Russell Whitchurch and Australian Securities and Investments Commission
[2012] AATA 784
•12 November 2012
[2012] AATA 784
Division GENERAL ADMINISTRATIVE DIVISION File Number
2012/1894
Re
Russell Whitchurch
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal Senior Member Dr K S Levy, RFD
Date 12 November 2012 Place Brisbane The decision under review is affirmed.
……………….[Sgd] ……………….
Senior Member Dr K S Levy, RFDCATCHWORDS
CORPORATIONS – Australian Securities and Investment Commission – Managed Investment Schemes – Responsible entity – Compliance plan – Removal of auditor – Considerations under ASIC Regulatory Guides – Permission for removal refused – Decision under review affirmed
LEGISLATION
Corporations Act 2001 (Cth) ss 331AC, 601HA, 601HG, 601HH
SECONDARY MATERIALS
Regulatory Guide 26: Resignation of auditors
Regulatory Guide 136: Managed investments: Discretionary powers and closely related schemes
REASONS FOR DECISION
Senior Member Dr K S Levy, RFD
12 November 2012
THE APPLICATION
Mr Russell Whitchurch made application, on behalf of Benchmark Capital Limited (“Benchmark Capital”) as responsible entity for the Benchmark Capital Mortgage Fund, to seek the consent of the Australian Securities and Investments Commission (ASIC) for the removal of the auditor of a compliance plan which had been put in place in respect of the Benchmark Capital Mortgage Fund. Benchmark Capital Limited and Benchmark Capital Mortgage Fund were previously known as Civic Capital Limited and
Civic Capital Mortgage respectively.
The original application was made on 16 December 2011. That application was defective but subsequently regularised and resubmitted to ASIC on 7 March 2012. By decision dated 11 April 2012, the application was rejected by a delegate of ASIC. That decision was advised to the applicant by letter dated 20 April 2012.
An appeal against that decision was made by application dated 1 May 2012.
Benchmark Capital was represented by the applicant Mr Whitchurch and he was accompanied by the managing director of Benchmark Capital, the responsible entity,
Mr Chris Cameron. I accept that the applicant is an authorised agent of the responsible entity, Benchmark Capital, and as such, I treat his application as that of the responsible entity.
ISSUE FOR DETERMINATION
The issue for determination is as follows:
Should the application for removal of an authorised auditor of the compliance plan of Benchmark Capital Limited (as responsible entity for the Benchmark Capital Mortgage Fund (“the scheme”) be approved under s 601HH(1)(b) of the Corporations Act 2001 (Cth) (“the Act”).
THE EVIDENCE
The factual position and background to this matter is comprehensively set out in ASIC’s Statement of Reasons for Decision as lodged with the Section 37 documents. A summary of the chronology of the facts is as follows:
·The background reveals that the scheme undertook the development of a building using loan moneys. During the global financial crisis in 2008, funding to continue the project was not readily available. The directors were left in the position of having a project half completed and might need to be halted resulting in losses for investors; or proceeding and thereby exceeding the 70% loan to valuation ratio which had been set out in the product disclosure statement. The directors decided to proceed on the latter basis. Evidence was received at the Tribunal hearing that it was the responsibility of shareholders to provide funds to keep the project going and Mr Whitchurch himself is a creditor to the fund.
·ASIC subsequently required a compliance plan to overcome the breaches of the original approval.
·On 16 June 2008, Mr Burgess (employed by accountants Thiel Partners),
became auditor for the compliance plan of Civic Capital Mortgage Fund.·On 3 December 2009, Benchmark Capital lodged an audit report of the compliance plan with ASIC. At that date, while there were some ongoing compliance issues, overall, the scheme was certified by the auditor as complying with the compliance plan.
·On 22 June 2011, Mr Burgess issued an independent audit report for the year ending 30 June 2010, as required by s 601HG of the Act. He noted that in conducting the audit of the compliance plan, there are limitations which will not necessarily detect “fraud, error or non-compliance with laws and regulations”. But he concluded his audit by issuing an adverse or qualified opinion which was based on the following specific observations:
(i)
The original product disclosure statement for Civic Mortgage Funds
(now Benchmark Capital Mortgage Funds) required a 70% loan to valuation ratio. As at 1 June 2010, that ratio was exceeded.
(ii)The independent auditors report for the year ended 30 June 2010 noted that due to the expiry of financial arrangements in the following financial year, there was a material uncertainty about the ongoing viability of the scheme. The auditor noted that this fact was not “fully disclosed” in the financial statement for the year ending 30 June 2010.
(iii)A complementary comment was made by the independent auditor of the responsible entity, Civic Capital Limited.
(iv)The compliance plan requires the financial controller to produce half yearly financial reports. No reports were produced for the half year ending 31 December 2009. An amendment was to be sought by the directors to have ASIC relax that requirement as it was regarded as too onerous.
(v)Adequate minutes had not been kept for all meetings of the board of directors, the lending committee, the compliance committee or the due diligence committee. It is not apparent from the Tribunal papers whether these committees all comprised the same directors.
(vi)The auditor also noted:
a)There was a lack of documentation of measures relevant to the compliance plan.
b)A breach had been reported for late lodgement of some statutory returns with respect to audit opinions of these managed investments.
c)The financial reports for the year ending 30 June 2010 had not been prepared, audited and lodged with ASIC as prescribed by the Act.
d)The compliance plan for Civic Capital Mortgage Fund had not been complied with, as at 30 June 2010. This non-compliance remained extant at the date of the independent auditors report in June 2011.
· A director had entered into a written agreement to subordinate his loan to “non-recourse” loan status until the liquidity position of the scheme met the original licensing conditions. A separate independent certificate of a chartered accountant is required for that director to be able to have his funds under that loan repaid.
The applicant submitted that his reasons for making the application were:
(a)a breakdown of communications with the auditor;
(b)the auditor fees were excessive; and
(c)Benchmark Capital, the responsible entity wished, for reasons of “economies of scale”, to have one audit firm undertake the audit of Benchmark Capital Limited and its entities, including the Benchmark Capital Mortgage Fund.
ASIC contended:
(1)These are not “exceptional circumstances”;
(2)Grounds 1 and 2 submitted by the applicant are of a commercial nature and it is for the applicant to resolve these with its auditor; and
(3)Ground 3 of the applicant’s submissions was not a justifiable reason to change auditor. Indeed, it argues that ASIC is concerned that the applicant is
“opinion shopping”.CONSIDERATION
The factual evidence presented by the parties is clear. The response by Mr Whitchurch, dated 14 August 2012, to a directions hearing in this matter was informative. As a result of that response and other documentary evidence, I make the following findings of fact:
(1)The Benchmark Capital Mortgage Fund has exceeded the 70% loan to valuation ratio as originally set out in the product disclosure statement.
(2)A compliance plan was approved by the directors of the responsible entity on 24 June 2008 and was lodged with ASIC on 26 June 2008.
(3)An adverse audit opinion was issued by the auditor for the financial year ending 30 June 2010.
(4)At 30 June 2011 there were continuing breaches identified, about documentation required to be maintained, including minutes and half yearly financial reports.
(5)At 30 June 2011 certain statutory audit returns had not been lodged with ASIC resulting in breaches of the Act.
(6)A director has a non-recourse loan in place in order to assist in the ongoing viability of the fund.
(7)The audit opinions for the years ending 30 June 2011 and 30 June 2012 are still outstanding.
Schemes are dealt with in Chapter 5C of the Act. The responsible entity has a number of responsibilities set out in Division 1 of Part 5C.2 of the Act. Compliance Plans are dealt with in Part 5C.4. Of particular significance is s 601 HA of the Act which specifies the features of a compliance plan. The responsible entity is charged with ensuring the compliance plan is audited. The role of the auditor and the reporting requirements are also set out in this Part (see s 601HG). The removal or resignation of an auditor is provided for in s 601HH. The applicant’s case was based, at the Tribunal hearing, on removal of the auditor although Mr Whitchurch stated the auditor had also applied to resign. In either case, the consent of ASIC is required under s 601HH.
It is clear auditor independence is of great importance in regulating corporate entities. There are prescribed requirements for an individual auditor and the audit firm (see s 324CA – s 324DD). Removal and resignation of company auditors is dealt with in a number of places in the Act. When dealing with registered schemes, it is set out in s 331AC. In this case, there is a different auditor for the responsible entity than for the compliance plan. Again, where a responsible entity seeks to remove an auditor or the auditor resigns, the consent of ASIC is required.
There is a common thread running through these provisions when referring to audit requirements regardless of whether the subject is a company or a scheme, as there is some interlinking of responsible entities (a company) and a compliance plan (the responsibility of the responsibility entity).
ASIC’s consent will be given only after taking into account certain policy considerations which are contained in Regulatory Guides. Regulatory Guide 136 entitled Managed investments: Discretionary powers and closely related schemes, deals with the policy of how ASIC will consent to the resignation of auditors (see paragraph RG 136.62). Paragraphs RG 136.64 – 136.66 highlight the importance of audit and that auditors should continue to hold office when they lodge their reports and for a period of time thereafter so that they can answer any questions from shareholders etc. It also states that Regulatory Guide 26 does not specifically deal with compliance plans but that similar considerations listed there will apply to compliance plans (see paragraph RG 136.63). ASIC also views the independence of audit of schemes as not to be regarded as less important than that of company audits (see paragraph RG 136.64).
This is further dealt with in Regulatory Guide 26: Resignation of auditors. This Regulatory Guide is concerned, amongst other important issues, with audit independence and the possible threats to independence if directors can remove auditors to get a more favourable audit response. As the protection of investors is in issue, ASIC, as regulator, is given statutory power to consent (or withhold consent) to the removal of an auditor.
In the case of managed investment schemes, particularly ones where a compliance plan is in place, the regulator would be expected to be alert to the removal of an auditor. Concern might not be expected if there were exceptional circumstances as set out in Regulatory Guide 26, para RG 26.16, which provides as follows:
(a)the failing health of the auditor;
(b)loss of independence of the auditor;
(c)the company is not audited by the auditor of its parent entity; or
(d)a relocation of the company’s or auditor’s principle place of business resulting in circumstances where it would be impractical for the auditor to perform the audit. With the exception of subpara (c) above, exceptional circumstances are not present here. The fact that there are different auditors between the scheme and the other company’s entities is dealt with in conjunction with other aspects of these reasons as set out below.
One of the issues of concern by ASIC is that the responsible entity may be “opinion shopping”. Regulatory Guide 26, at para RG 26.9, states
“Opinion shopping” is the practice of searching for an auditor willing to support a proposed accounting treatment. Normally the ASC will not consent to an application which it considers to be connected in any way to opinion shopping.
The applicant says the responsible entity wishes to have one auditor for all of Benchmark Capital’s entities. He also says the proposed audit firm charges less in professional fees than the firm where the present auditor is employed. The respondent says these are commercial issues. That is true but the applicant’s claims are not unreasonable in the circumstance where it is trying to regularise a project where some difficulties have been experienced in complying with statutory requirements and where there is good financial oversight.
The Regulatory Guides, which set out the policy of the law as it will be administered by ASIC in circumstances such as the present ones, are well founded. Auditors have to comply with statutory obligations under the Corporations law (set out above) and also have independent obligations as professional accountants and auditors. For example, they have obligations under APES 210: Conformity with Auditing and Assurance Standards, which have the force of law and are issued by the Accounting Professional and Ethical Standards Board (APESB). These have the force of law and impose responsibilities on auditors to:
…
Comply with public interest obligations
Comply with standard on independence
Maintain professional competence and due care
Adhere to auditing and assurance standards prescribed
The importance of audit set out in the statutory law, and its practical application, is guided by the policy issues set out in Regulatory Guide 136 (adopting Regulatory Guide 26). The fact that there are other standards set by negotiating bodies such as APESB also highlights that protection of the public (creditors, investors etc) is to be given great weight.
In considering the weight to be given to the applicant’s case against those legal requirements, I have some concern about the applicant’s claims. The issue of fees and the extent of fees may also be explicable by the fact that an auditor’s tasks become more lengthy and convoluted if it has to seek the production of documents in circumstances where the prescribed documents have not been maintained or not maintained in a satisfactory way. Where there is a delay or non-production of financial statements, this can also result in further enquiries by an auditor which may certainly take longer periods of time than where a set of statements are presented at the outset for the auditor to undertake his professional role. Mr Whitchurch’s claims about overcharging and an inability to get satisfactory answers were not tested by the presentation of witnesses from that firm or by other expert evidence.
As a result, I consider the evidence of the applicant in relation to fees charged by the auditors is not sufficiently robust to justify all claims made by him. In the circumstances, I am prepared to give greater weight to the submissions of ASIC.
In relation to the submissions about “opinion shopping”, I note the concerns submitted by Mr Coveney on behalf of ASIC and accept that they are well founded, based on the policies set out in the Regulatory Guides. For example, the Benchmark Capital Mortgage Fund had an adverse audit opinion for the year ending 30 June 2010. There is also some evidence that there have been breaches in the proper maintenance of certain documentation requirements for the year ended 30 June 2011, as well as a failure to lodge the audit report for that year; these are significant breaches. In addition, no audit report has been presented for the financial year ending 30 June 2012 and no adequate reference has been made as to why there was non-compliance for that year. This has now, in addition to the above outstanding requirements, also become an additional breach.
In relation to the concern of possible “opinion shopping” by ASIC, I am not satisfied that this has been adequately answered by the applicant and some doubt must therefore exist about the Benchmark Capital’s motives given that the audits of the compliance plan and other outstanding requirements which need to be rectified by the responsible entity. Therefore, I find that the decision by ASIC is the correct and preferable decision in the circumstances, at least until such time as the outstanding reporting obligations placed on Benchmark Capital Mortgage Fund have been rectified.
DECISION
The decision under review is affirmed.
I certify that the preceding 23 (twenty-three) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr K S Levy, RFD. .....................[Sgd]..........................................
Associate
Dated 12 November 2012
Date of hearing 27 September 2012
Applicant In person Counsel for the Respondent Gary Coveney
Solicitor for the Applicant Nicholas Goodstone
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