Gilliland and Australian Securities and Investments Commission - [2020] AATA 2660

Gilliland and Australian Securities and Investments Commission [2020] AATA 2660 (5 August 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2018/5931
Re:John William Gilliland
APPLICANT

AndAustralian Securities and Investments Commission
RESPONDENT

DECISION
Tribunal:Deputy President I R Hanger AM QC
Date:5 August 2020
Place:Brisbane

The Tribunal sets aside the reviewable decision and in substitution decides that the Applicant should not be disqualified as an auditor under s130F(2) of the Superannuation Industry (Supervision) Act 1993 (Cth).
..............................[SGD]...................................
Deputy President I R Hanger AM QC
CATCHWORDS
SUPERANNUATION – Self Managed Superannuation Fund – where applicant was disqualified from being an approved Self Managed Superannuation Fund auditor – whether applicant failed to perform adequately and properly an auditor’s duties – auditing of funds of family members – decision under review set aside.
LEGISLATION
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994 (Cth)
SECONDARY MATERIALS
Accounting Professional and Ethical Standards Board Limited APES 110 Code of Ethics for Professional Accountants
REASONS FOR DECISION
Deputy President I R Hanger AM QC
5 August 2020
INTRODUCTION

This is an application to review a decision of the respondent disqualifying the applicant from being an approved Self Managed Superannuation Fund (“SMSF”) auditor under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”).
Section 130F(2) of the SIS Act empowers the Respondent to order that an approved SMSF auditor be disqualified if the audit has failed to carry out or perform adequately the duties of an auditor under the SIS Act or is otherwise not a fit and proper person to be an approved SMSF auditor.
From about June 2013, until the decision of the respondent, the applicant was an approved SMSF auditor pursuant to section 128B of the SIS Act.[1] On 15 August 2018, a delegate of the respondent made an order disqualifying the applicant from being an approved SMSF auditor pursuant to section 130F(2) of the SIS Act.[2] On 5 September 2018, the applicant applied to review the decision[3] and on 20 September 2018 the respondent reaffirmed the disqualification.[4] On 15 October 2018, the applicant then applied to this Tribunal for a review of that decision.[5] This Tribunal may exercise all of the powers and discretions conferred on the respondent under the provisions of the SIS Act.
[1] Respondent’s Statement of Facts, Issues and Contentions, dated 11 March 2020, paragraph 1.1.
[2] T Documents, T3 p36.
[3] T Documents, T10 pp447-449; T11 p450.
[4] T Documents, T2 pp24 – 30.
[5] T Documents, T1 pp1-22.
The facts that gave rise to the disqualification are set out in the below paragraphs.
From 30 October 2012, the applicant, his wife and his daughter held the positions of both trustee and a member of the Fiscal Consultants Superannuation Fund (“FCSF”).[6]
[6] T Documents, T4 p122; T7 p269; T7 p313.
As at 30 June 2014, FCFS held:[7]
(a)on behalf of the applicant, member funds of approximately $2647.06;
(b)on behalf of the daughter, member funds of approximately $7399.62; and
(c)total member funds of approximately $10,046.68.
[7] T Documents, T7 p315.
As at 30 June 2015, FCSF held[8]:
(a)on behalf of the applicant, member funds of approximately $2331.20;
(b)on behalf of the applicant’s daughter, member funds of approximately $11,997.32; and
(c)total member funds of approximately $14,328.52.
[8] T Documents, T7 p315.
As at 30 June 2016, FCSF held[9]:
(a)on behalf of the applicant member funds of approximately $3309.82
(b)on behalf of the daughter member funds of approximately $14,721.92;
(c)total member funds of $18,031.74.
[9] Applicant’s Statement of Facts, Issues and Contentions, paragraph 10.
In his capacity as an approved SMSF auditor the applicant undertook audits for the fund for the 2013, 2014 and 2015 financial years.[10]
[10] T Documents, T4 p59, T7 p207.
In 2016 the applicant considered the mandated requirements of the Accounting Professional and Ethical Standards Board Limited APES 110 Code of Ethics for Professional Accountants (“APES 110”) as they relate to membership and administration of a fund and determined that he could no longer mitigate the threats to his independence and he resigned his appointment as auditor of the fund on 3 August 2016.[11]
[11] T Documents, T4 p59; T7 p207; Applicant’s Statement of Facts, Issues and Contentions, paragraph 11.
In the 2015 audit plan for the FCSF the applicant stated, among other things, that the applicant’s wife and daughter are trustees of the fund; that the members of the fund are the applicant his wife and daughter; that the wife as trustee was “actively involved in regular management of the fund”; and that the auditor, “is a member of the fund with a minimal balance and little influence over the investment strategy of the fund, considered to not be an impediment to the provision of a proper review. Trustee operates at arms-length from the conduct of the audit.”[12]
[12] T Documents, T7 p269.
In the 2015 audit checklist for FCSF, in responding to a requirement to confirm the independence of each audit team member, the applicant stated:[13]
J Gilliland is a member of the fund and a director and shareholder of the trustee company. The recording and stewardship of the fund is managed by Christine Gilliland. John Gilliland does not actively engage in the administration of the trustee company. The company exists solely to manage the affairs of the SMSF.
[13] T Documents, T7 p271.
In September 2017 the Australian Taxation Office (“ATO”) conducted an audit of the applicant’s activities as an approved SMSF auditor. In a letter to the ATO dated 18 November 2017[14] relating to his conduct in the FCSF, the applicant said that he had considered his familial relationship with his fellow trustees and the fact that he had a monetary investment in the fund and that could “create a threat” regarding the performance of his duties.[15] He “concluded that these threats were at an acceptable level and proceeded with the professional engagement. In doing so, I applied the obvious safeguard of requiring another trustee to administer the daily operation of the fund and stepping back from the provision of other accounting recording advice”.[16]
[14] T Documents, T4 p121.
[15] T Documents, T4 p129.
[16] Ibid.
He also stated, “In determining if the threats were reduced to an acceptable level in compliance with section 290 and 291 of the code, I applied the third-party test. This is a level at which a third party would be likely to conclude…that compliance with the fundamental principles of the code is not compromised. At the time, I regarded the safeguard of distancing myself from the administration of the fund reduced the threats to an acceptable level.”[17]
[17] T Documents, T4 pp129-130.
He concluded by stating, “Although I still hold the view that I have applied adequate safeguards in the mitigation of this threat to an acceptable level, ultimately, I must consider [The Australian Taxation Office’s] reservations. I concluded that to avoid the observation from the informed third party in respect of possible perceived conflict with the code that I must resign from the engagement and have done so to remove the threat”.[18]
[18] T Documents, T4 p130.
I note in passing that the interest of the ATO, and the documents from which I quoted,[19] were in late 2017 whereas the applicant had resigned as auditor in August 2016. I conclude that his resignation as auditor was not prompted by any intervention of a third party.
[19] T Documents, T4 pp121-130.
THE RELEVANT PROVISIONS
Section 35C of the SIS Act requires an SMSF to appoint an approved SMSF auditor to give the trustee a report that:
(a)contains an audit of the SMSF’s accounts; and
(b)includes a statement by the auditor as to:
(i)the extent of the auditor’s compliance with the auditor independence requirements referred to in section 1208F(d) of the Act; and
(ii)whether or not, in the auditor’s opinion, each trustee of the entity has, during the year of income, complied with the provisions of the Act and the relevant regulations.
Put simply, and not surprisingly, the SIS Act requires that an auditor be independent. In auditing the FCSF of which the applicant was a member the respondent found that he was in breach of the relevant provisions that apply to auditors of funds and that he should be disqualified.
Section 128F of the SIS Act prescribes that the independence requirements are as prescribed by the Superannuation Industry (Supervision) Regulations 1994 (Cth) (“the Regulations”) to the SIS Act. The Regulations (9A.06) require the auditor to comply with the independence requirements produced by the Accounting Professional and Ethical Standards Board Limited and set out in APES 110.
Paragraph 290.4 of APES 110 states:
In the case of Auditor Engagements, it is in the public interest and, therefore, required by this Code of Ethics, that members of Audit Teams, Firms and, Network Firms shall be independent of Audit Clients.
Paragraph 290.6 of APES 110 states that an auditor’s independence comprises both independence of mind and independence in appearance.
Paragraph 290.104 of APES 110 provides:
If a member of the Audit Team, a member of that Individual’s Immediate Family, or a Firm has a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Therefore, none of the following shall have a Direct Financial Interest or a material Indirect Financial Interest in the client: a member of the Audit Team; a member of that individual’s Immediate Family; or the Firm.
Paragraph 290.105 of APES 110 provides as follows:
When a member of the Audit Team has a Close Family member who the Audit Team member knows has a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, a self-interest threat is created. The significance of the threat will depend on factors such as:
(a)The nature of the relationship between the member of the Audit Team and the Close Family member; and
(b)The materiality of the Financial Interest to the Close Family member.
The significance of the threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level. Examples of such safeguards include:
(c)The Close Family member disposing as soon as practicable of all of the Financial Interest or disposing of a sufficient portion of an Indirect Financial Interest so that the remaining interest is no longer material;
(d)Having a Member review the work of the member of the Audit Team; or
(e)Removing the individual from the Audit Team.
The respondent also relies on contraventions of paragraph 290.128 of APES 110 which prohibits the conduct of an audit of a superannuation fund where the applicant’s immediate family member is charged with the governance of and therefore as a director of the fund.
The respondent also relies on the provisions of paragraph 290.144 of APES 110 which prohibits the conducting of an audit for a period during which the applicant was a director or officer of the fund.
CONSIDERATION
The applicant argues that when he took the course concerning APES 110 that he did, he held the opinion that by drawing down his financial interest in 2012/13 from almost $24,904.29 to $3703.91, he had reduced his interest to an immaterial amount in order to comply with the provisions of APES 110 paragraph 290.105 set out above.[20] I accept that he held that opinion. He also withdrew from decision making in the fund.
[20] Applicant’s Statement of Facts, Issues and Contentions, paragraph 31.
The applicant later formed the opinion that his initial conclusion was incorrect. As I have mentioned there is no evidence that was induced by the fact that some authority was taking an interest in his affairs.
I am satisfied that the applicant’s initial belief was incorrect. It was honestly but mistakenly held.
The applicant should never have become an auditor of the fund.
The respondent argues that the applicant either deliberately ignored the relevant rules concerning auditor independence or manifested ignorance of those rules. I am satisfied that he did neither. He did give consideration to the relevant rules but misinterpreted them.
In the applicant’s evidence before me he accepted that his interpretation was in error.
The applicant submits that during the relevant period, his judgement was affected to some extent by unfortunate events in his life.
His mother was diagnosed with cancer which was removed by surgery on 25 June 2014. She was released from hospital into the applicant’s care on 27 August 2014 and was fully dependent on his care from that time.[21]
[21] Applicant’s Statement of Facts, Issues and Contentions, paragraph 14.
The applicant’s mother was diagnosed with declining mental abilities in late September 2014. She was admitted to a hospice during October 2014 and died in December 2014.[22] The applicant is an only child and as such had primary care of his mother’s medical conditions prior to her death and across the period of the 2013/2014 audit of 8 September 2014.[23]
[22] Applicant’s Statement of Facts, Issues and Contentions, paragraph 15.
[23] Applicant’s Statement of Facts, Issues and Contentions, paragraph 16.
Following her death the applicant had the responsibility of attending to her funeral arrangements, settling her estate and selling her home which required substantial renovation prior to sale.[24] He supervised trades and agents from January to May 2015 and sold the residence on 30 May 2015.[25]
[24] Applicant’s Statement of Facts, Issues and Contentions, paragraph 17.
[25] Applicant’s Statement of Facts, Issues and Contentions, paragraph 18.
The applicant and his spouse had occupied a rented residence in 2014 and decided to search for a suitable property purchase in the first half of 2015. They settled a contract on 12 June 2015. He says “moving and establishment of the property were completed during July/August 2015” and that the 2014/15 audit was completed by 31 August 2015.[26]
[26] Applicant’s Statement of Facts, Issues and Contentions, paragraph 19.
In January 2016 the applicant’s spouse was diagnosed with serious operable cancer which was was addressed by surgery in February 2016. The applicant’s spouse was released from hospital in March 2016 and convalescent in the ensuing months. The applicant completed the third audit on 19 June 2016. [27]
[27] Applicant’s Statement of Facts, Issues and Contentions, paragraph 20.
These stressors are relevant. They do not excuse the applicant’s conduct but they assist in understanding it. The purpose of the rules is to protect the public and one factor that the Tribunal must consider is whether or not the aberrant conduct is likely to recur if he were to continue as an auditor. These stressful events were temporary matters even though they occurred over a significant period of time. They are not likely to recur.
I accept that the applicant held a genuine but erroneous belief for a period of time that he was entitled to conduct the audits because he had reduced his interest to a minimal amount and had attempted to put himself at arm’s length from decision-making processes in the fund. I accept that he resigned as auditor when he appreciated his error even though he retrospectively sought to justify his erroneous approach.
I also take into account that the FCSF was extraordinarily small, and that there is no evidence that the audit was in any fashion dishonest.
The applicant has practised as a tax agent since 1978 and other than for his conduct in this matter has an unblemished record. I am satisfied that the applicant poses no risk to the public if he resumes his practice as an auditor. Nor would the integrity of the SMSF system be undermined in any way.
DECISION
The Tribunal sets aside the decision under review which disqualified the Applicant from being an approved SMSF auditor and in substitution decides that the Applicant should not be disqualified as an auditor under s130F(2) of the SIS Act

I certify that the preceding 42 (forty-two) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Hanger AM QC

.................................[SGD].......................................
Associate
Dated: 5 August 2020

Date of hearing: 16 July 2020

Applicant: By video

Counsel for the Respondent: C. Schneider

Date of hearing:	16 July 2020
Applicant:	By video
Counsel for the Respondent:	C. Schneider