VBU and Australian Prudential Regulation Authority

[2007] AATA 1106

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1106

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No V2004/1132

GENERAL ADMINISTRATIVE  DIVISION		)
Re		VBU

Applicant

And AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

Respondent

DECISION

Tribunal G.D. Friedman, Senior Member, B.H. Pascoe, Senior Member

Date9 February 2007

PlaceMelbourne

Decision The Tribunal sets aside the decision under review.

The Tribunal certifies that the matter has terminated in a manner favourable to the applicant.

(sgd) G. D. Friedman

Senior Member

CATCHWORDS

CORPORATIONS - Applicant disqualified as trustee of superannuation fund - poor record- keeping - protection of integrity of superannuation system - whether applicant should be disqualified - whether respondent should accept enforceable undertaking

Australian Securities and Investments Commission Act 2001

Corporations Act 2001

Superannuation Industry (Supervision) Act 1933  ss 85, 120A, 307

Superannuation Laws Amendment Act (No. 4) 1998

Australian Securities and Investments Commission vDonald [2003] FCAFC 318

Australian Securities Commission v Donovan and Another (1998) 28 ACSR 583

Re HIH Insurance Ltd (in prov liq) Australian Securities and Investments Commission v Adler (2002) 42 ASCR 80

Re Slee and Australian Prudential Regulation Authority [2006] AATA 206

Rich v Australian Securities and Investments Commission [2004] HCA 42

REASONS FOR DECISION

9 February 2007 G.D. Friedman, Senior Member, B.H. Pascoe, Senior Member                  

1.      VBU is an accountant.  She seeks review of a decision made by the Australian Prudential Regulation Authority (APRA) to disqualify her from being a trustee, investment manager or custodian of a regulated superannuation entity arising from her conduct during an audit of a superannuation fund.

BACKGROUND

2.        VBU was born in 1962 and commenced with accountancy firm M. V. Anderson & Co in 1983 as an accountant.  She has been employed continuously by the firm since then.  In 1999 VBU was asked to assist in the audit of the Wall & Ceiling Superannuation Fund (the fund), which had been established on 18 August 1998.  On 7 December 1999 she and her colleague Mr N. Arvanitakis met with Mr R. Campbell, a part-time administrator of the fund, in relation to the audit, using a standard audit program for superannuation entities.  Mr Campbell provided her with his file of the trustees’ minutes to be reviewed as part of the audit process, and she prepared an audit work paper (the work paper) in which she summarised relevant items included in the minutes, and dated the work paper 7 December 1999.

3.        Some time after 7 December 1999, Mr Campbell provided M.V. Anderson & Co with copies of the minutes of trustees’ meetings dated 28 June 1999 and 15 July 1999, together with a copy of the Heads of Agreement (Draft Only) and Memorandum of Understanding relating to a resolution by the fund to enter into a contract for purchase of units in Mortgage & Property Holdings Unit Trust (the Unit Trust).  The minutes of these meetings were different from the minutes which VBU examined on 7 December 1999.  VBU did not write the date that the copies were provided by Mr Campbell either in the audit file or on the copies themselves.  At some time after 7 December 1999 but before June 2000 she reviewed the minutes and amended her audit work paper (the second work paper), noting her additional observations, although she inserted the date of the original work paper on the new work paper instead of the date on which the second work paper had been created.

4.        On 7 June 2000 APRA commenced an investigation into the affairs of the fund, and on 26 September 2001 VBU attended the offices of APRA to be examined orally about her involvement in the audit.  On 21 June 2004 the respondent disqualified her under s 120A of the Superannuation Industry (Supervision) Act 1933 (the Act) on the basis that she had contravened s 85 (prohibition of avoidance schemes) and s 307 (incorrectly keeping records with the intention of deceiving or misleading) of the Act.  The decision was affirmed on 9 September 2004.  She subsequently faced six charges in the Melbourne Magistrates’ Court of giving false testimony in a judicial proceeding (the oral examination) and making a record (her audit work paper) with the intention of deceiving APRA.  She was acquitted of all charges.  Mr Campbell and several others admitted taking part in a scheme to artificially reduce the market value ratio of the in-house assets of the fund by investing in the Unit Trust in the financial year ended on 30 June 1999 under a binding contract (the Heads of Agreement).  This was supposedly made on 30 June 1999 to avoid the application of Part 8 of the Act to the fund (the scheme).  In fact the Unit Trust did not exist on 30 June 1999.  The audit signed on 22 December 1999 was based on documents that did not exist at the time of completion of the audit and was designed to conceal the scheme from scrutiny by APRA or members of the fund.

ISSUES

5.        The issues before the Tribunal are whether VBU took part in the scheme with the intention of artificially reducing the market value ratio of the fund; whether she made or kept records in relation to the fund with the intention of deceiving or misleading APRA; and whether she is a fit and proper person to be a trustee, investment manager or custodian.  

EVIDENCE

6.        VBU told the Tribunal that she was part of the audit team of the fund.  She said that the notes she made on 7 December 1999 included a summary of matters that were important to the audit of the fund.  She said she did not see any problem with the financial affairs of the fund or of its in-house assets, and emphasised that the audit program used by the firm did not take into account the anticipated changes in the Superannuation Laws Amendment Act (No. 4) 1998 (the Amendment Act) that received Royal Assent on 23 December 1999.

7.        VBU stated that the fund’s financial records as at 30 June 1999 showed an investment of $300,000 in the Unit Trust by means of a cheque which was debited to the fund’s bank account on 30 June 1999.  She said that on 7 December 1999 she sighted the original unit certificate for 300,000 units, and the audit work in relation to the investment in the Unit Trust was limited to ascertaining the existence and valuation of the investment, in accordance with standard audit procedure.  She noted that the investment in the Unit Trust was accepted by Mr R. Elliott, the partner responsible for the audit, who had a closer involvement with the client than she did. 

8.        VBU said that she rewrote the second work paper after she received the amended minutes because the documents were a bit messy and she wanted the document to be neater and clearer.  She said she had no idea that the minutes she referred to were created after January 2000.  VBU explained that she did not record that she rewrote the document at a date later than 7 December 1999 because she saw no need to do so, as the document was created from the earlier work paper.  She said that she had no reason to doubt the accuracy of the revised minutes of meetings held on 28 June 1999 and 15 July 1999, and she had shredded earlier documents in line with confidentiality requirements.

9.        In relation to the examination on 26 September 2001, VBU stated that this was held nearly two years after the audit.  She said that she was not told the purpose of the examination or the allegation that documents had been back-dated, and that she gave truthful answers to the best of her recollection and relying on the documents on the audit file.  She conceded that her answer to a question of whether the second work paper could have been prepared later than 7 December 1999 was incorrect, but explained that at the time she did not recall re-writing the document, and as it was dated 7 December 1999 she assumed that this was the correct date.

10.      In relation to whether she is a fit and proper person to act as a trustee VBU stated that since 3 August 2000 she and her husband have operated their own superannuation fund and she has acted as a trustee of that fund.  She said that since her disqualification she has been forced to resign as trustee and has incurred financial losses as a consequence of having to join an industry-based superannuation fund.  VBU told the Tribunal that she has now changed her work practices, and takes extreme care.  She stated that her disqualification as a trustee has had a devastating effect on her.  She said there has been adverse publicity concerning the criminal charges that she faced in the Magistrates’ Court, and the events have affected her personal, social and financial life.  She said that she has suffered professionally as a consequence of the events, and has little future as a chartered accountant.

11.      Under cross-examination VBU agreed that her failure to record the date of creation of the second work paper had led to an impression that the document was created on 7 December 1999.  She emphasised that she had no reason to suspect that the revised minutes, on which she based the second work paper, were false, and noted that when she read the revised minutes she changed the work paper accordingly and should have noted that she had made changes.  VBU said that she had a general understanding of the Amendment Act, but did not appreciate the significance of the relevant dates in terms of the operation of the new legislation and its effect on asset values.

12.      VBU denied that she had deliberately given a false impression by rewriting the work paper, and reiterated that she had merely updated what she believed to be a correct version of the minutes.  She said that for this reason she did not know at that time that the documents she had created were false or misleading.  Being unaware of the falsification she denied re-writing the work paper with any intention of misleading APRA.

13.      Among documents tendered in evidence was the transcript of criminal proceedings against her in the Magistrates’ Court (Exhibit A5).  On 21 July 2006 at page 26 of the transcript the Magistrate concluded:

I found the defendant to be an impressive witness.  She gave her answers freely without hesitation.  She explained her conduct and gave reasons for it.

14.      In the Magistrates’ Court, evidence was given about VBU’s good character.  Mr Arvanitakis described her as trustworthy, honest, a capable accountant and conscientious.  Mr Campbell was granted an indemnity from prosecution and gave evidence in the Magistrates’ Court that he removed the original minutes and did not inform VBU or the other auditors about changes to the minutes.  He implicated a number of people but not VBU.  Mr D. Foulds, a chartered accountant with Pitcher Partners who administered the fund, pleaded guilty to breaches of the Act.  He told the Court that he drafted documents and minutes purporting to confirm that on 30 June 1999 the fund agreed to invest in the Unit Trust.  Mr Foulds gave evidence to the Court that he did not know VBU and had never met her.  

15.      The Magistrate found that there was no evidence to support the charges of giving false testimony at the examination.  She also found that although the second work paper did not correctly record and explain the matter to which it related, there was no dishonest intent by VBU to deceive APRA. The Magistrate said at page 27 of the transcript:

At no stage was she aware of the falsity of any of the minutes or other documentation provided to her.  She rewrote the document in question … so that it would clearly, neatly and more precisely reflect the contents of the revised minutes as given to her and for the assistance of APRA.

STATUTORY BACKGROUND

16.      Section 120A of the Act outlines the circumstances in which APRA may disqualify individuals:

(1)    The Regulator may disqualify an individual if satisfied that:

(a)     the person has contravened this Act or the Financial Sector(Collection of Data) Act 2001 on one or more occasions (whether before or after the commencement of this section); and

(b)      the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual.

(2) The Regulator may disqualify an individual who is, or was (including before the commencement of this section), a responsible officer of a trustee, investment manager or custodian (the body corporate) if satisfied that:

(a) the body corporate has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions (whether before or after the commencement of this section); and

(b)      at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate; and

(c)      in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate—the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual.

(3)The Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee, investment manager or custodian

…

17.      Section 85 of the Act provides:

(1) A person must not enter into, commence to carry out, or carry out, a scheme if the person entered into, commenced to carry out, or carried out the scheme or any part of the scheme with the intention that:

(a)     the scheme would result, or be likely to result, in an artificial reduction in the market value ratio of the fund’s in-house assets; and

(b)     that artificial reduction would avoid the application of any provision of this Part to the fund.

Civil penalty provision

(2)Subsection (1) is a civil penalty provision as defined by section 193, and Part 21 therefore provides for civil and criminal consequences of contravening, or being involved in a contravention of, that subsection.

Validity of transaction not affected by contravention of subsection (1)

(3)    A contravention of subsection (1) does not affect the validity of a transaction.

Scheme

(4)    In this section:

“scheme” means:

(a)       any agreement, arrangement, understanding, promise or undertaking:

(i)      whether express or implied; or

(ii)     whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

18.      Section 307 of the Act provides:

(1)    A person is guilty of an offence if the person:

(a)keeps any accounts, accounting records or other records in such a way that they:

(i)      do not correctly record and explain the matters, transactions, acts or operations to which they relate; or

(ii)     are (whether in whole or in part) illegible, indecipherable, incapable of identification or, if they are kept in the form of a data processing device, incapable of being used to reproduce information; or

(b)makes a record of any matter, transaction, act or operation in such a way that it does not correctly record the matter, transaction, act or operation; or

(c)alters, defaces, mutilates, falsifies, damages, removes, conceals or destroys any accounts, accounting records or other records (whether in whole or in part); or

(d)does or omits to do any other act or thing to any accounts, accounting records or other records;

with any of the following intentions (whether or not the person had any other intention):

(e)       deceiving or misleading the Regulator or a particular SIS officer;

(f)hindering or obstructing the Regulator or a particular SIS officer (otherwise than in the investigation of an offence against, or arising out of, this Act or the regulations);

(g)hindering or obstructing the investigation of an offence against, or arising out of, this Act or the regulations;

(h)hindering, obstructing or defeating the administration, execution or enforcement of this Act or the regulations;

(i)        defeating the purposes of this Act or the regulations.

IS DISQUALIFICATION APPROPRIATE?

19.      The power of disqualification given by s 120A of the Act is designed to protect the public from the actions of those who do not meet the standard required of them as auditors and trustees, rather than to punish the individuals concerned (Re Slee and Australian Prudential Regulatory Authority [2006] AATA 206).

20.      The Tribunal takes into account the comments made by the Magistrate in acquitting VBU of all charges, and the evidence given by other defendants and witnesses in the criminal proceedings that did not implicate VBU, although the Tribunal recognises that the standard of proof in the Magistrates’ Court is beyond reasonable doubt, and the standard of proof in the Tribunal is the lesser standard of balance of probabilities.  The Tribunal finds that VBU gave evidence at the hearing in a candid and frank manner, and that she acknowledged, in hindsight, that her actions in not dating the second work paper were incorrect and could have given an impression that she had been involved in false recording of documents.  The Tribunal considers her to be a truthful witness, and accepts her version of events concerning her role in the conduct of the audit and the circumstances of her creation of the work papers.

21.      In relation to the examination, the Tribunal accepts VBU's evidence that she was not informed of the nature and purpose of the proceedings, and that she answered questions to the best of her recollection at that time.

22.      For these reasons the Tribunal finds that VBU did not participate in any scheme that would result, or be likely to result, in an artificial reduction in the market value ratio of the fund’s in-house assets, so she did not contravene s 85 of the Act.

23.      In relation to s 307 of the Act, the Tribunal is satisfied that VBU did not keep or make any records with any of the intentions described in the section, so she did not contravene s 307.

24.      In view of its findings the Tribunal concludes that there is no basis for disqualification under s 120A(1) of the Act.

IS VBU A FIT AND PROPER PERSON TO BE A TRUSTEE, INVESTMENT MANAGER OR CUSTODIAN?

25.      The criteria for determining the fitness and propriety of a person under s 120A(3) of the Act are not set out in the Act. 

26.      In Rich v Australian Securities and Investments Commission [2004] HCA 42 the High Court considered the various factors to be taken into account in determining the length of disqualification under the provisions of the Corporations Act 2001.  McHugh J stated at paragraph 43:

In exercising their discretion, however, courts which administer the legislation do not concern themselves solely with the issue of whether the defendant now is or in the future will be a fit and proper person to manage corporations. They take into account a wide variety of factors in addition to determining whether any and, if so, what period of disqualification should be imposed. They consider more than the present and future fitness of the defendant to manage corporations. They take into account factors such as the size of any losses suffered by the corporation, its creditors and consumers, legislative objectives of personal and general deterrence, contrition on the part of the defendant, the gravity of the misconduct, the defendant's previous good character, prejudice to the defendant's business interests, personal hardship and the willingness of the defendant to render assistance to statutory authorities and administrators. No doubt some - maybe all - of these matters are relevant in determining whether the defendant ought to be disqualified or the period of disqualification that is required in order to protect the public. But in practice courts do not use these matters merely as evidentiary indicators of the time when the defendant will, if ever, be fit to manage corporations. Rather, they become part of a synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed…

At paragraph 48 McHugh J referred to Re HIH Insurance Ltd (in prov liq) Australian Securities and Investments Commission v Adler (2002) 42 ASCR 80 as the leading authority on the reasons for a court exercising its power under the Australian Securities and Investments Commission Act 2001 to order the disqualification of a person from managing corporations.  In Adler Santow J formulated 15 propositions including personal and general deterrence, the seriousness of the contraventions, the likelihood of the re-offending, the hardship suffered by the person and whether dishonesty is involved.

27.      In Australian Securities Commission v Donovan and Another (1998) 28 ACSR 583 at 606 Cooper J said that the extent to which a person benefited from the conduct personally or tried to conceal it are relevant matters when considering whether a disqualification order is appropriate, and, if so, the length of the disqualification.

28.      In relation to the second work paper, the Tribunal has already noted that VBU acknowledged her error in not including the date of creation of the document or an indication that the work paper had been re-written after 7 December 1999.  The Tribunal has concluded that her actions revealed no intent to mislead or deceive APRA.  VBU is regarded highly by her peers and has had no prior disciplinary or other actions of any kind against her.  She has not gained personally from her actions, and members of the fund did not suffer any loss.  The Tribunal accepts that she has suffered financially, socially and professionally as a result of the criminal proceedings and the matter before the Tribunal.  She is unlikely to repeat the poor record-keeping that led to disqualification.

29.      In all the circumstances the Tribunal finds that that VBU is a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian, so disqualification under s 120A(3) of the Act is not appropriate.

IS AN ENFORCEABLE UNDERTAKING APPROPRIATE?

30.      In Australian Securities and Investments Commissionv Donald [2003] FCAFC 318 the Full Federal Court held that, as an alternative to disqualification, the Tribunal had the power to direct that the Australian Securities and Investments Commission accept a written undertaking by the person who was the subject of proceedings. In the matter before the Tribunal VBU had offered to undertake not to act as a trustee or investment manager of a superannuation entity regulated by APRA (other than her role as trustee of her self-managed superannuation fund) or as responsible officer of a body corporate acting in that role, for a specified period. In the circumstances of this application, and the findings, the Tribunal does not consider that an undertaking is appropriate.

DECISION

31.      The Tribunal sets aside the decision under review.

I certify that the thirty-one [31] preceding paragraphs are a true copy of the reasons for the decision of:

G.D. Friedman, Senior Member and B. H. Pascoe, Senior Member

(sgd)       Lydia Zozula

Associate

Dates of hearing:  22 and 23 January 2007

Date of decision:  9 February 2007

Counsel for applicant:                  Mr M. Cahill

Solicitor for applicant:                  Linda Shanks

Counsel for respondent:              Mr G. Livermore

Solicitor for respondent:              Australian Prudential Regulation Authority