A recent case in New South Wales shows the high standard of service expected from service providers. This further shows how important it is to carefully select an accountant professional indemnity insurance expert, for example, to protect one’s assets.
In the case of Cam & Bear Pty Ltd versus McGoldrick this year, the Court of Appeal discovered that the auditor failed to provide warnings regarding the recoverability of his client’s assets. Failure to do so is estimated to have been responsible for 90% of the loss of the self-managed superannuation fund (SMSF).The SMSF was set up for Dr. Bear and his wife, and was managed by their friend Anthony Lewis under his own company Lewis Securities.
The Need for Enquiries
The financial accounts from 2003 to 2007 were not qualified by the SMSF auditor McGoldrick. However, the financial statements contained “cash” in its entries, which turned out to be unsecured loans to LSL Holdings, which is another company controlled by Lewis. The auditor, however, neither looked into these entries nor advised Dr. Bear and his wife that there is a chance that they would not be able to recover involved in the said entries.
The Supreme Court believes that the auditor should have conducted enquiries to understand the financial standing of LSL Holdings especially because it had significant deficiencies in its assets. It would have been a red flag that would cause him to advise the appellants that the entries are problematic and must be dealt with accordingly.
According to experts, professional scepticism is necessary in these cases. Before an auditor could advice his client, he needs to back his opinion with enough evidence. Assessing the evidence needs professional scepticism, and this includes scrutinising the evidence’s credibility and whether it was obtained from a reliable source.
According to an accountant professional indemnity insurance may be claimed as it was deemed that the auditor was negligent of his role in the case.
Senior policy adviser Michael Davidson adds that a certain level of proof is necessary for best auditing practice standards, and auditors have to be comfortable with what is presented as true and correct. Otherwise, further enquiry is needed until its legitimacy is established.