solicitor to investigate. When learning of the true position of these investments in 2014, proceedings were commenced against any remaining solvent borrowers or guarantors. She successfully reclaimed a portion of the SMSFs proceeds, totalling $3,277,785.
During proceedings it was argued that the SMSF financial accounts were poorly prepared in that they ascribed values to loans and investments which were, in fact, substantially worthless. Further, given Mr Moylan’s close relationship it was questioned whether there had been a concealment, fraud or dishonesty in the preparation of the SMSF accounts. That Mr Moylan had to be aware of the position of the loans given they were in default.
It was noted that the Court could only consider the material present in the auditors files which had been tendered in evidence. As such the Court held that the files in evidence provided no basis for a finding of dishonesty on the part of Mr Moylan.
The Court found that a failure to qualify the audit report, and thus a failure to bring the concerns or shortcomings regarding the loans to Ms Crittle’s attention for the years of audit, delayed any action she would have taken. Had action been taken earlier the Judge noted there was a greater probability of the loan proceeds being recovered.
The court determined that the plaintiff should be awarded damages from the defendants for a sum of $2,260,140 exclusive of any claim for interest from 31 August 2017.
“That amount is to be apportioned 10 per cent to the plaintiff and 90 per cent to the defendants for the contributory negligence of the plaintiff. Further, that amount is to be apportioned 20 per cent to MBS and 80 per cent to the defendants for the proportionate liability of MBS,”
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at tracey@superology.com.au