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Lesson in liability as auditor cops it for client’s losses

Lesson in liability as auditor cops it for client’s losses

An accountant who audited his client’s SMSF and was held responsible for losses incurred serves as a warning of the liabilities a court will hold professionals to regardless of their client’s questionable judgements.

SMSF Miranda Brownlee 16 July 2018
— 2 minute read

In the case Cam & Bear Pty Ltd v McGoldrick, the NSW Court of Appeal was asked to consider where the actions of accountant and SMSF auditor, John McGoldrick, caused the losses suffered by an SMSF.

The findings of the case and successful appeal by the accountant’s client makes it clear that “auditors are being held to a high standard by courts, especially when the clients are not financially sophisticated,” said DBA Lawyers senior associate David Oon.

How the case unfolded  

The trustee of the SMSF, Cam & Bear, was established for Dr Lance Bear and his wife, Ms Jennifer Campbell. Dr Bear and Ms Campbell were directors of the corporate trustee for the SMSF.

Mr McGoldrick was an accountant who audited the accounts of the fund, including for the financial years ended 30 June 2003 to 2007.

Some years after the fund was established, a close friend of Dr Bear, Anthony Lewis, who conducted a finance business, suggested that his company, Lewis Securities Ltd, manage the fund’s investments. Mr Lewis also suggested that another company in which he held a 35 per cent interest, Databank Investment Services, undertake the fund’s administration, according to the evidence provided by Dr Bear.

According to Dr Bear, from about 1996 until 2008, he understood from his conversations with Mr Lewis, and from financial accounts that he received from time to time, that the fund’s assets consisted of cash amounts and shares.

In reality, the money was actually lent on an unsecured basis to Mr Lewis’ company LSL Holdings, Mr Oon explained.

The investments were recorded as “cash – LSL Holdings P/L” in the SMSF’s financials.

Mr McGoldrick, the auditor, queried the description, but Mr Lewis told him the SMSF trustee was happy with the description. Mr McGoldrick did not directly communicate with Dr Bear.

When Dr Bear went to withdraw cash from the SMSF to start a new medical practice, he was unable to, since the contributions had been used for unsecured loans. Mr Lewis’ companies went into voluntary administration soon after that.

“Dr Bear felt he had suffered loss at the fault of Mr McGoldrick who didn’t warn him that the investments may not be recoverable,” explained Mr Oon.

Cam & Bear then sued Mr McGoldrick for damages for negligence, and misleading and deceptive conduct.

The case was heard by a single judge in the Supreme Court of NSW, with the court finding that while Mr McGoldrick had been negligent and engaged in misleading and deceptive conduct, these defaults had not caused any loss to the appellant.

An appeal was then brought by Cam & Bear against Mr John McGoldrick which was heard by three judges of the NSW Court of Appeal, explained Mr Oon.

“The court said that failure to tell Dr Bear the loans might not be recoverable caused Dr Bear to continue to make contributions, which would not have been made otherwise,” said Mr Oon.

“Overturning the earlier decision, McGoldrick’s negligence was found to have caused the loss.”

In its judgement, the court concluded that responsibility for the loss should be apportioned 10 per cent to Cam & Bear and 90 per cent to Mr McGoldrick.

The court found that the company which compiled the fund’s financial statements, Databank, was not liable to Cam & Bear as there was no evidence as to the basis on which the company was engaged.

The court said that “Mr McGoldrick was a very experienced accountant and auditor who was engaged for the purpose of protecting the fund and its trustee against financial risks that included the very type of risk that eventuated”.

It also said that McGoldrick was “clearly negligent in failing to make proper enquiries as to the recoverability of the amounts held by LSL Holdings and failing to report the results of those enquiries to the appellant trustee”.

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Lesson in liability as auditor cops it for client’s losses
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