Money Tips with Money Matchmaker®

Professional Indemnity Insurance for SMSF Auditors

Written by

Shaun McGowan

As an SMSF Auditor you have some very strict responsibilities. Your job is to provide independent verification that each self managed super fund (SMSF) you audit has been correctly managed, that the trustees have acted in compliance with all the regulations, and that all the financial records are in order.

In your role as SMSF Auditor you are expected to maintain strict independence and vigilance. Whilst you are relying on data provided to you by your client or the accountant who regularly manages their affairs, you are expected to use your own judgement as to whether that information provides a complete and accurate picture. If any data is missing or conflicting, you have a duty to follow it up and verify details until you can be completely certain that everything has been managed appropriately.

When you sign off on an audit, you are putting your personal and professional reputation behind it. If you make a mistake yourself, or fail to spot an error or fraud, you can be held personally liable for any financial loss your client experiences as a result. If an error or fraud is discovered after the SMSF accounts have been lodged, the client could face substantial regulatory fines in addition to any other losses.

If this happens, your client may file a professional negligence suit against you. Claims could include that:

  • You signed off on financial statements that contained errors, resulting in ASIC or ATO penalties.
  • You failed to detect and alert the client of fraudulent use of their SMSF funds.
  • You failed to deliver your services within the agreed time scales, leading to late filing penalties.
  • You did not provide the agreed services to a satisfactory professional standard.

Your clients and their accountants have a fiduciary duty to provide you with complete and accurate information about the financial management of the SMSF. However, it is your express role as an SMSF Auditor to verify every aspect of the data you receive, so reliance on the information provided by your clients will not protect you from a negligence claim.

Why do SMSF Auditors need professional indemnity insurance?

If you wish to offer your services as an SMSF Auditor in Australia, you must first register with the Australian Securities and Investment Commission (ASIC).

It is a legal requirement that you hold ‘adequate’ professional indemnity insurance, and as part of the registration process you will need to provide evidence of your insurance (i.e. a valid currency certificate).

The rules for registering as an SMSF Auditor are set out in this guide on the ASIC website. The guide explains that to qualify as ‘adequate’ your PII must give you at least $500,000 cover, preferably plus extra cover for your legal costs, and include at least one automatic reinstatement of cover (meaning that you will still be insured if you have to make a claim). It must specifically cover you for claims relating to audits made under the Superannuation Industry (Supervision) Act of 1993 (SIS Act).

This requirement exists to protect both SMSF and their clients. If you make an error or fail to detect a mistake or fraud in an SMSF’s financial records your clients could potentially experience major losses and severe regulatory penalties. Your professional indemnity insurance policy enables them to recover their losses even if you do not have the resources available to recompense them.

Remember that if you do not have professional indemnity insurance in place, your personal assets such as your home, as well as any business assets, could be at risk if you face a negligence claim.

What does professional indemnity insurance cover?

As an SMSF Auditor you may often work from your clients’ premises, so you may already have public liability insurance in place to protect you for any physical damage you inadvertently cause to another person or their property. However, this won’t protect you if one of your clients suffers a financial loss as a result of an error you make – which is where your professional indemnity insurance comes in.

Your PII policy covers the expenses you face if a client files a negligence claim against you. It protects you for any damages awarded against you if a claim is upheld – up to the limit of your policy. It also covers your legal costs, which will either be inclusive in your policy limit, or in addition to it (which means that costs won’t be deducted from the amount available to pay for damages).

Since errors or fraud could take some time to come to light, it might be prudent to add run off cover to your policy, to protect you against claims that could be made against you years after an audit has been completed.

Be proactive about managing debt with Money Matchmaker

How much is professional indemnity insurance for SMSF Auditors?

The cost of your professional indemnity insurance will be based on a number of factors, such as:

  • Your annual turnover
  • The amount of cover you wish to take out (the minimum for SMSF Auditors is $500,000)
  • Where you work (you will pay different levels of stamp duty in different states)
  • Whether you wish to add run off cover to your policy
Get help with your finances if you have bad credit with Money Matchmaker

Professional indemnity insurance case study

An SMSF Auditor was engaged by a client to perform an annual audit of their SMSF. During the year one of the SMSF Trustees had arranged an unauthorised loan of $300,000 from the SMSF funds to one of her relatives. She had hidden the transaction as a legitimate investment, and the other Trustees were unaware of it. The SMSF Auditor failed to detect it.

Eight months later the Trustee who had authorised the loan died. At this point it was discovered that the sum was missing and the fraud committed by the deceased Trustee was detected. The recipient of the loan failed to repay the amount and subsequently filed for bankruptcy, so the SMSF was unable to recover the money. In addition the ATO imposed a $12,000 fine on the SMSF for the breach of the regulations on lending to related parties.

The remaining Trustees filed a negligence claim against the SMSF Auditor who had failed to detect the fraudulent loan. The claim was upheld and the Auditor was ordered to pay $312,000 damages, in addition to incurring legal costs of $35,000. These costs were covered by his professional indemnity insurance policy, on which he paid an excess of just $[xx].

List of SMSF Auditing services that need professional indemnity insurance

You cannot become an SMSF Auditor in Australia unless you are registered with ASIC. Therefore, in order to provide any of the following services you must have professional indemnity insurance in place, as a requirement of your registration:

  • SMSF financial auditing
  • SMSF compliance auditing
  • Preparation of audit plans
  • Gathering of evidence in support of financial statements
  • Testing of assertions made in financial statements
  • Validation of data
  • Provision of financial status opinions
  • Documentation of audit procedures
  • Identification of compliance contraventions
  • Testing of compliance contraventions
  • Provision of compliance opinions
  • Reporting of audit results in compliance with Australian superannuation legislation

Looking for a business loan? Get the best deals

FIND YOUR LOAN

About Money.com.au

Money.com.au want to make managing money easy and fun! By giving Australians simple tools so they can make the best decisions they can about their money.

We understand that the world of finance is complex, and offer free, extensive guides on Personal Loans, Car Loans and Business Loans, along with tools like our Budget Planning Spreadsheet to help you better manage and understand personal finance.

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

Address

Money Pty Ltd,
Suite 3, Level 2,
1 Taylor Street,
Moorabbin, VIC, 3189 Australia

Company

Money Pty Ltd trading as Money
ABN: 42 626 094 773
ACL: 528698
AFCA: 83955

© Copyright 2021 Money Ltd.



Disclaimer

Money Pty Ltd (trading as Money.com.au) provides information about credit products and is authorised to do so as the holder of Australian Credit Licence 528698. Money.com.au does not compare every Lender in Australia. We are not a broker or credit provider and when we provide information via this website, we are not providing you with a recommendation or suggestion about a particular credit product. When you apply for a credit product via the Money.com.au website, you are not applying with us, you are applying directly with a Lender Partner. Before entering into any credit product from one of our Lender Partners, you should confirm the rates and product information with the Lender. All information on this website is general advice only and does not take into account your objectives, financial situation or needs. You should consider whether this advice is right for you and we encourage you to seek independent financial advice.