Latest AAT decision on regulation of approved SMSF auditors: Townshend and ASIC

Ms Janette Townshend was an approved SMSF auditor. However, in 2022 ASIC disqualified her. She applied for the AAT to review ASIC’s decision to disqualify her.

The AAT recently handed down the outcome of that application.

I do a lot of work with approved SMSF auditors. Accordingly, I read the decision with great interest. Here is my summary of the decision, along with some practical implications.

Summary of Townshend and ASIC [2023] AATA 3810

The following is only a summary. For the actual AAT decision, visit https://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2023/3810.html

Ms Townshend is an experienced accountant, with over 30 years of experience. She is a CPA. Except for this matter, she has an ‘unblemished professional record.’

Ms Townshend was at the relevant time an approved SMSF auditor.

Ms Townshend audited an SMSF where her husband was a member. She did this for multiple years.

As an approved SMSF auditor, SISA s 128F(d) and SISR reg 9A.06 expressly required that Ms Townshend follow APES 110. APES 110, of course, is the ‘Code of Ethics for Professional Accountants (including Independence Standards).’ APES 110 has undergone various iterations over the years. However, at all relevant times, it prohibited an individual from participating as an ‘Audit Team member’ where an immediate family member is a director of the audit client.

Interestingly, the AAT decision does not expressly say that ASIC disqualified Ms Townshend because she audited her husband’s SMSF. However, it is the clear implication in the AAT decision that that was indeed the reason why ASIC disqualified her.

Ms Townshend made a number of arguments as to why she should not be disqualified. Some of those arguments appear to have done her more harm than good.

Ms Townshend initially argued that she had no interest in the fund. She had also claimed that her ‘performance as an auditor was of a mechanical nature.’ ASIC argued that that description suggested she misunderstood what auditors do. The AAT appeared to side with ASIC. Ms Townshend ‘subsequently [withdrew] the suggestion that the auditor’s role was “mechanical in nature”, as well she might … that belated insight into the seriousness of the auditor’s role is welcome …’ The AAT went on: ‘that she perceived the audit role as being “mechanical in nature” suggests a serious misunderstanding about the auditor’s role in the regulatory system applicable to SMSFs.’

Ms Townshend argued that she was under the impression that ‘auditor independence requirements in the Code did not apply to SMSFs because the relevant provisions appear on their face to be directed to members of an audit team rather than individual auditors.’ The AAT considered that argument ‘untenable.’ The AAT noted that Ms Townshend ‘has now (reluctantly) accepted any doubts she might have had … should have been resolved by making appropriate enquiries.’

Ms Townshend displayed an ‘insistence [that her] the conduct was to some extent excused or explained because it was common in the industry.’ This argument definitely weighed against her. The AAT said that ‘[i]f there really is a widespread misunderstanding in the audit profession over the application of the auditor independence requirements, that is an argument for more stringent regulatory action in this case.’

As already stated, Ms Townshend has an otherwise unblemished record and the fact is that her error was the product of a misunderstanding. However, the AAT noted that her error was ‘all the more troubling given the extent of her experience.’

AAT decided to affirm the ASIC decision to disqualify Ms Townshend.

Practical implications

Naturally, all approved SMSF auditors should carefully consider and appropriately apply all relevant professional obligations for each matter.

Also, it is worth noting that Ms Townshend’s initial arguments appear to have found their way to the AAT. Ms Townshend withdrew certain arguments (eg, that she considered an auditor’s role to be ‘mechanical in nature’). However, they still weighed against her.

Accordingly, in crafting responses — even initial responses — to the ATO and ASIC, tremendous care needs to be taken. The wording and tone can matter and be relevant in any potential subsequent AAT decision.

DBA Lawyers has significant experience in advising on and drafting such responses. My colleagues and I are happy to be engaged by approved SMSF auditors to assist with such ATO/ASIC reviews/audits.

Related information

For related information and articles:

• Critical new ATO webpage — ALL SMSF auditors must pay close attention (https://www.dbalawyers.com.au/ato/critical-new-ato-webpage-all-smsf-auditors-must-pay-close-attention/)

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Bryce Figot ([email protected]) Special Counsel, DBA Lawyers

DBA LAWYERS

4 December 2023