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