Samuel and Australian Securities and Investments Commission
[2016] AATA 696
•9 September 2016
Samuel and Australian Securities and Investments Commission [2016] AATA 696 (9 September 2016)
Division
Taxation & Commercial Division
File Number(s)
2015/6576
Re
Abe Samuel
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 9 September 2016 Place Sydney The decision under review is affirmed.
....................[sgd]....................................................
Professor R Deutsch, Deputy President
CATCHWORDS
SUPERANNUATION – auditor – self-managed superannuation funds - approved SMSF auditor - Commissioner of Taxation referral to regulator - disqualification order issued by ASIC – whether applicant complied with regulator standards – whether auditor independence as set by regulations - failure to perform duties or functions of an approved auditor adequately or properly – not a fit and proper person to be an approved auditor – decision affirmed
LEGISLATION
Superannuation Industry (Supervision) Act 1993 ss 10, 35B, 35C, 128A, 128B, 128F, 128P, 130F, 344
SECONDARY MATERIALS
APES 110 (as at 1 July 2011)
REASONS FOR DECISION
Professor R Deutsch, Deputy President
9 September 2016
INTRODUCTION
Pursuant to s 130F (2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act), on 7 October 2015, a delegate of the Respondent made a decision (the disqualification decision) to disqualify the Applicant from being an “approved SMSF auditor”.
On 4 November 2015, the Applicant requested that the Respondent reconsider the disqualification decision.
On 23 November 2015, another delegate of the Respondent decided to confirm the disqualification decision.
On 18 December 2015, the Applicant applied to the Administrative Appeals Tribunal (the Tribunal) for a review of the disqualification decision.
The law and the facts in this case are broadly agreed. Set out below under the headings “The Legislation” and “The Factual Background” is the legislation and the facts as summarised in the Respondent’s Statement of Facts Issues and Contentions dated 29 February 2016.
What is not agreed is the application of the law to the facts in this case. This is considered below under the heading “Application of the Law to the Facts”.
THE LEGISLATION
Section 35B of the Act provides that a trustee of a superannuation entity that is a self-managed superannuation fund (a SMSF) must, in respect of each year of income of the fund, ensure that accounts are prepared in respect of the SMSF.
Section 35C relevantly provides that a trustee of a SMSF must 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 s 128F (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.
The term “approved SMSF auditor” is defined in s 10 of the Act to mean:
... a person who is registered under section 128B, but does not include:
(a) a person for whom an order disqualifying a person from being an approved SMSF auditor, or suspending a person’s registration as an approved SMSF auditor, is in force under section 130F; or
(b) a person who is disqualified from being or acting as an auditor of all superannuation entities under section 130D.
Pursuant to s 128A of the Act, a person may apply to the Respondent, as the relevant regulator, for registration as an approved SMSF auditor. Subsection 128B (1) provides that the respondent must grant such an application if the Applicant satisfies the requirements in that provision. Those requirements relate to the qualifications, experience, competence and probity of the Applicant. Among other things, an Applicant must be a fit and proper person to be an approved SMSF auditor.
The Act imposes professional and other obligations on an approved SMSF auditor. In particular, s 128F states that an approved SMSF auditor must comply with, among other things:
(a)competency and other standards determined by the respondent (see s 128F (c)); and
(b)the auditor independence requirements set out in the regulations (see s 128F(d)).
Section 128F(d) refers to certain Regulations which in turn require the application of the Accounting Professional and Ethical Standards (APES) issued by the APES Board. Of particular relevance, is the APES 110 Code of Ethics for Professional Accountants (APES 110) issued in December 2010 and coming into effect on 1 July 2011. Paragraph 290.4 of APES 110 states that:
In the case of Audit 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 states that an auditor’s independence comprises both “independence of mind” and “independence in appearance”.
Paragraph 290.104 states that:
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. [Emphasis added.]
Paragraph 290.144 states that:
If, during the period covered by the audit report, a member of the Audit Team had served as a Director or Officer of the Audit Client, or was an employee in a position to exert significant influence over the preparation of the clients accounting records or the Financial Statements on which the Firm will express an Opinion, the threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Consequently, such individuals shall not be assigned to the Audit Team. [Emphasis added.]
Section 128P relevantly provides that, if the Commissioner of Taxation is of the opinion that:
(a) an approved SMSF auditor is not a fit and proper person to be an approved SMSF auditor; or
(b) in relation to the conduct of an audit of a SMSF:
(i) a person has contravened the Act or the Regulations; or
(ii) a person who conducted, or is conducting, the audit has failed to carry out or perform adequately and properly the duties of an auditor under the Act or some other law;
the Commissioner may refer the details of the matter to the Respondent.
Section 130F of the Act provides for the Respondent to order that an approved SMSF auditor be disqualified or his or her registration be suspended.
In particular, s 130F (2) relevantly states that:
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
...; or
(b) the person has failed to comply with a condition, or additional condition, imposed under section 128D on the person’s registration as an approved SMSF auditor; or
(c) the person has made a false declaration in ...; or
(d) the person is otherwise not a fit and proper person to be an approved SMSF auditor for the purposes of this Act.
Pursuant to s 130F(8), the Respondent may revoke such an order on its own initiative or on the application of the disqualified or suspended person.
Section 344 of the Act provides for:
(a)reconsideration by the Respondent of a decision to make an order under s 130F (2); and
(b)if, upon reconsideration, the decision is confirmed or varied, review by the Tribunal.
THE FACTUAL BACKGROUND
The Applicant was registered as an approved SMSF auditor on 21 June 2013.
At all relevant times, he was also an accountant and a registered tax agent.
On 24 April 2015, the Commissioner of Taxation referred to the Respondent, pursuant to s 128P of the Act, the matter of the Applicant’s status as an approved SMSF auditor. The Commissioner of Taxation had formed the opinion that:
·in relation to the conduct of audits of certain SMSFs, the Applicant had failed to carry out or perform adequately and properly the duties and functions of an approved SMSF auditor; and
·the Applicant was not a fit and proper person to be an approved SMSF auditor.
The Commissioner of Taxation found, among other things, that:
·the Applicant had not provided sufficient appropriate evidence on which to base his audit opinion;
·the Applicant had failed to maintain his independence as an approved SMSF auditor; and
·in respect of the Applicant’s response to these concerns:
Mr Samuel’s response to the ATO’s position has made clear his complete misunderstanding of basic SMSF structures and definition. His attempts to explain his behaviour relating to independence issues is fundamentally flawed and his insistence that he has mitigated threats to independence which can never be reduced to an acceptable level shows he does not have the capability or the willingness to understand these significant issues ...
The Commissioner of Taxation’s referral related to, in particular, the Applicant’s audit reports in respect of the accounts of the following three SMSFs for the year ended 30 June 2012:
(a)the Choice Business Management Pty Ltd Superannuation Fund (the Choice Superannuation Fund);
(b)the Cindy Samuel Superannuation Fund (the Cindy Samuel Superannuation Fund);
(c)the Kras Engineering Pty Ltd Superannuation Fund (the Kras Superannuation Fund).
On repeated occasions the Applicant has sought to describe each audit report as independent.
The relevant details for each of the SMSFs for the year ended 30 June 2012 were as follows:
(a)for the Kras Superannuation Fund:
·the Applicant was the tax agent;
·the Applicant was the auditor as a ‘Partner’ in the firm ‘Choice Business’;
·the date of the audit report was 14 March 2013;
·the trustees of the SMSF were either Kras Engineering Pty Ltd (ACN 080 795 599) (Kras Engineering) or Mr Jeff and Ms Anna Krasilovsky;
·the signatory to the trustee report was Kras Engineering;
·the members of the SMSF were Mr Jeff and Ms Anna Krasilovsky;
(b)for the Cindy Samuels Superannuation Fund:
·the Applicant was the tax agent;
·the Applicant was the auditor as a ‘Partner’ in the firm ‘Choice Business’;
·the date of the audit report was 15 June 2013;
·the trustees of the SMSF were the Applicant and a relative of the Applicant, Ms Cindy Samuel. There was some conjecture as to whether Messrs Aaron and Nathan Fischer were also trustees but the greater likelihood is that they were not formally appointed trustees but they may have been acting in a manner to suggest they were;
·the signatories to the trustee report were Messrs Aaron and Nathan Fischer;
·the member of the SMSF was Ms Cindy Samuel, in respect of whom the applicant held an enduring power of attorney and was her guardian;
(c)for the Choice Superannuation Fund:
·the Applicant was the tax agent;
·the Applicant was the approved SMSF auditor;
·the date of the audit report was 24 June 2013;
·the trustee of the SMSF was Choice Business Management Pty Ltd, in respect of which the Applicant was the sole director;
·the signatories to the trustee report were Messrs Aaron and Nathan Fischer;
·the member of the SMSF was the Applicant.
On 29 January 2014, the Applicant applied to the Australian Taxation Office to add Messrs Aaron and Nathan Fischer as trustees of the Choice Superannuation Fund. The Australian Taxation Office rejected that application on 14 February 2014. Nonetheless, the trustee report for the year ended 30 June 2012 was signed by Messrs Aaron and Nathan Fischer.
In respect of each of the SMSFs, the Applicant was, in addition to his roles as tax agent and auditor, the accountant for the fund.
The Commissioner of Taxation considered that, for all three SMSFs, the Applicant had “failed to demonstrate that he had fully considered all compliance matters as he did not have a comprehensive audit plan and compliance checklist”.
In respect of the audit of the Kras Superannuation Fund, the Applicant did not produce evidence, such as a contract of purchase or a certificate of title, to substantiate the fund’s ownership of a commercial property said to comprise 77.70% of the fund’s total assets.
On 28 April 2015, the Respondent notified the Applicant that it had received the referral from the Commissioner of Taxation and was considering whether or not to make an order under s 130F of the Act. The Respondent invited the Applicant to make submissions. On 19 June 2015, the Applicant provided submissions.
On 7 October 2015, the Respondent’s delegate made, pursuant to s 130F(2) of the Act, an order disqualifying the Applicant from being an approved SMSF auditor.26 The order came into effect on 14 October 2015. In deciding to make such an order, the delegate found that, in respect of his auditing of the Choice Superannuation Fund and the Cindy Samuels Superannuation Fund:
(a)the Applicant had engaged in an ongoing contravention of the independence requirements set out in paragraphs 290.104 and 290.144 of APES 110; and
(b)having regard to his response to concerns about this contravention, the Applicant had demonstrated a lack of knowledge of those requirements.
The delegate also found that the quality of the Applicant’s audit documentation required improvement. On the basis of these findings, the delegate stated that:
Ensuring that a SMSF is audited by an independent auditor is a fundamental requirement to the integrity of the whole SMSF system. The independence requirements that Mr Samuel failed to comply with are fundamental to the role of an approved SMSF auditor. His conduct represents such a significant departure from what is expected of an approved SMSF auditor. I therefore consider that Mr Samuel is not a fit and proper person to be an approved SMSF auditor under subsection 130F(2)(d).
The quality of Mr Samuel’s audits is clearly not adequate and adds further basis to my conclusion that Mr Samuel is not a fit and proper person to be an approved SMSF auditor.
In the circumstances, the delegate decided to disqualify the Applicant from being an approved SMSF auditor.
Upon reconsideration, the delegate affirmed the disqualification decision, finding that:
·by undertaking the audits of the Choice Superannuation Fund and the Cindy Samuels Superannuation Fund, the Applicant had contravened the independence requirements set out in paragraphs 290.104 and 290.144 of APES 110;
·in his audit reports, the Applicant had incorrectly claimed to be an independent auditor complying with auditing standards. In so asserting, the delegate found that the Applicant did not “understand the concept of independence and its purpose in the context of auditing”.
·the documentation in respect of the Kras Superannuation Fund was inadequate and the records available to the Applicant did not provide sufficient evidence to establish the fund’s ownership of its most significant asset.
The delegate concluded that the applicant was not a fit and proper person to be an approved SMSF auditor and that he should therefore be disqualified.
On 21 December 2015, the Applicant applied to the Tribunal for review of the confirmed disqualification decision.
ISSUES
The issues in this proceeding are:
(a)whether:
(i)the Applicant has failed to carry out or perform adequately and properly the duties of an auditor under the Act or the Regulations or as otherwise required by law; and, furthermore or alternatively,
(ii)the Applicant is not a fit and proper person to be an approved SMSF auditor for the purposes of the Act; and
(b)if so, whether an order should be made under s 130F(2) of the Act and, if such an order should be made, the nature of the order.
APPLICATION OF THE LAW TO THE FACTS: CONSIDERATION OF THE ISSUES
Has the Applicant failed to perform adequately and properly the auditor's duties and is not a fit and proper person?
The Respondent asserts that the Applicant has failed to perform adequately and properly and is not a fit and proper person largely but not exclusively based on his failure to adhere to the principles of independence which is enshrined in the law.
In response, the Applicant makes a number of contentions most notably that he placed reliance on general information that he obtained from the ATO, from the National Tax & Accountants' Association (NTAA) and from the attitude of his industry peers in assessing independence issues.
He also asserts that he invited the ATO to review and analyse the systems and safeguards that he had in place so as to satisfy the independence issues.
The Tribunal has no reason to doubt that the Applicant believed these assertions to be true but such matters can hardly be used to support the position the Applicant has taken. The rules as set out in APES 110 make it abundantly clear that there are no safeguards that could or would mitigate the threat of breaching the independence concerns to any acceptable level.
Furthermore, relying on general information of an unspecified nature even if provided by the ATO (which was not, in any case, clearly established in this case) and the general attitude that was adopted by industry peers to justify a clear breach of the rules requiring independence is unacceptable and dangerous.
In the view of this Tribunal, the Applicant’s conduct has been such that it is clear on an objective assessment of all the circumstances that the Applicant has failed to perform the auditor’s duties adequately and properly.
The key failings can be summarised as follows:
(i)As the auditor of the Choice Superannuation Fund and the Cindy Samuel Superannuation Fund, the Applicant plainly breached the auditor independence requirements in APES 110. As a consequence, he contravened his professional obligations under s 128F of the Act.
(ii)In his conduct of the audit of the Kras Superannuation Fund, the Applicant had insufficient evidence to establish the fund’s ownership of a major asset.
(iii)The Applicant’s audit documentation was inadequate. Among other things, he did not have a comprehensive audit plan and compliance checklist.
In these circumstances, the Applicant has failed to comply with two fundamental aspects of auditing: independence and diligence.
He has also failed to demonstrate insight into his critical deficiencies. His conduct falls very far below the standards expected and required of an approved SMSF auditor.
Some of his conduct is in clear contravention of the Act.
There was also a suggestion put by the Applicant that he was somehow locked into the appointment as the auditor and he was thus compelled to complete the audit of the various funds: Applicant’s Statement of Facts. Issues and Contentions Page 5 Para 4. If that is what the Applicant is asserting (and it was not made clear at the hearing) then he has misunderstood the appointment arrangements that apply to an auditor of such funds.
For the sake of clarity while an auditor is appointed on an annual basis, if at any time the auditor forms the opinion that the audit would be compromised due to concerns regarding independence the auditor must immediately advise all relevant parties and cease to act as the auditor. No doubt this can and will cause practical problems in relation to the completion of the audit but that is not a basis for continuing to act. The independence rules are a key and fundamental component of the Australian superannuation framework and cannot be disregarded.
As the Tribunal is satisfied that:
·the Applicant has failed to carry out or perform adequately and properly the duties of an auditor under the Act or the Regulations or as otherwise required by law; and, furthermore or alternatively,
·the Applicant is not a fit and proper person to be an approved SMSF auditor for the purposes of the Act;
the discretionary power to make an order under s 130F (2) of the Act is enlivened.
Given:
·the very serious and fundamental nature of the applicant’s deficiencies;
·his longstanding and ongoing failure to understand properly those deficiencies; and
·the clear need to uphold the integrity of the SMSF system;
the Tribunal:
·exercises the power under s 130F (2) to make an order against the Applicant; and
·makes an order disqualifying the Applicant from being an approved SMSF auditor.
If the Applicant is to act again as an approved SMSF auditor, it should only occur once he has satisfied the Respondent that he understands the seriousness of the deficiencies in his conduct and that such conduct will not be repeated: s 130F(10) of the Act.
CONCLUSION
The Tribunal affirms the decision under review to make an order disqualifying the Applicant from being an approved SMSF auditor from 14 October 2015.
I certify that the preceding 54 (fifty -four) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President ...........................[sgd].............................................
Associate
Dated 9 September 2016
Date(s) of hearing 15 June 2016 Date final submissions received 8 July 2016 Applicant In person Counsel for the Respondent R Knowles Solicitors for the Respondent Australian Security and Investments Commission
Key Legal Topics
Areas of Law
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Administrative Law
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Commercial Law
Legal Concepts
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Judicial Review
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Procedural Fairness
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Standing
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Statutory Construction
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Remedies
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