Murphy and Australian Securities and Investments Commission (Taxation and business)
[2025] ARTA 75
•6 February 2025
Murphy and Australian Securities and Investments Commission (Taxation and business) [2025] ARTA 75 (6 February 2025)
Applicant/s: Terence Murphy
Respondent: Australian Securities and Investments Commission
Tribunal Number: 2024/1506
Tribunal:General Member Darian-Smith
Place:Sydney
Date:6 February 2025
Decision:The Tribunal affirms the decision under review.
Statement made on 05 February 2025 at 2:35pm
Catchwords
SUPERANNUATION – Applicant disqualified from being an approved auditor of Self- Managed Superannuation Funds (SMSFs) – Applicant’s failure to comply with conditions imposed by Respondent (ASIC) on registration as an SMSF auditor – Applicant’s failure to comply with applicable auditing standards and reporting requirements – whether the Applicant is a fit and proper person – specific and general deterrence considerations – Reviewable Decision to disqualify the Applicant affirmed
Legislation
Superannuation Industry (Supervision) Act 1993 (Cth) ss. 6, 10, 11A, 35B, 35C, 62, 65-67B, 67, 71, 82, 84,104A, 109, 128A,128B, 128D, 128F, 129, 130F, 344
Superannuation Industry (Supervision) Regulations 1994 (Cth) Reg. 4.09, 4.09A, 8.02B, 13.14Taxation Administration Act 1953 (Cth) s. 355-65
Cases
Drake v Minister for Immigration and Ethnic Affairs [1979] 46 FLR 409
Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278
Murphy and Australian Securities and Investments Commission [2013] AATA 810
Australian Securities and Investments Commission v Gilliland [2022] FCA 1421
Henley and Australian Securities and Investments Commission [2024] AATA 82
Islam and Australian Securities and Investments Commission [2024] ARTA 88Secondary Materials
Guidance Statement GS 009 Auditing Self-Managed Superannuation Funds
Second Reading Speech to the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Bill 2012
Statement of Reasons
In the period from 5 June 2013 until 22 December 2023, the Applicant (Mr Murphy) was an approved self-managed superannuation fund (SMSF) auditor under s.128B of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
On 27 February 2024, a delegate of the Respondent (ASIC) confirmed the decision made by ASIC under s.130F(2) of the SIS Act on 15 December 2023 to disqualify Mr Murphy from being an approved SMSF auditor.[1] (Reviewable Decision)
[1] T2, Tender Bundle pages 20-37.
On 5 March 2024, Mr Murphy made an application to the Administrative Review Tribunal for review of the Reviewable Decision.[2] (Application for Review)
[2] T1, Tender Bundle pages 13-19.
I have decided that, in all the circumstances, the Reviewable Decision was the correct decision and that it ought to be affirmed, for the reasons set out below.
THE SIS ACT REGULATORY AND DISCIPLINARY FRAMEWORK
A person may apply to ASIC for registration as an approved SMSF auditor under s.128A of the SIS Act. ASIC must grant the application under s.128B if the prescribed requirements are met. Those requirements are set out in s.128B(1) of the SIS Act, which states:
128B Registration as an approved SMSF auditor
Obligation to register
(1) The Regulator must grant an application under s.128A and register the applicant as an approved SMSF auditor if:
(a) the applicant:
(i) has the qualifications prescribed by the regulations; and
(ii) has the practical experience prescribed by the regulations; and
(iii) has passed a competency examination in accordance with section 128C; and
(b) the Regulator is satisfied that the applicant:
(i) is capable of performing the duties of an approved SMSF auditor; and
(ii) is unlikely to contravene the obligations of an approved SMSF auditor under Subdivision B; and
(iii) is otherwise a fit and proper person to be an approved SMSF auditor.”[3]
[3] The Regulator is defined in s.10 of the SIS Act to mean ASIC in this context.
Once approved for registration, the SIS Act imposes professional obligations on an approved SMSF auditor. Section 128F(c) provides:
128F Professional obligations of approved SMSF auditors
An approved SMSF auditor must...
(c) comply with...
(ii) any auditing standards, made by the Auditing and Assurance Standards Board under section 336 of the Corporations Act 2001, that are applicable to the duties of an approved SMSF auditor under this Act; and
(iii) any auditing and assurance standards, formulated by the Auditing and Assurance Standards Board under section 227B of the Australian Securities andInvestments Commission Act 2001, that are applicable to those duties…”
Further compliance obligations are imposed upon approved SMSF auditors under s.129 of the SIS Act, including the obligation to report non-compliance in relation to a superannuation entity to the Regulator in relation to a matter specified in the approved form.[4]
[4] SIS Act s.129(1)(a) and s.129(3).
ASIC may impose conditions on a person’s registration as an approved SMSF auditor by giving written notice under s.128D(1)(a) of the SIS Act. The conditions which can be imposed by ASIC extend to the matters specified in s.128D(3), which provides:
“(3) Without limiting the conditions that the Regulator may impose under this section, those conditions, or those conditions as varied, may require one or more of the following:
(a) that the person complete a course of education or training specified in the notice;
(b) that the person undertake and pass a competency examination within a period specified by the Regulator.”
ASIC has the power to disqualify or to suspend a person from being an approved SMSF auditor under s.130F of the SIS Act. Section 130F(2) relevantly provides:
“(2) The Regulator may make a written order disqualifying a person from being an approved SMSF auditor, or suspending a person’s registration as an approved SMSF auditor, if:
(a) the person has failed, whether within or outside Australia, to carry out or perform adequately and properly:
(i) the duties of an auditor under this Act or the regulations; or
(ii) any duties required by a law of the Commonwealth, a State, or a Territory to be carried out or performed by an auditor; or…
(b) the person has failed to comply with a condition, imposed under s.128D on the person’s registration as an approved SMS auditor…”
The applicable auditing and assurance standards for an approved SMSF auditor are to be found in Guidance Statement GS 009 Auditing Self-Managed Superannuation Funds[5] (GS 009). As GS 009 states, SMSF auditors must comply with Australian Auditing Standards (ASAs) when providing their opinion on an SMSF’s financial report. They must also comply with Standards on Assurance Engagements (ASAEs) when providing their opinion on the SMSF’s compliance with the SIS Act and the Superannuation Industry (Supervision)Regulations 1994 (Cth) (SIS Regulations). The ASAs provide important guidance on how a compliance audit is to be conducted and the critical requirements of ASAs and ASAEs are for practical purposes the same.
[5] T64, Tender Bundle pages 1398-1518. Version of GS 009 issued June 2020.
GS 009, at paragraph [25], sets out the key ASAs which are relevant to the conduct of a financial audit of a SMSF. The Reviewable Decision identified[6] the relevant ASAs for the purpose of that decision as:
(a) ASA 210 Agreeing the Terms of Audit Engagements.[7]
(b) ASA 230 Audit Documentation.[8]
(c) ASA 500 Audit Evidence.[9]
(d) ASA 540 Auditing Accounting Estimates and Related Disclosures.[10]
(e) ASA 550 Related Parties.[11]
(f) ASA 580 Written Representations.[12]
(g) ASA 700 Forming an Opinion and Reporting on a Financial Report.[13] and
(h) ASA 705 Modifications to the Opinions in the Independent Auditor’s Report.[14]
[6] T2, Tender Bundle pages 22-23.
[7] T64: GS009 [25(c)], Tender Bundle pages 1410-1411.
[8] T64: GS009 [25(e)], Tender Bundle pages 1411-1412.
[9] T64: GS009 [25(p)], Tender Bundle pages 1414-1415.
[10] T64: GS009 [25(v)], Tender Bundle page 1415.
[11] T64: GS009 [25(w)], Tender Bundle page 1415.
[12] T64: GS009 [25(z)], Tender Bundle page 1416.
[13] T64: GS009 [25(bb)], Tender Bundle page 1416.
[14] T64: GS009 [25(cc)], Tender Bundle page 1416.
FACTUAL BACKGROUND OF THE REVIEWABLE DECISION
On 20 April 2022, following an Australian Taxation Office (ATO) review of SMSF audit files and a referral to ASIC, which resulted in the identification of breaches by Mr Murphy of auditing and independence standards, ASIC imposed conditions under s.128D of the SIS Act on Mr Murphy’s registration as an SMSF auditor.[15] (Conditions Decision)
[15] T5, T5-1, Tender Bundle pages 43, 44-47.
The conditions imposed on Mr Murphy by the Conditions Decision were:
“1. The approved SMSF auditor must not audit any SMSF that is also a client (for the preparation of accounts or financial statements) of any entity that the SMSF auditor has a financial interest in, is employed by or is appointed in any management or governance capacity (including but not limited to being a director, trustee, executive officer.”
“2. The approved SMSF auditor must engage an independent approved SMSF auditor to undertake a review of their SMSF audit tools, templates and methodology and a review of three selected SMSF audit files. The independent reviewer is to be someone agreed to by ASIC. The review is to assess compliance with the auditor’s relevant SIS Act requirements and SMSF auditing and assurance standards. These reviews are to be conducted at the approved SMSF auditor’s expense.
a. Within one month from the date of this condition being imposed the approved SMSF auditor must provide the name and contact details of a proposed independent reviewer for ASIC to consider along with a statement about their independence. The reviewer must not be engaged until ASIC provides approval to do so.
b. Within four months of this condition being imposed the reviewer is to complete their review of SMSF audit tools, templates and methodology. The reviewer must have provided written observations to the approved SMSF auditor and the approved SMSF auditor is to have provided written responses, including actions to address any issues raised. The reviewer’s written comments and the approved SMSF auditor’s responses are to be provided to ASIC within 4 months of this condition being imposed.
c. Within six months from the date of this condition being imposed the approved SMSF auditor must provide a list of all SMSFs that they are the appointed auditor for the financial year ended 30 June 2021. The list is to include the total assets of the SMSF and the date of the audit report. ASIC will then choose three SMSF audits for review and notify the approved SMSF auditor of the selection. The approved SMSF auditor must provide the reviewer the selected audit files within seven days of being notified of the selection and then within 2 days confirm in writing to ASIC that the files have been provided to the reviewer.
d. The reviewer will review the selected audit files and provide a statement in writing to ASIC within 60 days of receiving them. The statement must detail the scope of the review, any significant deficiencies identified, and whether in the reviewer’s opinion, based on their review, the SMSF audits have been conducted in accordance with the applicable Australian Auditing Standards and the SIS Act.” (Conditions 2 a.- d. collectively, Review Conditions).
“3. Within nine months of the conditions being imposed the approved SMSF auditor must sit and pass, on their first attempt, ASIC’s approved SMSF auditor competency exam (referred to in section 128C of the SIS Act). The auditor must provide to ASIC within one week of completing the exam, evidence of the successful completion and passing of the SMSF auditor competency exam.” (Competency Exam Condition)
“4. Within one month of these further conditions being imposed, the approved SMSF auditor must provide:
evidence to ASIC of their successful completion of ‘Audit of SMSFs’ CPA Australia online course.” (Online Training Condition)
“a copy of the letter formally imposing these conditions to the auditor’s professional association for them to be aware of the conditions for any future compliance monitoring activity in relation to the auditor, such as practice reviews; and
evidence to ASIC that the letter has been provided to the professional association.” (Professional Association Condition)
The stated reasons given by ASIC’s Delegate, Craig Angove, for imposing the conditions in the Conditions Decision were as follows:
“I am imposing these conditions and no other sanction at this stage for the following reasons:
(a) Australian auditing and assurance standards require sufficient evidence to support your audit opinions and to adequately document your audits. I am satisfied that you failed to:
a. Provide audit evidence and specific procedures demonstrating your conclusions that the real property investments in both the Holmes Family Superannuation Fund and Barry Family Super Fund’s 2015-16 financial statements were at market value.
b. Provide audit evidence and specific procedures that the loan arrangement for residential property in the Barry Family Super Fund’s 2015-16 financial statements, was obtained or reviewed for compliance with the limited recourse borrowing arrangement requirements.
c. Provide audit evidence and specific procedures to support your assertion that, because a third-party real estate agent is managing the Barry Family Super Fund’s property, the rental agreement is not with a related party and is at arm’s length.
d. Provide audit evidence and specific procedures demonstrating your judgments made and conclusions reached on the Hanna Family Super Fund’s compliance with the in-house asset rules.
I am not satisfied that sufficient appropriate audit evidence was obtained in accordance with Australian auditing and assurance standards, or that a sufficient level of knowledge relating to the SIS Act or SIS Regulations requirements was demonstrated. Imposing additional conditions may address any lack of knowledge and competency in these areas. They will also provide accountability to ASIC that this has been so addressed.”[16]
[16] T5-1, Tender Bundle pages 45-46.
ASIC could have imposed the harsher sanction of disqualification or suspension on Mr Murphy in the Conditions Decision. Rather, ASIC’s Delegate said:
“You have co-operated throughout the process and I acknowledge the efforts being made by you. Overall I am satisfied that the conditions provide a reasonable alternative to disqualification or suspension and are appropriate in the circumstances.”[17]
[17] T5-1, Tender Bundle pages 46-47.
The Conditions Decision gave Mr Murphy another chance to address the perceived shortcomings in his compliance with Australian auditing and assurance standards. The Conditions Decision was a reviewable decision under the SIS Act. Mr Murphy did not seek review of the Conditions Decision.
The subsequent failures of Mr Murphy to comply in a timely manner, or in some respects at all, with the Conditions Decision lies at the heart of the Reviewable Decision.
In accordance with the Review Conditions of the Conditions Decision, ASIC conducted a peer review of three audit files for the financial year ending 30 June 2021 (2021 financial year). These three audit files were for Stephen Hess Superfund (Hess Fund), David Malcolm Superannuation Fund (Malcolm Fund) and The Trustee for Shaurya & Samar Superannuation Fund (S&S Fund) respectively.
On 1 March 2023, ASIC notified Mr Murphy by “show cause” correspondence that it had concerns that he had failed to comply with the Conditions Decision.[18] Those concerns included his non-compliance with the Competency Exam Condition or with the three audit file requirements of the Review Conditions. ASIC further indicated to Mr Murphy that, as the result of those concerns, it was considering whether to disqualify or suspend him as an approved SMSF auditor under s.130F(2) of the SIS Act. ASIC invited Mr Murphy to make written submissions before taking a decision to that effect.
[18] T54-1, Tender Bundle pages 1077-1081.
On 15 December 2023, having considered written submissions and other materials received from Mr Murphy,[19] ASIC made the decision to disqualify him from being an approved SMSF auditor under s.130F(2) of the SIS Act.[20] (Disqualification Decision)
[19] T57-2, Tender Bundle pages 1093-1103.
[20] T61-1, Tender Bundle pages 1223-1224; Disqualification Order is at T61-2, Tender Bundle page 1225; Statement of Reasons for Decision is at T61-3, Tender Bundle pages 1226-1247.
On 20 December 2023, Mr Murphy requested ASIC to reconsider the Disqualification Decision under s.344(1) of the SIS Act, which resulted in ASIC making the Reviewable Decision.
In the Reviewable Decision, ASIC’s Delegate, Myra Poon, identified three questions to be answered, as follows:
1. “Has Mr Murphy failed to carry out or perform adequately and properly, the auditor’s duties?”[21]
2. “Has Mr Murphy failed to comply with a condition on his registration?”[22] and
3.” Is disqualification of Mr Murphy appropriate in the circumstances?”[23]
In confirming the Disqualification Decision, ASIC’s Delegate answered each of the three questions in the affirmative.
[21] T2 at Tender Bundle pages 26-32.
[22] T2 at Tender Bundle pages 32-33.
[23] T2 at Tender Bundle pages 33-34.
In respect of the first question as to whether Mr Murphy carried out his duties as an approved SMSF auditor, adequately and properly, the key findings in the Reviewable Decision were that:
(a)Mr Murphy’s reliance in the Hess Fund audit on a rate notice, insurance papers and rental statement did not amount to sufficient evidence to verify the ownership of real property by the Hess Fund.
(b)Mr Murphy wrongly issued an engagement letter to the trustee in the Hess Fund matter that related to a registrable superannuation entity (RSE) rather than to a SMSF.
(c)Mr Murphy wrongly used RSE audit reports for SMSF audits in each of the Malcolm Fund and S&S Fund audits.
(d)Mr Murphy’s failure to report in the approved form in (c) above, as required by ASA 700, was also a failure to comply with s.35C of the SIS Act.
(e)Mr Murphy failed to obtain sufficient evidence in the Malcolm Fund audit that the fund’s units in the 27 Gwynne Street Property Unit Trust existed and were accurately valued.
(f)Mr Murphy failed to lodge Auditor Contravention Reports (ACRs) with the ATO, as required by s.129 of the SIS Act. and
(g)Mr Murphy failed to obtain sufficient evidence that each of the Hess Fund, Malcolm Fund and S&S Fund complied with the trustee declaration requirements for the 2021 financial year.
In relation to the second question as to Mr Murphy’s failure to comply with a condition on his registration, the key findings in the Reviewable Decision were that Mr Murphy failed to comply with the Competency Exam Condition in respect of each of its time requirement, the pass mark requirement and the first attempt requirement.
The findings made in relation to the first and second questions are said by ASIC to support the finding in the Reviewable Decision in respect of the third question, that disqualification of Mr Murphy as an SMSF auditor was the appropriate outcome in the circumstances. The Delegate found that suspension was not an appropriate remedy in this case because of the repeated instances of non-compliance by Mr Murphy. The circumstances supporting disqualification included the breaches of the Conditions Decision, the need to have due regard to the legislative objectives of the SMSF auditor registration regime, the repeated breaches by Mr Murphy of his fundamental obligations as an auditor, the need to protect against potential future failures by Mr Murphy in relation to SMSF audits and the need to send a general deterrence message that SMSF auditors must comply with their obligations.
MR MURPHY’S POSITION
Mr. Murphy principally relies upon the matters set out in his Statement of Facts, Issues and Contentions dated 5 August 2024[24] (Applicant’s SFIC) and the Attachments referred to in it.[25] The Applicant’s SFIC expands on the submissions made in his Review Application as to why the Reviewable Decision is wrong.[26] Mr Murphy filed a witness statement dated 14 November 2024.[27] He also filed the witness statements of Angie Berry[28], Graham Gilkison[29] and Wendy Smart[30], all dated 8 November 2024, and the witness statement of Suzanne Grobke[31] dated 11 November 2024. ASIC was content for the evidence of the witnesses, other than Mr Murphy, to be received into evidence unchallenged.
[24] Document 3, Tender Bundle pages 1544-1567.
[25] Documents 10-26, Tender Bundle pages 1575-1635.
[26] T1, Tender Bundle pages 17-19.
[27] Document 9, Tender Bundle pages 1573-1574.
[28] Document 4, Tender Bundle page 1568.
[29] Document 5, Tender Bundle page 1569.
[30] Document 7, Tender Bundle page 1571.
[31] Document 8, Tender Bundle page 1572.
For the most part, Mr Murphy’s contentions had already been communicated to ASIC before the Disqualification Decision and the Reviewable Decision were made. Mr Murphy’s submissions on the three essential questions dealt with in the Reviewable Decision are usefully summarised by ASIC’s Delegate in the Statement of Reasons given in the Reviewable Decision at paragraphs [25], [33], [36], [40], [44], [48], [51], [53] and [57].[32] A number of Mr Murphy’s contentions are summarised by ASIC in paragraph [94] of the Respondent’s SFIC, which are mostly extracted from the Application for Review.
[32] T2, Tender Bundle pages 27-33.
The Applicant’s SFIC is structured to be responsive to ASIC’s Statement of Facts, Issues and Contentions dated 28 June 2024 (Respondent’s SFIC). My detailed consideration of the conduct of Mr Murphy and the conclusions which have informed the Tribunal in determining whether the Reviewable Decision “was the correct or preferable one on the material before the Tribunal”[33], is set out in the sections which follow.
[33] Drake v Minister for Immigration and Ethnic Affairs [1979] 46 FLR 409,419.
NON-COMPLIANCE WITH THE CONDITIONS DECISION: REVIEW CONDITIONS
ASIC contends that Mr Murphy failed to notify it of a proposed independent peer reviewer and to provide a supporting statement about that reviewer’s independence by the due date of 20 May 2022. Mr Murphy’s proposal of Mark Walmsley as the independent reviewer, and ASIC’s approval of Mr Walmsley, occurred on 19 August 2022.[34] Mr Walmsley’s appointment took place after two earlier reviewers proposed by Mr Murphy were rejected by ASIC as not being sufficiently independent of Mr Murphy to appropriately conduct the peer review.
[34] Respondent’s SFIC [31], Tender Bundle page 1528; T26, Tender Bundle page 124.
Delay was also encountered in the provision by Mr Murphy to ASIC of a list of the SMSF audits completed by him in the 2021 financial year.[35] The due date for the list was 20 August 2022. Mr Murphy provided the list on 20 September 2022[36], and the selection by ASIC of the Hess Fund, Malcolm Fund and S&S Fund was completed on 28 September 2022[37].
[35] Respondent’s SFIC [32], Tender Bundle page 1528.
[36] T29, T30, Tender Bundle pages 147-151.
[37] T32, Tender Bundle page 154.
Mr Murphy’s submission is that these tasks “were completed roughly within the time frame, some slightly out but only minor time delay.” Mr Murphy further submits that delay was caused by ASIC’s Delegate changing his mind - “Craig Angove declined my first two selections as Review Auditor then finally agreed third pick.” Mr Murphy also refers to having had two bouts of COVID.[38]
[38] Applicant’s SFIC, see tender Bundle pages 1546-1547.
NON-COMPLIANCE WITH THE CONDITIONS DECISION: COMPETENCY EXAM CONDITION
ASIC contends that Mr Murphy failed to comply with the Competency Exam Condition, both as to meeting the required timeframes and achieving the required outcome.[39] The due date for completion of the Competency Exam Condition was 27 January 2023, with the exam to have been completed by 20 January 2023. In the event, after following up from ASIC, Mr Murphy advised ASIC on 13 February 2023, that he would be sitting the exam on 17 February 2023.[40] Mr Murphy sat the exam on 17 February 2023 and failed it.[41] Mr Murphy requested that ASIC pass him in any event due to a medical issue,[42] and, despite ASIC not acceding to this request, contends that he passed the exam.[43] Mr Murphy has made no subsequent attempt to sit the Competency Exam.
[39] Respondent’s SFIC [36]-[40], [84]-[85], Tender Bundle pages 1525-1530, 1538-1539.
[40] T49, Tender Bundle page 1057.
[41] T53-1, Tender Bundle page 1074.
[42] T53, Tender Bundle page 1073.
[43] T59, Tender Bundle page 1173.
Mr Murphy’s submissions are that he had diarrhea during the exam and spent 6 minutes on the toilet during the exam before leaving it early and that “he got more [than] 65 percent of question but on weighting…I ended up 62 out [of] hundred.”[44] In addition to maintaining that he in fact passed the exam,[45] Mr Murphy addresses the issue of why he did not re-sit the exam as follows:
“ASIC have questioned why didn’t I redo the exam. Major reason is they emailed me to advise I only had one attempt after promising me I had two attempts. This was straight after I advised them I had COVID for second time. I wasn’t sure I could trust them.”[46]
[44] Applicant’s SFIC, Tender Bundle page 1547; Document 15, Tender Bundle pages 1594-1595.
[45] A fact correctly disputed by ASIC, see Tender Bundle page 1594.
[46] Tender Bundle page 1547.
Mr Murphy was cross-examined in some detail about the Competency Exam Condition, but his responses were not of great assistance to the Tribunal because of his refusal to accept the basic premises, both of which were established on the evidence, that he failed the exam and that he needed to sit and pass the exam to comply with the condition.[47]
[47] Transcript Day1 P-41 lines 38-47 and P-42 lines 29-31.
NON-COMPLIANCE WITH THE CONDITIONS DECISION: ON-LINE TRAINING CONDITION
ASIC accepts that the Online Training Condition was completed by Mr Murphy, but not by the due date for compliance which was 20 May 2022.[48] The training required by the Online Training Condition was completed by Mr Murphy on 29 May 2022, and ASIC were advised of this by Mr Murphy on 1 June 2022.[49]
[48] Respondent’s SFIC [41], Tender Bundle page 1530.
[49] T6, Tender Bundle page 48.
NON-COMPLIANCE WITH THE CONDITIONS DECISION: PROFESSIONAL ASSOCIATION CONDITION
The Professional Association Condition was also due to be completed by Mr Murphy by 20 May 2022. ASIC accepts that compliance with the Professional Association Condition was achieved, albeit late, by Mr Murphy on 28 July 2022, when he provided a copy of ASIC’s Conditions Decision correspondence to CPA Australia.[50] Mr Murphy’s email sent 27 July 2022, informed ASIC that the delay “reflects getting virus twice in not much over month.”[51]
[50] Respondent’s SFIC [42], Tender Bundle page 1530; T14, Tender Bundle pages 73-74.
[51] T13, Tender Bundle page 70.
FAILURE TO NOTIFY CONTRAVENTIONS IN THE APPROVED FORM
ASIC contends that Mr Murphy, when making mandatory disclosures to the ATO of possible contraventions of SMSF requirements, has failed to use the correct form.[52] The mandatory reporting requirements for a SMSF auditor when he or she forms the opinion that a breach of superannuation legislation may have occurred, is set out in s.129 of the SIS Act.
[52] Respondent’s SFIC [43]-[49], Tender Bundle pages 1530-1531.
Section 129(3) of the SIS Act provides that where such an opinion is formed, the SMSF auditor must:
“if the superannuation entity is a self-managed superannuation fund and the matter is specified in the approved form—tell the Regulator about the matter in the approved form.” The reference to an approved form is to a form approved by ASIC.[53]
As noted in paragraph [23(f)] above, the relevant approval form for a report under s.129(3) is an ACF.[54]
[53] SIS Act s.11A(1).
[54] GS 009 [21(c)].
On 25 January 2023, the ATO received a SMSF Regulatory Contravention Disclosure Form (RCD) from Mr Murphy, as the SMSF auditor of the relevant fund.[55] In circumstances where an RCD is only normally lodged when a SMSF is making a voluntary disclosure, and expecting to have received an ACR instead, the ATO officer contacted Mr Murphy, and recorded in his file note[56]:
“I received a [RCD] (voluntary disclosure) form from the SMSF auditor of the impacted fund-Terence Murphy… The information in the disclosure was scarce and did not reference any legislation that indicated the fund had contravened super legislation. Additionally, it is unusual to receive a voluntary disclosure from the auditor of a super fund…There were no [ACR’s] lodged by the auditor. I contacted the auditor to establish the facts of why a disclosure was submitted and no ACR submitted. Following the conversation, I have concerns about the conduct of the auditor: He appeared to be unaware of the correct way to lodge an ACR and indicated he had lodged other ACRs on the incorrect form…He indicated that he did not have the time to find the correct form. He indicated that he did not have the time to complete things properly. He indicated that he did not have any engagement with the fund’s trustees. He indicated that he had completed audits without all of the information supplied by the client and advised he used his ’auditors judgment’. A person working for the auditor (in an earlier call) advised they were completing audits on behalf of the auditor and the auditor was just signing off. I believe that this auditor may not be meeting the competency standard for approved SMSF auditors under instrument ASIC Class Order [CO 12/1687].”[57]
[55] T54-2, Tender Bundle pages 1082-1087.
[56] Subsequently disclosed by the ATO to ASIC under s.355-65(3) of Schedule 1 to the Taxation Administration Act 1953 (Cth) for the purposes of administering Part 16 of the SIS Act.
[57] T44, Tender Bundle pages 316-317.
The Tribunal notes that Mr Murphy has disputed, in the Applicant’s evidence[58], the fact that the ATO officer spoke to a person working with the auditor as is alleged in the penultimate sentence of the file note extracted above. The Tribunal will disregard that sentence in the file note in its determination of the Application for Review. The Tribunal further notes that Mr Murphy generally disputes the points of detail in the ATO officer’s file note.[59]
[58] In the witness statements of Angie Berry (Tender Bundle page 1568), Graham Gilkison (Tender Bundle page 1569), Wendy Smart (Tender Bundle page 1571) all dated 8 November 2024, and Suzanne Grobke (Tender Bundle page 1572) dated 11 November 2024.
[59] Applicant’s SFIC pages 5-6, Tender Bundle pages 1548-1549.
Mr Murphy’s main submissions on this issue were:
(a)that he always completed audit documentation in hard copy rather than digitally, apparently on advice from his solicitor to use paper documents for everything to do with audits. His office had run out of paper SMSF regulatory contravention disclosure forms. More forms were on order from the Government Printer but as receipt of the forms could take months, he had to improvise in the interim period.
(b)the Auditor/actuary contravention report[60] and the SMSF regulatory contravention disclosure report[61] are very similar forms in the information they require. The ATO had previously accepted the Auditor/actuary contravention report from Mr Murphy in hard copy in lieu of the SMSF regulatory contravention disclosure form. and
(c)Mr Murphy’s use of the wrong form “wasn’t [a] case of I was confused about reports it was out of necessity.”[62]
[60] Applicant’s SFIC, Attachment 7; Tender Bundle pages 1601-1608.
[61] Applicant’s SFIC, Attachment 7A; Tender Bundle pages 1609-1621.
[62] Applicant’s SFIC pages 4-5, Tender Bundle pages 1547-1548.
AUDIT QUALITY: TOOLS, TEMPLATES AND METHODOLOGIES ADOPTED
The report prepared by the peer reviewer Mark Walmsley dated 30 November 2022[63] (Walmsley Report), provided a qualified opinion on the tools, templates and methodologies being used by Mr Murphy to perform audits which comply with the SIS Act, Australian Accounting Standards and applicable ethical standards. Relevantly, Mr Murphy had been using a two-page audit checklist (Checklist) for the SMSF audits conducted by him in the 2021 financial year, including for the audits of the three funds the subject of the independent peer review.[64]
[63] T38-4, Tender Bundle pages 226-246.
[64] An example of the two-page audit checklist is attached to the Walmsley Report: see T38-4 at Tender Bundle pages 232-233
Whilst the opinion in the Walmsley Report was to the effect that Mr Murphy could perform compliant audits[65], it was qualified by a table of 19 comments and recommendations concerning the Checklist and identified two audit subject areas not currently included in the Checklist.[66] ASIC contends in the Respondent’s SFIC, that the Walmsley Report qualifications are material and wide-ranging and show the extent to which the Checklist likely falls short of ensuring compliance with ASRs and the SIS Act:
“The comments are significant: for example, it is recommended that the checklist test for assertions of existence, ownership, valuation, completeness and classification of assets.”[67]
[65] T38-4 at Tender Bundle page 227.
[66] T38-4 at Tender Bundle pages 229-231.
[67] Respondent’s SFIC [51], Tender Bundle page 1532.
Mr Murphy submits that ASIC ignored the significant improvements made by him to the Checklist and “takes me to task on some audit areas” identified in the Walmsley Report, when in substance Mark Walmsley had given him a “pass” on the peer review.[68] Mr Murphy says that the 5 items shown in the Walmsley Report as not having been included in the revised checklist (items 4g, 4h, 4i, 6 and 6a) have now been “corrected”.
[68] Applicant’s SFIC pages 7-8, Tender Bundle pages 1550-1551.
Mr Murphy was questioned by ASIC’s counsel as to what he meant when he said that Mr Walmsley had given him a pass mark on the three audits. The following exchange took place:
Counsel: “Would you accept that, on balance, Mr Walmsley believed that your tools and templates required some significant improvement?”
Mr Murphy: “Some improvement, yes. You know, they required some improvement. Mainly on the documentation side, you know. I think he was satisfied we did everything, covered all bases. But, you know, like, I think there was a couple of areas he picked out we should have documented a little bit. But I might add I passed all three audits, and he stated that in writing.”
Counsel: “Sorry, when you say you passed all three audits, can you clarify what you mean by that?”
Mr Murphy: “Well, he said he was satisfied that I met all the – I can read it out to you, from reassurance, are you satisfied that I met all the auditing standards and requirements as required under the SIS Act. Except there were some exceptions and he listed them. So it was a pass but with some exceptions. And might I add, the SIS Act goes to over 1,000 pages. There isn’t an auditor in Australia that’s going to get 100 percent mark off.”[69]
[69] Transcript Day 1 P-51 lines 23-37.
AUDIT QUALITY: HESS FUND
The principal areas of concern for ASIC in relation to the quality of the audit by Mr Murphy of the Hess Fund were:
(a)Mr Murphy’s failure to identify that there was inadequate evidence of the ownership of the 17 Clearwater Street, Bethania property by the SMSF.[70] (Hess property ownership concern)
(b)Mr Murphy’s failure to determine whether a borrowing from La Trobe Financial of $466,095.41 was the subject of a relevant exception so as to enable compliance by the SMSF with s.67 of the SISA Act.[71] (Hess compliant borrowing concern) and
(c)deficiencies in the engagement letter issued by Mr Murphy for the audit of the Hess Fund.[72] (Hess engagement letter concern)
[70] Respondent’s SFIC [52]-[54], Tender Bundle pages 1532-1533.
[71] Respondent’s SFIC [55]-[57], Tender Bundle page 1533.
[72] Respondent’s SFIC [58], Tender Bundle page 1533.
The Hess property ownership concern arises out of the requirement imposed by reg 409A of the SIS Regulations that a trustee of a regulated superannuation fund which is a SMSF keep the assets held by the fund separate from the assets held by the trustee in its personal capacity.
The relevant facts were:
(a)The Hess Fund Statement of Financial Position for the 2021 financial year (2021 financial statement), recorded direct property as an asset valued at $611,577.98.[73]
(b)“Note 6A-Direct Property” to the 2021 financial statement recorded $600,000 as attributable to “At market value: Clearwater Street Bethania.”[74]
(c)Mr Murphy needed to conclude for the purpose of the audit that the property described as “Clearwater Street Bethania” was owned by the Hess Fund. and
(d)Mr Murphy reached the conclusion that the Clearwater Street Bethania property was owned by the Hess Fund.
[73] T45-5, Tender Bundle at page 367.
[74] T45-5, Tender Bundle at page 371.
Mr Murphy relied on three documents to support his conclusion as to ownership:
(a)a Rate Notice addressed to “STEPHEN HESS PTY LTD (TRUSTEE)” with “Property location: 17 Clearwater Street, BETHANIA, QLD 4205”.[75]
(b)a La Trobe Financial Loan Activity Statement addressed to “Stephen Hess Pty Ltd II OR and ATF Hess H”, which referred in its “Security Documents in Custody & Insurance Summary” to 17 Clearwater Street BETHANIA”.[76] and
(c)a rental agent statement addressed to “STEPHEN HESS SUPER FUND” which referred to “17A Clearwater Street, Bethania, 4205” and “17B Clearwater Street, Bethania, 4205”.[77]
[75] T45-5, Tender Bundle at page 391.
[76] T45-5, Tender Bundle at pages 393, 395.
[77] T45-5, Tender Bundle at page 389.
Mr Murphy contended that together the three documents were more than sufficient to prove the ownership of 17 Clearwater Street by the Hess Fund and ASIC’s rejection of his conclusion on this point, showed a lack of “understanding of probability and audit judgement on these three documents, maybe attack one but together as three it leans strongly to ownership…I dismiss ASIC [c]oncern on grounds it ignores cumulative proof and not independent.”[78]
[78] Applicant’s SFIC page 8, Tender Bundle page 1551.
Mr Murphy maintained the position under cross-examination that the cumulative effect of the three documents established the ownership of 17 Clearwater Street by the Hess Fund.[79] Mr Murphy weas cross-examined in relation to the detail of each of the three documents, but his answers do not in my view establish that reliance on those 3 documents (even cumulatively) was sufficient to establish ownership.
[79] Transcript Day 2 P-64 lines 19-34.
The Hess compliant borrowing concern arises out of the requirement imposed by s.67 of the SIS Act prohibiting a SMSF from borrowing money unless an exception applied.
The relevant facts were:
(a)the audit file recorded a loan from La Trobe Financial with a balance owing on 30 June 2021 of $466,095.41.[80]
(b)the audit checklist recorded that Deed complies with -Borrowing Powers and was further annotated by Mr Murphy “Sighted Deeds Sighted Borrowing Trust”.[81] and
(c)there was insufficient other information available in the audit working papers for the Hess Fund to work out whether there was an applicable exception for the purposes of compliance with s.67 of the SIS Act.
[80] T45-5, Tender Bundle at page 419.
[81] T45-5, Tender Bundle at page 357.
The Hess engagement letter concern arises because it is apparent on the face of that letter that an incorrect template has been adopted in preparing the letter.[82] So much is made clear by references being made to sections of the SIS Act not in force when the letter was issued, references being made to provisions of the SIS Act which do not apply to SMSFs and assessing compliance with certain guidelines issued by APRA where the ATO was the relevant entity responsible for the regulation of SMSFs.
[82] T45-5, Tender Bundle at pages 410-411.
Under cross-examination as to the circumstances leading to the use of the incorrect template to prepare the Hess engagement letter, Mr Murphy had no adequate explanation to offer as to why an engagement letter signed by him, which was so obviously not appropriate for the audit work for a SMSF, had been sent to the client.[83]
[83] Transcript Day 2, from P-83 line 18 up to P-86 line 28.
AUDIT QUALITY: MALCOLM FUND
The principal areas of concern for ASIC in relation the quality of the audit by Mr Murphy of the Malcolm Fund were Mr Murphy’s failure to:
(a)use the correct approved form of auditor’s report to report to the trustee on the outcomes of the audit.[84] (Malcolm auditors report form concern)
(b)note the lack of evidence concerning the ownership of and the valuation of units in an unlisted trust.[85] (Malcolm ownership and valuation of trust units concern)
(c)note the absence of evidence of rental being at market rate.[86] (Malcolm market rate rental concern)
(d)note the absence of evidence concerning whether the investment in the unit trust was at arms-length and whether an exemption for business real property applied.[87] (Malcolm business real property exemption concern) and
(e)analyse the Malcolm Fund’s compliance with investment strategy.[88] (Malcolm investment strategy compliance concern)
[84] Respondent’s SFIC [59]-[66], Tender Bundle pages 1534-1535.
[85] Respondent’s SFIC [67]-[71], Tender Bundle pages 1535-1536.
[86] Respondent’s SFIC [72]-[73], Tender Bundle pages 1536-1537.
[87] Respondent’s SFIC [74]-[77], Tender Bundle page 1537.
[88] Respondent’s SFIC [78]-[80], Tender Bundle pages 1537-1538.
The Malcolm auditors report form concern arose because Mr Murphy used the incorrect “approved form”[89] for the purposes of providing his SMSF audit report for the 2021 financial year, as required by s.35C(1) of the SIS Act.
[89] Defined in s.11A(1) of the SIS Act.
The relevant facts were:
(a)On 21 February 2022, Mr Murphy provided a report headed “Independent Auditor’s Report to the Members of David Malcolm Superannuation Fund”[90] which used the approved form for the report for the audit of an RSE.
(b)The report contains the following audit opinion:
“In my opinion the trustee of DAVID MALCOLM SUPERANNUATION FUND has complied, in all material respects with: (a) The requirements of the applicable SIS Act and Regulations, APRA reporting standards, Corporations Act and Corporations Regulations specified above for the year ended 30 June 2021. (b) The requirement to maintain an operational risk reserve at the required target amount in accordance with its ORFR strategy.”[91] and
(c)Mr Murphy signed off on the audit report as “RSE Auditor”.[92]
[90] T45-6, Tender Bundle pages 454-458.
[91] T45-6, Tender Bundle at page 456.
[92] T45-6, Tender Bundle at page 458.
In material respects the audit report references matters which apply only to RSE’s, including the requirement to maintain an operational risk reserve in accordance with its Operational Risk Financial Requirement strategy and meeting APRA reporting requirements.
Mr Murphy’s explanation for the use of the wrong approved form in providing what purports to be a SMSF audit report centres around a software issue: “I concede that while reports very similar there were [a] few difference[s]. This was not my fault they were computer generated some were correct some slightly different. It wasn’t possible to fix software as it was off shelf, so we had to develop our own which I did over time.”[93]
[93] Applicant’s SFIC page11, Tender Bundle page 1554.
The use of the wrong RSE audit report form instead of the SMSF audit report form was the first of the only two points of criticism about the three audits under review which Mr Murphy was prepared to concede was validly made by ASIC.
The Malcolm ownership and valuation of trust unit concern arose out of the requirement in the SIS Regulations that a trustee of a SMSF fund keep the assets of the fund separate from his own personal assets[94], and that the assets be valued at market value when financial statements and accounts are prepared for the SMSF fund[95].
[94] SIS Regulations reg. 4.09A.
[95] SIS Regulations reg. 8.02B.
The relevant facts were:
(a)the audit conducted by Mr Murphy apparently assumes that the Malcolm Fund owned a property at 27 Gwynne Street Cremorne through the ownership of units in the 27 Gwynne Street Property Unit Trust.[96]
(b)the Statement of Financial Position of the Malcolm Fund records the fund as owning units in an unlisted unit trust valued at $786,011.67.[97]
(c)the unlisted unit trust referred to appears to be the 27 Gwynne Street Property Unit Trust, which is said in its own accounts to have net assets of $788,968 and to be the owner of 27 Gwynne Street Cremorne.[98] and
(d)a title search of 27 Gwynne Street Cremorne, shows David Malcolm Pty Ltd to be the registered proprietor.[99]
[96] T45-6, Tender Bundle page 453.
[97] T45-6, Tender Bundle page 540.
[98] T45-6, Tender Bundle page 521.
[99] T45-6, Tender Bundle page 515.
The evidence which is missing from Mr Murphy’s audit file (beyond undocumented assertions) is:
(a)documents (certificate of ownership of units or unit trust register) which establishes the ownership of the units in the 27 Gwynne Street Property Unit Trust or the beneficial ownership of 27 Gwynne Street Cremorne. and
(b)a direct valuation of the units in the unit trust, or an indirect valuation of those units through a valuation of 27 Gwynne Street Cremorne.
Mr Murphy’s submission on this point is that he used auditor judgment in the absence of there being a certificate of ownership of the units. He explained that as the title search showed 23 Gwynne Street being owned by David Malcolm Pty Ltd and David Malcolm was the only shareholder and owner of that company, “I formed opinion if owned company wholly and Company owned property per Land Title then by definition he owns everything. I did ask for Certificate but wasn’t forthcoming so I used auditor judgement.”[100]
[100] Applicant’s SFIC page 11, Tender Bundle page 1554.
The Malcolm market rate rental concern arose out of the in-house asset rules in s.109 SIS Act, which impose a requirement that a trustee of a superannuation entity not invest with a third party other than on an arm’s length commercial basis.
The relevant fact was that 27 Gwynne Street Cremorne had received rental income of $9000 for the 2021 financial year.[101] The audit question was whether the in-house asset rules had been complied with in respect of the rental arrangements, including whether the rent paid (at a return of 1.5%) was a market rate rental. Mr Murphy’s position was that he had discussed this issue with the external accountant of the Malcolm Fund, who was satisfied that the rent paid was at around market.[102] ASIC’s contention was that additional audit evidence that the 1.5% return equated to market should have been obtained by Mr Murphy before giving his audit sign-off on the rent arrangements.
[101] T45-6, Tender Bundle page 520.
[102] Applicant’s SFIC page 12, Tender Bundle page 1555.
The Malcolm business real property exemption concern arose out of the limitation imposed by s.82 of the SIS Act on the “in-house assets” allowed to be held by a SMSF fund. The definition of “in-house assets” in s.71(1) of the SIS Act includes an “asset of the fund which is subject to a lease or lease arrangement”, with exemptions, including the exemption in s.71(1)(g) for a lease of real property which is “business real property” (as defined in s.66(5) of the SIS Act).
In the audit checklist for the Malcolm Fund, Mr Murphy stated that “Asset purchases in accordance with Act” and that “Related Party exemption Business Real Property” applied.[103] Mr Murphy referenced audit working paper 8.0[104], the Projected Investment Strategy, which does not itself establish the business real property exemption.
[103] T45-6, Tender Bundle page 452.
[104] T45-8, Tender Bundle page 659.
The ANZ bank statements for the Malcolm Fund are addressed to 27 Gwynne Street Cremorne[105], which is the property stated to be held by the 27 Gwynne Street Property Unit Trust. An issue is raised by this fact as to the relationship between the tenant and the Malcolm Fund. The Malcolm Fund audit file does not contain sufficient evidence concerning whether the investment in the unit trust was at arms-length, or whether the business real property exemption was applicable in the circumstances.
[105] T45-6, Tender Bundle pages 492-506.
The Malcolm investment strategy compliance concern arose from the requirement in reg. 4.09 of the SIS Regulations that a SMSF trustee “must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity”.
The Projected Investment Strategy document produced for the Malcolm Fund[106] did not provide for it to invest in an unlisted unit trust. The audit file does not disclose any evaluation undertaken by Mr Murphy about this apparent non-compliance with the investment strategy.
[106] T45-8, Tender Bundle page 659.
AUDIT QUALITY: S&S FUND
The principal area of concern for ASIC in relation the quality of the audit by Mr Murphy of the S&S Fund was Mr Murphy’s failure to use the correct approved form of auditor’s report to report to the trustee on the outcomes of the audit. (S&S auditors report form concern)
The S&S auditors report form concern raises the same issues as those which were raised in relation to the Malcolm auditors report form concern. On 21 January 2022, Mr Murphy provided a report headed “Independent Auditor’s Report to the Members of Shaurya & Samar Superannuation Fund”[107] which, similarly, incorrectly used the approved form for the report for an audit of an RSE.
[107] T45-9, Tender Bundle pages 676-680.
AUDIT QUALITY: ATO TRUSTEE DECLARATIONS
Under s.104A of the SIS Act, the directors of a corporate trustee of a superannuation fund must provide a signed declaration in the approved form stating that “he or she understands his or her duties as trustee of a self managed superannuation fund”. The directors must also “ensure that the declaration is retained so long as it is relevant, and in any case for at least 10 years.”[108] Failure to provide a signed declaration in accordance with s.104A(2) is a strict liability offence.[109]
[108] SIS Act s.104A(2)(c).
[109] SIS Act s.104A(3).
ASIC’s complaint is that Mr. Murphy failed to ensure that the required declarations were included in the audit papers for each of the Hess Fund, the Malcolm Fund and the S&S Fund.[110] Similar facts and circumstances to those raised in paragraphs [58(b) and (c)] and [59] above arise for the S&S Fund.
[110] Respondent’s SFIC [82]-[83], Tender Bundle page 1538.
This was the second of the only two points of criticism about the three audits under review which Mr Murphy was prepared to concede was valid and needed to be addressed in the future.
DID MR MURPHY FAIL TO COMPLY WITH ADDITIONAL CONDITIONS IMPOSED ON HIS REGISTRATION?
ASIC contends that there was repeated and material non-compliance by Mr Murphy with the key components of the Conditions Decision.[111] Specifically, Mr Murphy failed to:
(a)comply within the required timeframes of the Review Condition and failed to provide comments and otherwise respond to the independent reviewer as required.
(b)sit and pass the SMSF competency exam on a first attempt within the required timeframe of the Competency Exam Condition and subsequently failed to take any steps to sit and pass the exam after his first failed attempt.
(c)complete the on-line training within the required timeframe of the Online Training Condition. and
(d)notify ASIC of the notification of CPA Australia of the Conditions Decision within the required timeframe of the Professional Association Condition.
[111] Respondent’s SFIC [84]-[85], Tender Bundle pages 1538-1539.
The effect of Mr Murphy’s cumulative failures to comply with the terms of the Conditions Decision, which had imposed conditions, or additional conditions, under s.128D of the SISAct on Mr Murphy’s registration as an approved SMSF auditor, is to enliven ASIC’s power to disqualify him under s.130F(2)(b) from being an approved SMSF auditor.
DID MR MURPHY FAIL TO COMPLY WITH APPLICABLE AUDITING STANDARDS?
ASIC contends that Mr Murphy’s audit of each of the Hess Fund, the Malcolm Fund and the S&S Fund was not conducted in compliance with his obligation as a SMSF auditor under s.128F(c)(ii) and (iii) of the SIS Act (set out at paragraph [6] above), to comply with the auditing and assurance standards set by the Auditing and Assurance Standards Board. The applicable ASAs do not refer to the specific documents that a reasonable auditor would have obtained in auditing those funds. However, the Tribunal agrees that, having regard to the purpose of a SMSF audit and the requirements of the SIS Act and Regulations, it is possible to identify the documents and enquiries that a reasonably competent and diligent auditor would obtain to comply with the ASAs.
ASIC identified[112] a few significant failings by Mr Murphy to carry out his duties as a SMSF auditor:
(a) the use of the wrong forms in reporting to ASIC.
(b) the use of a deficient audit checklist, which remained deficient even as updated.
(c) failures to identify whether a trustee was a natural person or a corporation or that a member of a fund was not a director of the trustee company.
(d) not obtaining sufficient audit evidence of the ownership of a major asset.
(e) not obtaining sufficient audit evidence that assets were recorded at their market value.
(f) failing to analyse whether the investment strategy was being complied with.
(g) failing to obtain evidence that borrowings came within a relevant exception. and
(h) consistently failing to keep records on his audit files that met the requirements of ASA 230, which requires the preparation of audit papers …” sufficient to enable an experienced auditor, having no previous connection to the audit, to understand the results of the audit procedures performed, the audit evidence obtained, significant matters arising during the audit, the audit conclusions reached thereon and significant professional judgements made in reaching those conclusions.”
[112] Respondent’s SFIC [88], Tender Bundle pages 1539-1540.
I am satisfied on the material before the Tribunal that each of the failings referred to in sub-paragraphs (a) to (h) of the preceding paragraph have been demonstrated to have occurred to a lesser or greater extent.
DID MR MURPHY FAIL TO COMPLY WITH THE REPORTING PROVISIONS OF THE SISACT?
ASIC contends that Mr Murphy provided or lodged audit reports which were not in the approved form required, respectively, by ss. 35C and 129 of the SIS Act.
In respect of the former, by issuing RSE auditors reports for the Malcolm Fund and the S&S Fund, instead of SMSF auditors reports, Mr Murphy contravened ss. 35C(5)(c) and 35C(6) of the SIS Act. In respect of the latter, Mr Murphy failed to use the approved ACR in reporting a contravention to the ATO, which was in breach of s. 129 of the SIS Act. This conduct of Mr. Murphy is said by ASIC to demonstrate either a lack of awareness of the correct reporting processes or, alternatively, a lack of due professional care and regard for those reporting processes.
SHOULD MR MURPHY BE DISQUALIFIED?
Mr Murphy has had issues with ASIC in the past about his practical experience and general competency to act as an auditor. Mr Murphy applied to ASIC to be registered as an auditor in 2002 and again in 2012. On both occasions, his application was refused by ASIC. On both occasions, he sought review in the Tribunal of ASIC’s decision not to register him. On both occasions, the Tribunal affirmed ASIC’s decision not to register him.[113]
[113] Re Murphy and Australian Securities and Investments Commission [2004] AATA 1371; Re Murphy andAustralian Securities and Investments Commission [2013] AATA 810.
Importantly, in both earlier cases, there was no finding that Mr Murphy was not a fit and proper person to be a registered auditor, and in the present case it is not contended as the ground for disqualification under s.130F(2) of the SIS Act that Mr Murphy is not a fit and proper person to be an approved SMSF auditor. The present case is about whether Mr Murphy meets the requisite auditing and assurance standards to continue to be an approved SMSF auditor.
Mr Murphy makes the submission that the loss of his approved SMSF auditor registration would mean closure of his practice and the loss of his clients because his disqualification would have the immediate outcome that he would cease to be “a fit and proper person” for the purposes of his registration as a tax agent.[114] The Tribunal does not find that submission to be persuasive because there is simply no evidence, independent of Mr Murphy’s concern, that such an outcome, including the asserted consequences for his tax agent status, would necessarily result from his disqualification as an approved SMSF auditor.
[114] Applicant’s SFIC pages 1, 23, Tender Bundle pages 1544, 1566.
The Tribunal accepts that in the period since 2013, Mr Murphy has acquired considerable practical experience in auditing work. However, it is clear from the material before the Tribunal that lingering questions have remained about whether Mr Murphy’s auditing work as an approved SMSF auditor has met the requisite auditing and assurance standards. Mr Murphy referred in his submissions to the referral from the ATO to ASIC in March 2021, which was made in relation to his audits of other SMSFs.[115] He also referred to the detailed letter drafted by his then barrister, Ian Stanley, in response to the ASIC letter dated 6 August 2021 which had outlined ASIC’s concerns about aspects of SMSF audits conducted by Mr Murphy.[116] He further submits:” ASIC accepted this barrister letter when they decided not to take further action but instead to offer education.”[117] The Tribunal notes that the ASIC concerns about the particular SMSFs addressed in the Ian Stanley correspondence are not the subject of the Reviewable Decision, but the correspondence does provides useful context for present purposes.
[115] Applicant’s SFIC page 2, Tender Bundle page 1545 and Attachment 1 at Tender Bundle page 1575.
[116] Applicant’s SFIC page 2, Tender Bundle page 1545 and Attachment 2 at Tender Bundle 1580-1592.
[117] Applicant’s SFIC page 3, Tender Bundle page 1546.
ASIC contends that Mr Murphy appears not to have accepted the criticisms levelled at his performance as a SMSF auditor. This is evidenced by examples taken by ASIC from what is said by Mr Murphy in the Application for Review.[118] ASIC notes the significance of Mr Murphy’s failure to accept legitimate criticisms of his conduct as auditor in the light of the Conditions Decision.[119]
[118] Respondent’s SFIC [97], Tender Bundle page 1542.
[119] Respondent’s SFIC [99], Tender Bundle page 1543.
It emerged from the hearing that Mr Murphy has only ever accepted the validity of two of the complaints against him, being those that concerned the use of the wrong form of audit report in relation to the Malcolm Fund and the S&S Fund, and his failure to include signed trustee declaration statements in the audit papers. He conceded little to no ground when each of the other complaints were put to him in cross-examination.
A recurring theme in his dialogue with ASIC has been that ASIC’s approach has been a pedantic one. That submission was referred to by ASIC’s delegate in the Reviewable Decision at paragraph [57]:
“Mr Murphy also submits that ASIC’s concerns are pedantic. I acknowledge that each of the instances of non-compliance on their own are not serious and would not warrant disqualification. However, when taken as a whole, together with the reasons for the previously imposed conditions on his registration, and in the context of Mr Murphy’s lack of contrition, I am satisfied that Mr Murphy’s non-compliance is serious and systemic.”[120]
[120] T2, Tender Bundle page 34.
Mr Murphy was taken to paragraph [57] of the Reviewable Decision in his cross-examination. He acknowledged that the term pedantic was one which was introduced by him in his submissions. The following exchange then took place:
Counsel: “Would you accept that what [the Delegate] is saying is that one or two instances might by themselves not be significant enough to disqualify you, but it is the cumulative effect that is problematic. Do you see that?”
Mr Murphy: “Yes, no, I see that, but, you know, my view would be if the pedantic—you know if you use the correct English pronunciation and term, then I can’t see how the cumulative effect would suffice for a disqualification. On that basis you’d disqualify half your audit force, or a lot more.”
Counsel: So, you don’t think it’s concerning if someone has made a thousand very small errors? You wouldn’t think that’s concerning because each error by itself is small?”
Mr Murphy: “Yes, look that- and it would be concerning but I pushed back on every single one of them pedantic issues- every single one, except for two. I’ve acknowledged two.”[121]
[121] Transcript Day 2 P-62 lines 13-44 at lines 32-44.
The difficulty for Mr Murphy is that auditing is by its very nature an exacting discipline. It is all about the detail. Mr Murphy’s evidence consistently showed a reluctance on his part to accept responsibility for addressing the detail of SMSF audits he was conducting, and getting the detail right, to the extent that it met the requirements of the applicable ASA’s and the SIS Act and Regulations.
ASIC’s principal submission as to disqualification is that that remedy is no more than what is required having regard to the purpose of s.130F(2)(a) of the SIS Act. The supporting reasoning for ASIC’s submission is:
“Whilst each breach…might, on its own, be taken to be honest and relatively minor, the cumulative effect demonstrates that Mr Murphy has an inadequate knowledge of his obligations as a SMSF auditor. Alternatively, Mr Murphy has chosen to disregard those obligations. His conduct demonstrates that he lacks the necessary degree of competency and diligence required of a SMSF auditor. His vague and cursory response to ASIC and the Tribunal suggest his failings will not be properly addressed by anything but a disqualification.”[122]
[122] Respondent’s SFIC [100], Tender Bundle page 1543.
The Second Reading Speech to the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Bill 2012, which bill introduced a registration regime for SMSF auditors to the SIS Act, points to the vital role of SMSF auditors in “maintaining the integrity of a major sector of the superannuation system.” The Speech goes on to say that ASIC “will be the registration body for SMSF auditors and will be responsible for setting competency standards and taking enforcement action against auditors who have not met their obligations.”[123]
[123] Commonwealth, Parliamentary Debates, House of Representatives, 19 September 2012, page 11169. Referred to in Henley and Australian Securities and Investments Commission [2024] AATA 82 (Henley) at [36].
The purpose of a banning order, including the disqualification currently under consideration, is protective in nature, with deterrence playing an important part in that protective purpose. In Re Howarth and Australian Securities and InvestmentsCommission[124], Deputy President Forgie stated:
“The weight of authority in the Federal and Supreme Courts to whose judgments we have referred seems to be to the effect that a disqualification order, and so a banning order, is made on the basis of what will protect the public. It is not made on the basis of what will punish the person concerned even though punishment or the imposition of a penalty may be the practical outcome of the making of an order. Deterrence is also a relevant concern. Deterrence may relate both to the person concerned and to others engaged or potentially engaged in the finance. If imposed, it is relevant in the case of the individual in that it protects the public from that person’s being involved in the industry. Whether imposed or not, the possibility that an order might be made is itself a deterrent both to an individual and to all of those engaged in that industry.”[125]
[124] (2008) 101 ALD 602, [2008] AATA 278.
[125] (2008) 101 ALD 602, 653, [2008] AATA 278 at [180].
Specific deterrence is a necessary consideration for the tribunal in considering whether a disqualification is appropriate. As was apparent from both the Applicant’s SFIC and from Mr Murphy’s cross-examination he did not and does not accept, with limited exceptions, any of the identified and well-documented deficiencies in the conduct of his audit files when measured against the relevant ASAs.
Further, Mr Murphy repeatedly relied on his “auditors judgment” to fill the gaps in the peer reviewed audit files, which gaps should instead have been filled with additional documentary evidence which another experienced auditor, having no prior knowledge of the file, could follow. An example of this, from Mr Murphy’s closing submissions, related to the Hess property ownership concern:
“I’m just going to disagree with the Stephen Hess, you know. Like the rates notice, and the insurance papers, and the rental notice, they can attack it all they like, but at the end of the day, I’m the auditor and I make the judgment, and I’m satisfied that it was sufficient evidence in those three for me to make that judgment.”[126]
The Tribunal is satisfied that a disqualification order is appropriate as specific deterrence to Mr Murphy.
[126] Transcript Day 3 P-148 lines 14-18.
General deterrence is also a necessary consideration for the Tribunal in determining whether a disqualification is appropriate. In Australian Securities and Investments Commission vGilliland[127], Collier J noted:
“Perhaps surprisingly, there is little authority specifically addressing the relevance of general deterrence as a factor for consideration in respect of the disqualification of SMSF auditors pursuant to s. 130F of the SIS Act. Of some assistance are Whittle and Australian Securities and Investments Commission [2018] AATA 1861, Australian Securities and Investments Commission v McCormack (2017) 160 ALD 155,170; [2017] FCA 672, and Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; [2008] AATA 278.”[128]
Her Honour considered those and other authorities, concluding:
“While s.130F of the SIS Act does not specifically mandate the issue of general deterrence as a factor requiring consideration by a decision-maker, I accept ASIC’s argument that, in view of the subject matter, scope and purpose of s.130F of the SIS Act, and the statutory scheme of the legislation, general deterrence is implicitly a relevant factor for the decision maker to take into account.”[129]
[127] [2022] FCA 1421. See also Henley at [37].
[128] [2022] FCA 1421 at [29].
[129] [2022] FCA 1421 at [36].
On 15 January 2025, ASIC referred the Tribunal to the decision in Islam and Australian Securities & Investments Commission (Taxation and business)[130] (Islam). Submissions were received from Mr Murphy on 27 January 2025, together with supporting documents on 3 February 2025, which documents detailed certain differences between the facts in Islam and the present case. Having considered Mr Murphy’s submissions, the Tribunal accepts that the present case is different in its facts from Islam, including because the latter case concerned a not fit and proper person disqualification issue, which issue did not need to be determined in respect of Mr Murphy.
[130] [2024] ARTA 88 (18 December 2024).
However, the Tribunal does endorse what was said by the Tribunal in Islam about general deterrence:
“Clear messages need to be given to SMSF auditors. Those messages include that it is not acceptable for approved SMSF auditors to:
a. Withhold material from the regulators.
b. Mislead the regulators with submissions you do not correct and later disavow.
c. Rely on trustee representation letters as sole audit evidence without more- particularly when considering issues such as market value.
d. Not have phone notes on the audit file of important discussions.
e. Not document the SMSF’s reasoning on the audit file.
f. Ignore or not identify inconsistencies between documents.
g. Maintain audit files that an experienced auditor could not pick up and follow.”[131]
Points d., e., f. and g. are of particular relevance to this case.
[131] [2024] ARTA 88, [111].
As has been said earlier, approved SMSF auditors are crucial to the upholding of the SMSF system. The public must have confidence that ASIC’s oversight of the SMSF system carries with it the ability to back up those clear messages with appropriate sanctions. It follows that Mr Murphy should be subject to a disqualification order for reasons of general deterrence and for the protection of both the public and of the integrity of the superannuation system.
Mr Murphy is rightly concerned, as is the Tribunal, about the potential impact of his disqualification on the future employment of the employees of his Accountants and More practice. That concern raises two related questions. First, what proportion of the accounting work of Mr Murphy’s practice is SMSF audit related work? Second, given that Mr Murphy’s disqualification as an approved SMSF auditor has now been in effect since 22 December 2023, has that event materially affected the ongoing employment of the employees of the practice?
The first question was addressed in cross-examination, where Mr Murphy’s evidence was that prior to his disqualification the percentage of the practice’s work dedicated to SMSF audits was no more than about five percent.[132] In respect of the second question, I questioned Mr Murphy as to whether each of the half-dozen employees of the practice identified by him in the Applicant’s SFIC[133] were employed by the practice as at the effective date of his disqualification in December 2023, and whether those employees were still employed by the practice at the time of the hearing. Mr Murphy answered yes to both questions.[134]
[132] Transcript Day 1 P-27 lines 32-35.
[133] Applicant’s SFIC page 1 Tender Bundle page 1544.
[134] Transcript Day 3 P133 lines 40-46 and P-134 lines 1-4.
The Tribunal is satisfied that affirming the disqualification order, which has now been in place for over 12 months, will, although being serious for the business, not very likely have the immediate and catastrophic effect on Mr Murphy’s accounting practice which he has predicted for it in his submissions.
The Tribunal has noted the serious point made by Mr Murphy that there is a real shortage of tax accountants in rural and remote areas and that his absence from the market will leave a gap in the country market in respect of SMSF audit service provision. However, as hardly needs stating, people living in the country have no lesser entitlement than those living in the city to have access to audit services for their SMSFs which meet the required auditing and assurance standards. The Tribunal is not satisfied on the evidence before it that the SMSF audit services which Mr Murphy has been delivering do meet the required auditing and assurance standards.
Having regard to all the circumstances, Mr Murphy should be disqualified as an approved SMSF auditor. Those circumstances include his serious failure to comply with the Conditions Decision, which had provided him with a “second chance”[135] and the necessary path forward to avoid a disqualification order having to be made at that earlier time. A disqualification order is appropriate having regard to the need for both specific and general deterrence.
[135] Transcript Day 3 P-146 lines 36-39.
CONCLUSION AND DECISION
For the reasons set out above, I have concluded that the correct or preferable decision on the material before me is for the Reviewable Decision to be affirmed. Accordingly, the Tribunal affirms the decision under review.
Date(s) of hearing: 11, 12 & 13 December 2024 Date final submissions received: 3 February 2025 Applicant: T Murphy (self-represented) Counsel for the Respondent: F Bentley Solicitors for the Respondent: A Paciocco, ASIC
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