Legal database - View: Cases: Re Applicant and Federal Commissioner of Taxation

Confidential and Commissioner of Taxation
[2011] AATA 403

(Decision by: C Walsh, Senior Member)

Confidential
and Commissioner of Taxation

Tribunal:

Administrative Appeals Tribunal

Subject References:
SUPERANNUATION
auditor
approved auditor
self-managed superannuation funds
disqualification order issued by the Commissioner
Commissioner's decision not to revoke disqualification auditor
registered company auditor
certified practicing accountant
in-house assets greater than 5%
not dealing at arm's length
failure to report contraventions of SISA to fund trustees or ATO
failure to perform duties or functions of an approved auditor adequately or properly
not a fit and proper person to be an approved auditor
Australian and Assurance Standards Board
Australian Auditing Standards
Standards on Assurance Engagements
auditor independence
audit documentation

Legislative References:
Superannuation Industry (Supervision) Act 1993 - section 10; 17A; 65; 82; 83; 84; 85; 109; 129; 130; 131(1); 131(5); 131(7)
Superannuation Industry (Supervisions) Regulations 1994 - Regulation 1.04(2); Schedule 1AAA
Acts Interpretation Act 1901 - section 15AB

Case References:
Fearon v Australian Prudential Regulation Authority - [2006] AATA 918
Re Preuss and Australian Prudential Regulation Authority - (2005) 87 ALD 629
Kamah v Australian Prudential Regulation Authority 147 FCR 516; Re Slee and Australian Prudential Regulation Authority - [2006] AATA 206
Australian Broadcasting Tribunal v Bond (Australian Broadcasting) - (1990) 170 CLR 321
Hughes and Vale Pty Ltd v The State of New South Wales - (1955) 93 CLR 127
Re Francesco Martino and the Australian Taxation Office - [2002] AATA 1242
Toohey v Tax Agents' Board of Victoria - (2007) 67 ATR 522
Re Shingles and Director-General of Social Security - (1984) 6 ADL 568
Re Christoffelsz and Commonwealth - (1987) 13 ALD 392
Re Gilbert and Secretary, Department of Social Security - (1987) 13 ALD 518
Television and Radio Broadcasting Services Australia Pty Ltd and Australian Communications Authority - [2000] AATA 104
Stasos v Tax Agents' Board of New South Wales - (1990) 90 ATC 4950
Re Su v Tax Agent's Board of South Australia - (1982) 82 ATC 4282
Confidential and C of T - [2008] AATA 415
Wilson v Comcare - [2010] AATA 396
Drake v Minister for Immigration & Ethnic Affairs - (1979) 46 FLR 409

Decision date: 13 June 2011

Sydney

Decision by:
C Walsh, Senior Member

INTRODUCTION

1.Before being disqualified as an "approved auditor" by the Respondent, the Applicant was an approved auditor of various self-managed superannuation funds, including the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund No. 1.

2. The Applicant's disqualification as an "approved auditor" came about, briefly, as follows. On 27 May 2008, the Respondent notified the corporate trustee of the L Superannuation Fund (of which the Applicant is a director) that he would be conducting an audit of that fund in respect of the income year ended 30 June 2005. The L Superannuation Fund was subsequently selected by the Respondent for a comprehensive audit in respect of the income years ended 30 June 2004, 30 June 2005, 30 June 2006 and 30 June 2007. As a result of the findings from those audits, an internal recommendation within the Australian Taxation Office ( ATO ) was made that the Applicant be referred for review to the ATO's "Approved Auditor Review Program - Independence".

3. The Applicant was subsequently advised the Respondent, by letter dated 22 February 2010, that, as a result of that review, he was considering disqualifying the Applicant from being an approved auditor. In the "Position Paper" attached to that letter, the Respondent advised the Applicant that his position on the Applicant's disqualification was based on the outcome of the ATO's review of the Applicant's audit of three funds, namely the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund No. 1. The Applicant responded to that letter on 7 April 2010, requesting that the Respondent reconsider his position on his intention to disqualify the Applicant as an approved auditor.

4. On 4 June 2010, the Respondent advised the Applicant that he had considered the Applicant's response (dated 7 April 2010) but he had nevertheless decided to issue the Applicant with a disqualification order under section 131(1) of the Superannuation Industry (Supervision) Act 1993 ( SISA ). On 5 July 2010, the Applicant's solicitor wrote to the Respondent requesting that the Respondent reconsider his decision to issue the Applicant with a disqualification order. On 3 September 2010, the Respondent confirmed his original decision to issue the Applicant with a disqualification order.

5. The Applicant now seeks a review by the Tribunal of the decision made by the Respondent on 3 September 2010, pursuant to section 131(5) of SISA, to refuse to revoke the disqualification order issued to him on 4 June 2010 under section 131(1) of SISA.

IS THE DECISION BY THE RESPONDENT TO REFUSE TO REVOKE THE DISQUALIFICATION ORDER HE ISSUED TO THE APPLICANT THE CORRECT OR PREFERABLE ONE?

FACTUAL BACKGROUND

6. Prior to his disqualification as an "approved auditor" by the Respondent, the Applicant was the named auditor of the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund No. 1, as well as other self-managed superannuation funds. The Applicant has been a "registered company auditor" for 25 years, a member of Certified Practising Accountant Australia Ltd for 27 years and a registered tax agent for 37 years.

7. The L Superannuation Fund and the Q Superannuation Fund have the same corporate trustee, LN Pty Ltd. The directors of LN Pty Ltd are the Applicant, his wife and his two daughters. The members of the L Superannuation Fund are the Applicant, his wife and his two daughters. The members of the Q Superannuation Fund are the Applicant, his wife, his daughter and his son. The Applicant is also the director of KM Pty Ltd, a related entity of the L Superannuation Fund and the Q Superannuation Fund. The members and trustees of the S Superannuation Fund No. 1 are Mr PS and Ms WM. The Applicant is the registered tax agent for the S Superannuation Fund No.1.

8. On 27 May 2008, the Respondent notified LN Pty Ltd (the corporate trustee of the L Superannuation Fund) that he intended to conduct an audit of that fund, in respect of the income year ended 30 June 2005.

9. The L Superannuation Fund was subsequently selected for comprehensive audit in respect of the income years ended 30 June 2004, 30 June 2005, 30 June 2006, and 30 June 2007.

10. As a result of the findings from those audits, an internal recommendation within the Australian Taxation Office ( ATO ) was made that the Applicant be referred for review to the ATO's "Approved Auditor Review Program - Independence".

11. Following that internal review, the Respondent wrote to the Applicant (on 4 February 2009) stating that the complying status of the L Superannuation Fund would not be revoked, provided all outstanding amounts plus additional rent and interest to 30 June 2009 was paid by the Applicant to that fund on 30 June 2009 and that documentary evidence of the receipt of those monies by the fund was provided to the Respondent. Those payments were made to the Respondent by the Applicant.

12. By letter dated 22 February 2010, the Respondent advised the Applicant that based on his review of the audit working papers of the three superannuation funds audited by the Applicant (namely the L Superannuation Fund, Q Superannuation Fund and the S Superannuation Fund No. 1), he was considering disqualifying the Applicant from being an approved auditor.

13. In the "Position Paper" attached to the Respondent's letter dated 22 February 2010, the Respondent identified a number of contraventions of SISA by the trustees of the L Superannuation Fund and the Q Superannuation Fund which the Applicant, as the auditor of those funds, had failed to notify the trustees of the funds of and report to the ATO (as required by section 129 of SISA). In summary, the contraventions identified in the Respondent's "Position Paper" were as follows:

(i): The trustee of the L Superannuation Fund had contravened sections 84 and 109 of SISA because the fund had in-house assets greater than 5% and for the reason that the trustee had not dealt at arm's length in relation to the lease of fund assets (comprising jewellery, paintings and antiques which were valued at $87,075) to a fund member and a related entity since no lease agreements were in place in respect of the assets leased and no income was earned by the fund from the lease of the assets;
(ii): The trustees of the Q Superannuation Fund had contravened section 65(1)(a) of SISA by lending $11,000 to a fund member (i.e. the Applicant's wife).
(iii): Since that loan represented 84% of the fund's total assets and no interest was paid on the loan in the 2007 and 2008 years, the trustees had also contravened sections 84 and 109 of SISA by having in-house assets greater than 5% of the fund's total assets and by not dealing at arm's length in relation to the loan;
(iv): The trustees of the Q Superannuation Fund had contravened section 65(1)(b) of SISA by providing indirect financial assistance to a member as a consequence of $10,000 (showed in the fund's 2008 financial statements as an expense for 'management fees') being paid to a company (KM Pty Ltd) of which a member of the fund was a director; and
(v): The Q Superannuation Fund did not meet the definition of "self-managed superannuation fund" in section 17A of SISA in respect of the 2008 year as not all members of the fund were also directors of the corporate trustee of the fund in that year.

14. In relation to the S Superannuation Fund No. 1, the Respondent's "Position Paper" noted the following:

(i): The Applicant's audit file for the fund: (a) did not contain an audit plan; (b) contained a limited audit checklist which did not consider all relevant financial and SISA compliance matters; (c) did not contain any supporting documents demonstrating that the Applicant had verified the existence, ownership, valuation or use of the assets of the fund; and (d) did not contain any supporting documents demonstrating the income or expenses of the fund;
(ii): In response to the Respondent's query regarding an expense of $988 which was described as in the fund's financial statements for the 2008 year as "insurance", the Applicant stated that all monies paid in relation to the insurance expense had been refunded by the member as the insurance policies were not in the fund's name but. However, there was no evidence in the Applicant's audit files that the Applicant identified the insurance expense had been incorrectly classified as an expense of the fund or that the Applicant brought the matter to the attention of the fund's trustees at the time of performing the audit. According to the Applicant, at the time of the audit he had questioned the trustees about the insurance policy and they advised the policy was in the name of the fund but he did not verify that. (The amount of the insurance was subsequently found to be $1,098, not $988); and
(iii): The Applicant issued an unqualified audit report for the fund for the 2008 year, when he should have issued a qualified report.

15. The Respondent's "Position Paper" concluded that the Applicant had not performed adequately and properly the duties of an approved auditor under SISA and Australian Accounting Standards and, for that reason, it was the Respondent's intention to disqualify the Applicant as an approved auditor under section 131 of SISA.

16. On 7 April 2010, the Applicant's solicitor responded to the Respondent's letter dated 22 February 2010 seeking to explain the Applicant's position in relation to his audits of the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund and requesting that the Respondent reconsider his position in relation to his intention to disqualify the Applicant as an approved auditor.

17. On 4 June 2010 the Respondent advised the Applicant that he had considered the Applicant's response (dated 7 April 2010) and he had decided to disqualify the Applicant as an approved auditor in accordance with section 131(1) of SISA. Attached to that letter was the Respondent's "Reasons for decision" which concluded that:

" In two if the three funds [the Applicant] audited it was identified that the trustee had contravened the SISA and that the contraventions were serious. [The Applicant] did not report these contraventions in writing to the trustees or the ATO as required by section 129 of the SISA.

It was also determined that [the Applicant] did not comply with Auditing Standards to maintain professional independence and prepare appropriate audit documentation.

As a director of the corporate trustee of the [L] Superannuation Fund and the Q Superannuation Fund [the Applicant was] responsible for ensuring these funds comply with SISA. By performing the audits of [the Applicant's] own SMSFs and not reporting the contraventions [the Applicant was] responsible for, [the Applicant has] disregarded [his] obligations as both a trustee and auditor.

The contraventions also related to members using the resources of the fund for their own current benefit. This undermines the fundamental purpose of SMSFs which is to provide retirement benefits.

It is therefore determined that [the Applicant did] not [perform] adequately and properly the duties of an approved auditor under the SISA and Australian Accounting Standards.

As such, [the Applicant has] been disqualified as an approved auditor under subsection 131(1) of the SISA."

18. On 5 July 2010, the Applicant's solicitor wrote to the Respondent requesting a review of his decision to issue the Applicant with a disqualification order.

19. By letter dated 3 September 2010, the Respondent advised the Applicant that he had decided to confirm his original decision (dated 4 June 2010) to issue the Applicant with a disqualification order, pursuant to section 131(1) of SISA. Attached to that letter was the Respondent's "Reasons for decision" which identified the following facts as being relevant to the Respondent's decision not to revoke the disqualification order which he had issued to the Applicant:

" [ L ] Superannuation Fund

5.
The trustee of the [L] Superannuation Fund allowed related parties and members of the fund to use the assets. These assets included jewellery used by a member, and paintings and antiques used by a related trust. No lease agreements were in place and no income was earned from these assets. The value of these assets in the 2005 year was $87,075.

6.
The value of the assets used by related parties remained at $87,075 in the 2007 and 2008 financial statements and no income was reported from the use of the assets in these years.

7.
An Australian Taxation Office (ATO) audit of the [L] Superannuation Fund determined that the trustee contravened section 109 of the SISA due to the non-arm's length nature of the arrangements. The trustee agreed to establish formal lease agreements and pay outstanding amounts owed to the fund.

8.
[The Applicant] did not report the contraventions to the ATO in any financial year, and there was no evidence that [the Applicant] reported the contraventions to the trustee in writing. [The Applicant] also did not qualify [his] audit report in any affected years.

9.
[The Applicant's] audit file in relation to the [L] Superannuation Fund did not contain an audit plan or audit checklist. There were no documents demonstrating [the Applicant] had performed any audit tests in relation to the funds compliance with the specific provisions of the SISA, or that [the Applicant] had verified the existence, ownership, valuation or use of the assets.

10.
[The Applicant's] file for the [L] Superannuation Fund did not contain an Asset Register with notation that you 'Sighted and Confirmed." [The Applicant's] file also contained copies of this fund's bank statements.
Q Superannuation Fund

11.
The 2008 financial statements for the Q Superannuation Fund showed an asset valued at $11,000 and described as 'Transfer - [the Applicant's wife]'. The 2007 comparative figures showed this asset had remained unchanged since the previous year.

12.
In [the Applicant's] initial response [he] stated that this asset was an advance to [the Applicant's wife]. In subsequent responses [the Applicant] stated this asset was an inadvertent transfer from the wrong account and that the amount has been refunded with interest.

13.
The total assets of the Q Superannuation Fund were $13,108 in the 2008 year. This included only the 'Transfer - [the Applicant's wife]' asset mentioned above, and $2,108 of cash.

14.
The 2008 financial statements for the Q Superannuation Fund also showed an expense of $10,000 for 'management fees'.

15.
In [the Applicant's] fax dated 17 November 2009 you stated the management fee was paid to [KM] Pty Ltd. [The Applicant is] a director of [KM] Pty Ltd. [The Applicant] stated the fee was for an extensive review generating investment opportunities for the next 10 to 15 years. No invoice was provided for the fee and no other documents were provided demonstrating any service was provided.

16.
In [the Applicant's response to [the Respondent's] show cause letter dated 7 April 2010 [the Applicant] stated the $10,000 management fee '.....included reimbursement of fees for professional services necessitated as the result of the need to respond to specific enquiries of the Commissioner of Taxation, which involved related entities at the time.' [The Applicant] also stated that the fees were charged at arm's length rates and [the Applicant] had evidence to substantiate this position. [The Applicant] stated [he] would provide the evidence within 'a day or two after lodgement of this submission'.

17.
[The Applicant] did not provide any further evidence in relation to the $10,000 management fee.

18.
The Q Superannuation Fund did not meet the definition of a Self-Managed Superannuation Fund (SMSF) as not all members were directors of the corporate trustee in the 2008 year.

19.
[The Applicant] issued an unqualified audit report in relation to the Q Superannuation Fund for the 2008 year. [The Applicant] did not report any contraventions to the ATO and [the Applicant] did not inform the trustees in writing of any contraventions.

20.
[The Applicant's] audit file in relation to the Q Superannuation Fund did not contain an audit plan or audit checklist. There were no documents demonstrating [the Applicant] had performed any audit tests in relation to the fund's compliance with the specific provisions of the SISA, or that [the Applicant] had verified the existence, ownership, valuation or use of those assets.
P [ S ] Superannuation Fund

21.
[The Applicant's] audit file in relation to the P [S] Superannuation Fund No 1 did not contain an audit plan. There was a limited audit checklist that did not consider all relevant financial and SISA compliance matters.

22.
[The Applicant's] audit file in relation the P [S] Superannuation Fund No 1 did not contain any supporting documents demonstrating that [the Applicant] had verified the existence, ownership, valuation or use of the assets. There were no supporting documents demonstrating [the Applicant] verified the income or expenses of the fund.

23.
In response to [the Respondent's] query regarding the expense of $988 described as 'Insurance' in the 2008 financial statements, [the Applicant] stated that all monies paid in relation to the insurance expense had been refunded by the member as the insurance policies were not in the Super Fund's name.

24.
There was no evidence in [the Applicant's] audit file that [the Applicant] identified the insurance expense was incorrectly classified as an expense of the fund, or that [the Applicant] brought the matter to the attention of the trustees at the time of performing the audit.

25.
In [the Applicant's] response to our show cause letter dated 7 April 2010 [the Applicant] stated that at the time of the audit [the Applicant] questioned the trustees about the insurance policy and they advised the insurance policy was in the name of the fund. [The Applicant] stated that whilst [he] did not verify this position it is not in the nature of an audit to authenticate every transaction.

26.
[The Applicant] issued an unqualified audit report in relation to the P [S] Superannuation Fund No 1 for the 2008 year."

20. The Respondent's "Reasons for decision" concluded that:

"Based on the facts in [the Applicant's] case the Commissioner is of the opinion that [the Applicant] failed to carry out or perform adequately and properly the duties of an approved auditor under the SISA and SISR and [he is] otherwise not a fit and proper person to be an approved auditor for the purposes of the SISA."

RELEVANT LAW

21. The term "approved auditor" is defined in section 10 of SISA to mean a person included in a class of persons specified in regulations made for the purposes of that definition, but does not include a person in respect of whom a disqualification order is in force under section 131 of SISA.

22. Regulation 1.04(2) of the Superannuation Industry (Superannuation) Regulations ( SISR ) relevantly provides that an auditor of a "self-managed superannuation funds" (as defined in section 17 of SISA) will constitute an "approved auditor" for the purposes of the section 10 definition of that term if either: (i) the person is a "registered company auditor" under Division 2 of Part 9.2 of the Corporations Act 2001 ( Corporations Law ); or (ii) is associated with a professional organisation specified in Schedule 1AAA of regulation 1.04(2), including membership of CPA Australia Limited.

23. The Applicant has been a "registered company auditor" for 25 years and a CPA member for 27 years and is thus eligible to be an "approved auditor" of "self-managed superannuation funds" (as defined in section 17A of SISA) for the purposes of SISA.

24. Section 129 SISA (headed "Obligations of Actuaries and Auditors - Compliance"), provides, among other things, that where the auditor of superannuation funds "forms the opinion that it is likely that a contravention of any of the following may have occurred, may be occurring, or may occur", in relation to the fund:

(i): SISA or the SISR;
(ii): if the fund is a registrable superannuation entity - the Financial Sector (Collection of Data) Act 2001; or
(iii): if the fund is a registrable superannuation entity - a provision of the Corporations Act 2001 listed in the definition of "regulatory provisions" in section 38A(b) of SISA or specified in the SISR made for the purposes of section 38(A)(b)(xvi) of that definition (section 129(1)(a) of SISA);

and the person formed the opinion in the course of or in connection with the performance by the person of an audit under SISA or the regulations of the Financial Sector (Collection of Data) Act 2001 (section 129(1)(b) of SISA), the person must, immediately after forming the relevant opinion:

(i): tell a trustee of the fund about the matter in writing ; and
(ii): if the fund is a self-managed superannuation fund and the matter is specified in the approved form - tell the Commissioner about the matter in the approved form : section 129(3) of SISA.

25. Regulated superannuation funds (including self-managed superannuation funds) are required to comply with various "regulatory provisions", as defined in section 38A of SISA. The main regulatory provisions are contained in SISA and the SISR. Examples of SISA regulatory provisions which superannuation funds are required to comply with and which are relevant for present purposes include the following:

•: The trustee of a regulated superannuation fund must not lend money of the fund or give any financial assistance using the resources of the fund to a relative or a relative of a member of the fund: section 65 of SISA;
•: The trustee of a regulated superannuation fund must generally limit the total of 'in-house assets' to a maximum of 5% of the market value of the fund's total assets at year end and is prohibited from making or acquiring an 'in-house asset' that would cause the total of 'in-house assets' to exceed the 5% in-house asset ratio limit. Broadly, an 'in-house asset' is an asset of the fund that is: (i) a loan to, or an investment in, a related party of the fund; (ii) an investment in a related trust of the fund; or (iii) an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund: sections 82 to 85 of SISA; and
•: Investments by a self-managed superannuation fund must be made and maintained on a strict commercial, arm's length basis. That is, the purchase and sale price of assets should reflect a true market value and income and assets held by the fund should reflect a true market rate of return: section 109 of SISA.

26. Failure by the trustee to comply with any of the above regulatory provisions constitutes a contravention of SISA which would be reportable by the approved auditor of the relevant self-managed superannuation fund to the trustee of the fund (in writing) and to the ATO (in the approved form), pursuant to section 129(1) and (3) of SISA.

27. Section 131(1) of SISA provides that the Commissioner 'may' (i.e. has the discretion to) make a written order disqualifying a person from being an "approved auditor" if either:

"

(a)
the person has failed , whether within or outside Australia, to carry out or perform adequately and properly :

(i)
the duties of an auditor ........ under [ SISA ] or the [ SISR ]; or

(ii)
any duties required by a law of the Commonwealth, a State or a Territory to be carried out or performed by an auditor........; or

(iii)
any functions that an auditor.......is entitled to perform in relation to [SISA] or the regulations......; or

(b)
the person is otherwise not a fit and proper person to be an approved auditor ....... for the purposes of [ SISA ]." [Emphasis added]

28. A disqualification order issued under section 131(1), takes effect on the day specified in the order: section 131(2) of SISA.

29. The Commissioner's power of disqualification in section 131(1) of SISA is intended to protect the public from the actions of those auditors who do not meet the standards required of them as auditors: Fearon v Australian Prudential Regulation Authority [2006] AATA 918 at [42]; Kamah v Australian Prudential Regulation Authority 147 FCR 516; Re Slee and Australian Prudential Regulation Authority [2006] AATA 206. There is a significant public interest in ensuring people have adequate superannuation retirement savings which is reflected in part in the significant taxation concessions available to enable and which encourage people to invest in superannuation: Fearon at [42]. As a result, there is a genuine public interest in affording protection to the members of the fund by reason of protecting the integrity of the superannuation system. It is not possible to say that a self-managed superannuation fund is an entirely private matter. Even where the members of the fund are family, they should be as entitled to the same protection that non-related fund members would be: Re Preuss and Australian Prudential Regulation Authority (2005) 87 ALD 629 at [97].

30. The Commissioner may revoke a disqualification order on the Commissioner's own initiative or on written application made by the disqualified person: section 131(5) of SISA. However, section 131(5), must be read subject to section 131(7) of SISA which states that the Commissioner:

" ..... must not revoke a disqualification order unless the [Commissioner] is satisfied that the person concerned:

(a)
is likely to carry out and perform adequately and properly the duties of an auditor.......under [SISA] or the [SISR]; and

(b)
is otherwise a fit and proper person to be an approved auditor........for the purposes of [the SISA]." [Emphasis added]

31. Accordingly, before exercising his discretion in section 131(5) of SISA and revoking a disqualification order which has been issued to a person under section 131(1) of SISA, the Commissioner must first be satisfied that the relevant person satisfies both paragraphs (a) and (b) of section 131(7) of SISA, as set out above. That is, if the Commissioner cannot by satisfied that a person does not meet the requirements in section 131(7)(a) and (b) of SISA, he must not revoke a disqualification order which is in force.

32. Section 129 and 130 are contained in Part 16 of SISA, which is headed "Actuaries and Auditors of Superannuation Entities". The object of Part 16 is to set out special rules for actuaries and auditors of superannuation entities. Part 16 commenced operation on 1 December 1993, although it only applies to funds in relation to the 1994-1995 and subsequent income years. ( a ) When has an approved auditor carried out and performed adequately and

properly the duties of an auditor ... under SISA and the SISR "?

33. No guidance is offered in SISA or the SISR as to what is meant by the phrase "carry out and perform adequately and properly the duties of an auditor......under SISA and the SISR" for the purposes of section 131 of SISA.

34. In Fearon's case, at [42], the Tribunal upheld the Australian Prudential Regulation Authority's ( APRA's ) decision to disqualify Mr Fearon from being an approved auditor for not only failing to carry out the obligations of an approved auditor under SISA adequately and properly and for breaching the standards set by the professional association of which he was a member, but also for the reason that Mr Fearon's "conduct was such as to require action to protect the public and the integrity of the superannuation system".

35. Also in Fearon's case, at [42], the Tribunal agreed with the submission of counsel for APRA that "the financial integrity and the prudential management of superannuation funds is dependent on auditors and trustees and their professional independence, honesty and integrity in the way in which they carry out their functions." In conclusion, the Tribunal found that Mr Fearon was not a "fit and proper person" to be an approved auditor and that he should be disqualified to protect the public and the integrity of the superannuation system.

36. To further assist the Tribunal in ascertaining the meaning of this phrase, regard may be had to relevant extrinsic materials: section 15AB of the Acts Interpretation Act 1901 and Re Shingles and Director-General of Social Security (1984) 6 ADL 568; Re Christoffelsz and Commonwealth (1987) 13 ALD 392; Re Gilbert and Secretary, Department of Social Security (1987) 13 ALD 518 and Television and Radio Broadcasting Services Australia Pty Ltd and Australian Communications Authority [2000] AATA 104 [9].

37. All CPA members are required to adhere to the standards of the Auditing and Assurance Standards Board ( AUASB ) and the Accounting Professional and Ethical Standards Board ( APESB ). The AUASB has issued standards which auditors (including "registered company auditors") are required to follow when auditing self-managed superannuation funds. In summary, the AUASB standards provide that auditors are responsible for conducting a:

(i): financial audit according to 'Australian Auditing Standards' ( ASAs ); and
(ii): compliance audit according to applicable 'Standards on Assurance Engagements' ( ASAEs ).

38. Some of the key ASAs, applicable to the audit of self-managed superannuation funds, include:

(i): ASA 220 (titled "Quality Control for Audits of Historical Financial Information") which requires auditors to form a conclusion on compliance with the independence requirements applying to the audit engagement as well as complying with the code of ethics (refer to paragraph 39 below); and
(ii): ASA 230 (titled "Audit Documentation") requires the auditor to prepare on a timely basis audit documentation that is sufficient and appropriate to provide: (a) the basis for the auditor's report; and (b) evidence that the audit was performed in accordance with ASAs, applicable ASAEs and applicable legal and regulatory requirements.

Both ASA 220 and ASA 230 are operative for financial reporting periods commencing on or after 1 July 2006.

39. Further, all CPA Australia Ltd members must comply with Australian Professional and Ethical Standard ( APES ) APES 110, titled "Code of Ethics for Professional Accountants" ( Code of Ethics ). The Code of Ethics can be found in the CPA "Members Handbook" or on the APESB website. The Code of Ethics was operative from 1 July 2006, or as otherwise provided within the Code.

40. Section 100.4 of the Code of Ethics states that a member is required to comply with the following five "fundamental principles":

"

(a)
Integrity

(b)
Objectivity

(c)
Professional competence and due care

(d)
Confidentiality

(e)
Professional behaviour". [Emphasis added]

41. Section 100.10 of the Code of Ethics states that compliance with the "fundamental principles" may potentially be threatened by a broad range of circumstances, including:

"

(a)
Self - interest threats , which may occur as a result of the financial or other interests of a Member or of an Immediate or Close Family member;

(b)
Self-review threats, which may occur when a previous judgment needs to be re-evaluated by the Member responsible for that judgment;

(c)
Advocacy threats, which may occur when a Member promotes a position or opinion to the point that subsequent objectivity may be compromised;

(d)
Familiarity threats , which may occur when, because of a close relationship, a Member becomes too sympathetic to the interests of others; and

(e)
Intimidation threats, which may occur when a Member may be deterred from acting objectively by threats, actual or perceived." [Emphasis added]

42. Section 120 of the Code of Ethics states that the fundamental principle of 'objectivity' imposes an obligation on all members not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others and that:

" A Member may be exposed to situations that impair objectivity. It is impracticable to define and prescribe all such situations. Relationships that bias or unduly influence the professional judgment of the member should be avoided."

43. Section 290 of the Code of Ethics, titled "Independence - Assurance Engagements", which became operative on 15 February 2008, addresses issues relating to professional 'independence' for assurance engagements, which includes engaging in the audit of self-managed superannuation funds. This standard is based on the Code of Ethics for Professional Accountants issued by the International Federation of Accountants. The preface to section 290 states that the:

"concept of Independence is fundamental to compliance with the principles of integrity and objectivity . This Code adopts a conceptual framework that requires the identification and evaluation of threats to Independence and the application of safeguards to reduce any threats created to an acceptable level." [Emphasis added]

44. "Independence" is defined in section 290.8 of the Code of Ethics as follows:

" Independence requires:

Independence of Mind

The state of mind that permits the expressions of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

Independence of Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a Firm's, or a member of the Assurance Team's, integrity, objectivity or professional scepticism had been compromised." [Emphasis added]

45. ASAE 3100 titled "Standard on Assurance Engagements ASAE Compliance Engagements" was reissued by the AUASB on 9 September 2008 (and became effective on 1 October 2008). Paragraph 12 of ASAE 3100 provides that the assurance practitioners, including approved auditors of a self-managed superannuation funds,

" shall comply with the fundamental ethical principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour".

Accordingly, ASAE 3100 adopts the five "fundamental principles" set down in the Code of Ethics (refer to paragraph 40 above).

46. Paragraph 13 of ASAE 3100 states that:

" The concept of independence is fundamental to the assurance practitioner's compliance with the principles of integrity and objectivity under paragraph 12." [Emphasis added]

47. According to paragraph 14, ASAE 3100 provides

" A framework of principles that members of assurance teams, firm and network firms can use to identify threats to independence, evaluate the significance of those threats...............Where the practitioner is not able to comply with the fundamental ethical principles, including those relating to independence, the practitioner cannot claim compliance with this ASAE. In such circumstances, ASAE 3100 may still provide useful guidance."

48. In February 2008, the "Representatives of the Australian Accounting Profession" (comprising CPA Australia Ltd, the Institute of Chartered Accountants and the National Institute of Chartered Accountants) released a document titled "Competency Requirements - For Auditors of Self-Managed Superannuation Funds". Among other things, that document outlines the knowledge and skills required by a competent auditor of a self-managed superannuation funds and it refers to the Code of Ethics fundamental principles of 'integrity', 'objectivity' and professional 'independence'.

49. Further, in June 2008, the "Joint Accounting Bodies" (comprising CPA Australia, the Institute of Chartered Accountants in Australia and the National Institute of Accountants) issued Version 3 of the , titled "Independence guide: interpretations in co-regulatory environment" ( Guide ). The first version of the Guide was published in October 2005. The Guide provides a clear indication of the conceptual approach which should be adopted by accountants and auditors to 'independence', along with practical examples (i.e. 'case studies') of independence issues frequently encountered by accountants and auditors. Throughout the Guide reference is made to the Code of Ethics concept and definition of 'independence'.

50. Guidance Statement GS 009, titled "Auditing Self-Managed Superannuation Funds" (issued by the AUASB in October 2008), was formulated by the ATO to provide guidance to auditors responsible for conducting a financial audit and a compliance audit of a self-managed superannuation fund. Annexed to GS 009 a document titled "Auditing a self-managed super fund" (originally issued by the ATO in August 2008) which provides approved auditors with a checklist of questions and statements to consider when auditing self-managed superannuation funds. The questions are designed to assist approved auditors to identify potentially reportable contraventions of SISA and the SISR.

51. In January 2010, the ATO issued a guide for the auditors of self-managed superannuation funds, titled "Approved auditors and self-managed super funds - Your role and responsibilities as an approved auditor" which publication is intended to provide auditors with information about their responsibilities under SISA, the expectations the ATO has about the conduct of a self-managed superannuation fund audit and further support to assist auditors in satisfying these obligations. This guide refers to the Code of Ethic fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. It also refers to the Code of Ethics concept of 'independence' and cites the Code of Ethics definition of that term.

52. Law Administration Practice Statement PS LA 2010/2 - Self-managed superannuation funds - approved auditors - disqualification and/or referral to a professional association (PS LA 2010/2), issued on 8 July 2010, outlines the factors the Commissioner will consider when deciding whether to disqualify a person from being an approved auditor for the purposes of SISA. Paragraph 19 of PS LA 2010/2 states that the issue of whether a person has failed to carry out the duties of an approved auditor adequately and properly will "depend on the facts in the particular case". By way of example, paragraph 20 of PS LA 2010/2 states:

" In another case, the trustee of an SMSF made a large cash loan to a relative of a member of the SMSF . The making of the loan resulted in a number of contraventions of SISA . The approved auditor did not qualify the audit report by identifying the material contravention or report the contravention to the Commissioner on an ACR, as required

A reasonable person would conclude that an audit had not been carried out adequately and properly." [Emphasis added]

53. A further example of circumstances in which the Commissioner is likely to find that an auditor had failed to carry out his or her duties or functions as an approved auditor adequately and properly is set out in paragraph 18 of PS LA 2010/2, as follows:

" In cases where an auditor has not prepared any documentation, such as audit working papers, to evidence that an actual audit has been undertaken it would be reasonable to conclude that the person has not carried out the duties and functions of an approved auditor adequately and properly. Documentation of an audit of an SMSF is necessary to evidence that an audit has been properly conducted."

54. By contrast, paragraph 21 of PS LA 2010/2, offers an example of where, according to the Commissioner, a reasonable person would not consider that the auditor had failed to carry out his or her duties adequately or properly:

" An approved auditor (a sole practitioner) has been auditing several SMSFs annually for the past ten years. The ATO reviewed the auditor's audits in the past and consistently found that he or she performed the audits diligently and thoroughly.

During a recent ATO audit of one of the SMSFs which the auditor had audited, it was discovered that he or she had not identified and reported a contravention in respect of the most recent income year.

However, the auditor was able to provide documentation to satisfy the Commissioner that the audit sampling methodology used was in accordance with the appropriate professional standards but in this case a transaction which was not selected as part of the sampling undertaken would have highlighted the possibility of a contravention."

55. Finally, section 324CA of the Corporations Law, which became effective on 1 July 2004, provides that it is a contravention of the CL for an individual auditor (which includes a "registered company auditor") to engage in audit activity in relation to an 'audited body' (which is defined to include a company) if, at a particular time, a "conflict of interest situation" exists in relation to the audited body at that time and the individual auditor is aware that a conflict of interest situation exists. Broadly, section 324CA requires the auditor to take all reasonable steps to ensure that the conflict of interest situation ceases as soon as he or she becomes aware of it. If, after seven days, the conflict of interest situation continues the auditor must report the conflict of interest situation to the Australian Securities and Investments Commission. Failure to do so constitutes a section 324CA(1A) by the auditor.

56. A "conflict of interest situation" exists in relation to an audited body at a particular time if, because of circumstances that exist at that time: (a) the auditor is not capable of exercising objective and impartial judgment in relation to the conduct of the audit of the audited body; or (b) a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the auditor, is not capable of exercising objective and impartial judgment in relation to the conduct of the audit of the audited body: section 324CD(1) of the Corporations Law. To determine this, regard may be had to circumstances arising from any relationship that exists, has existed, or is likely to exist, between the individual auditor and, if the audited body is a company, the company, a current or former director of the company and a person currently or formerly involved with the management of the company: section 324CD(2) of the Corporations Law.

( b ) When is a person otherwise not a " fit and proper person to be an approved auditor " for the purposes of SISA ?

57. The expression "fit and proper person" is not defined in SISA for the purposes of section 131. However, the expression has been considered by the courts on a number of occasions. In the leading decision of the High Court of Australia in Australian Broadcasting Tribunal v Bond and Others (1990) 170 CLR 321, Toohey and Gaudron JJ considered the meaning of the expression "fit and proper person" in the context of the Broadcasting Act 1992. Their Honours made the following comments (at 380):

" The expression 'fit and proper person', standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities. The concept of 'fit and proper' cannot be entirely divorced from the conduct of the person who is or will be engaging in those activities. However, depending on the nature of the activities, the question may be whether improper conduct has occurred, whether it is likely to occur, whether it can be assumed that it will not occur, or whether the general community will have confidence that it will not occur . The list is not exhaustive but it does indicate that, in certain contexts, character (because it provides indication of likely future conduct) or reputation (because it provides indication of public perception of likely future conduct) may be sufficient to ground a finding that a person is not fit and proper to undertake the activities in question." [Emphasis added]

58. Their Honours continued (at 380):

" Whether the fitness and propriety of a licensee to hold a commercial licence are sufficiently ascertained by reference to its character or reputation, or must be ascertained by reference to the conduct of its affairs and activities, is a question the answer to which must be found by implication from the provisions of the Broadcasting Act dealing with the grant, renewal and revocation or suspension of a commercial licence and from the activities to be undertaken pursuant to the licence."

See also Toohey v Tax Agents' Board of Victoria (2007) 67 ATR 522, where the Tribunal observed at [16] that in determining whether a person is a 'fit and proper person' the enquiry must be directed not only to whether improper conduct has occurred, but whether it is likely to occur again, and whether the community will have confidence that it will not occur.

59. The meaning of the expression "fit and proper person" was also considered by the High Court in Hughes and Vale Pty Ltd v The State of NSW (No. 2) (1995) 93 CLR 127. Dixon CJ and McTiernan and Webb JJ observed (at 156-157):

" The expression 'fit and proper person' is of course familiar enough as traditional words when used with reference to offices and perhaps vocations. But their very purpose is to give the widest scope for judgment and indeed for rejection. ' Fit' (or 'idoneous') with respect to an office is said to involve three things, honesty, knowledge and ability : ' honesty' to execute it truly, without malice affection or partiality; ' knowledge' to know what he ought duly to do; and ' ability' as well as in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it." [Emphasis added]

60. The qualities of 'honesty', 'knowledge' (or 'professional competency') and 'ability' (i.e. the ability to act appropriately) were qualities which were considered relevant in determining whether a person was "fit and proper" to be a tax agent in the following cases. The Tribunal considers that similar qualities should be possessed by approved auditors of self-managed superannuation funds.

61. In Stasos v Tax Agent's Board of New South Wales (1990) 90 ATC 4950 Mr Stasos's registration as a tax agent was cancelled as he had evaded tax, held bank accounts in false names and, for many of his clients, deductions had not been claimed in their income tax returns. Hill J, of the Federal Court of Australia, concluded that Mr Stasos was not a 'fit and proper person' to be registered as a tax agent. According to Hill J, to be a fit and proper person in relation to an office or vacation, a person must have honesty, knowledge, ability, diligence and professionalism, which included putting the interests of one's client before one's self-interest.

62. Similarly, in Re Su v Tax Agent's Board of South Australia (1982) 82 ATC 4282 the Tax Agents Board cancelled Mr Su's registration as a tax agent, primarily for failing to lodge his personal income tax returns and failing to pay group tax instalments (i.e. PAYG withholding) on time. Davies J, of the Federal court of Australia, found that this reflected poorly on Mr Su's competence as a tax agent. According to Davies J, the competence of a tax agent was crucial to whether that tax agent was "fit and proper". His Honour commented (at 4286) that a person such as a tax agent should be "a person of such competence and integrity that others may entrust their taxation affairs to his care. He should be a person of such reputation and ability that officers of the taxation department may proceed upon the footing that taxation returns lodged by the agent have been prepared by him honestly and competently."

63. More recently, in Re Francesco Martino and the Australian Taxation Office [2002] AATA 1242, the Tribunal considered whether an 'associate' of the applicant was a 'fit and proper person' for the purposes of section 39G(1)(a) of the Excise Act 1901 and in the context of a review of a decision by the Commissioner to disallow an objection against a decision to cancel a tobacco producer's licence under Part IV of that Act.

64. In Re Francesco Martino, the Tribunal concluded, at [43], that the matters which must be taken into account in determining what constitutes a 'fit and proper person' will always depend upon the context of a particular case. The Tribunal commented that it seemed that the privileges, obligations and responsibilities of a licence holder under the Excise Act must clearly be relevant in shaping the matters to which regard must be had in determining whether a person (in that case, the 'associate' of the applicant) is a 'fit and proper person'. At [46], the Tribunal remarked that the nature of the privileges, obligations and responsibilities of a licence holder were such that qualities of diligence, honesty and the likelihood of his or her observing the law appeared to be pivotal characteristics to be taken into account in ascertaining whether the person (i.e. the 'associate' of the applicant) was a 'fit and proper person' for the purposes of that Act.

65. The Tribunal takes the view that similar considerations, as those discussed by the High Court in Australian Broadcasting Tribunal v Bond and Hughes and Vale Pty Ltd v The State of NSW and by the Tribunal in Re Francesco Martino and Toohey, should be applied in determining whether an "approved auditor" of self-managed superannuation funds can be said to be a 'fit and proper person' for the purposes of section 131 of SISA and the SISR.

SUBMISSIONS AND EVIDENCE

66. With respect to the contraventions of SISA by the trustees of the L Superannuation Fund (as set out above in paragraphs 13(i) and 19), the Applicant made the following submissions:

•: The L Superannuation Fund was established on 4 November 1986 and from its inception its investments included "in house assets" as defined in section 71 SISA. These assets include an investment in a lodge and chalets and a lifestyle village located in the south west of Western Australia. The law in relation to "in house assets" was altered in August 1999. However, self-managed superannuation funds which were complying funds at that time were exempted from the impact of that legislative change, provided there was only a limited increase of that type of asset within the fund. To ensure the L Superannuation Fund remained compliant, given the legislation was not retrospective, the assets of the fund were quarantined.
•: The technical non-compliance by the fund, described in paragraph 13(i) above, was not 'material' because there was no impact on the retirement benefits of the fund's members, and in the relevant audited 2008 financial year the fund's: (i) income was 81¢ in; and (ii) cash expenses were $12.
•: The fund is well-managed financially as it has had capital growth exceeding 10% per annum over the past 10 years.
•: The Respondent was satisfied that the breach relating to the use of fund assets by the members could be and was corrected.

67. The Applicant acknowledged before the Tribunal that he did not identify the breaches of SISA by the trustees of the L Superannuation Fund (as set out above in paragraphs 13(i) and 19) during the course of his audit of that fund. The Applicant stated that he did not view the use of jewellery by a member and paintings and antiques by a related entity as a contravention of SISA. Consequently, he issued an unqualified audit report in relation to the fund. The Applicant told the Tribunal that it was the ATO, in its review of his audit, who had identified the relevant breaches of SISA by the trustees of the fund. The Applicant confirmed that he did not perform any testing of and had no audit plan or checklist in place for his audit of the L Superannuation fund as there had been no movement in the fund since 1999. The Applicant admitted that he had no documents demonstrating that he had verified the existence, ownership, valuation or use of the fund's assets.

68. As regards the contraventions of SISA by the Q Superannuation Fund (as set out above in paragraphs 13(ii) to (v) and 19), the Applicant submitted the following:

•: The Q Superannuation Fund commenced in June 2006 and, since that time, the trustee has had an excellent record in growing the asset base of the fund.
•: The $10,000 fee which was paid on 1 September 2007 to a related company (KM Pty Ltd) was for professional services to be rendered to develop and review various investment strategies for the fund. However, to date, the fund has not commenced an active investment program and it will not do so until it has a sufficient capital base. The total assets of the fund in 2008 were $13,108.
•: The transfer of $11,000 from the fund to the Applicant's wife in the 2008 year was an inadvertent transfer of funds. That is, the transfer was an administrative error completed by the Applicant's administration officer, Ms J, who was at that time working for him on-line in Perth and later that year from Broome. The error was corrected as soon as the Applicant was made aware of it.

70. The Applicant gave evidence that no audit plan or checklist had been put in place in relation to the Q Superannuation Fund for the reason that the fund had just been set up and he knew 'intimately' what transactions it was involved in. With respect to the contravention of SISA relating to the $10,000 which was identified in the fund's 2008 financial statement simply as an expense for 'management fees', the Applicant explained that the $10,000 expense was, in actual fact, for a 'combination' of the following: (i) a payment to KM Pty Ltd, a related company, to provide an extensive review of investment opportunities for the fund over the next ten to fifteen years; (ii) to remunerate the Applicant and his administrator for training his daughter, also a director of the corporate trustee of the fund, for more than 25 hours in all issues associated with generating investments and managing capital for the fund; and (iii) to, as mentioned to in the Applicant's solicitor's letter to the Respondent dated 7 April 2010 (refer to paragraph 16 above), reimburse "fees for professional services necessitated as the result of the need to respond to specific enquiries of the Commissioner of Taxation, which involved related entities at that time." Whilst the Applicant explained to the Tribunal that the $10,000 transfer was for a 'combination' of those three things, there was documentary evidence that KM Pty Ltd had issued a tax invoice to the Q Superannuation Fund on 1 September for the whole amount of $10,000, "Being professional service rendered for:- Develop and review various investment strategies." When this invoice was put before the Applicant to comment on, he said that it was "incomplete" and "could be added to". There was no indication in the fund's accounts for 2008 that the $10,000 expense was for the combination of the things described by the Applicant. The $10,000 was described only as being an expense for 'management fees'.

70. In relation to the 'inadvertent' transfer of $11,000 from the Q Superannuation Fund to the Applicant's wife, telephone evidence was given by Ms J, the Applicant's administrative assistant. Ms J confirmed that she had been employed by a property trust since November 1999 to provide administrative services to the Applicant, KM Pty Ltd and LN Pty Ltd, the corporate trustee of the L Superannuation Fund and the Q Superannuation Fund. The services she provides consist of preparation and lodgement of weekly and monthly reports, financial accounts, tax returns, BAS and various other administration duties, as required.

71. According to Ms J, in June 2007 she inadvertently transferred $11,000 from the Q Superannuation Fund to the Applicant's wife's 'access' account by ticking the wrong box on the e-mail/internet transfer form. Ms J stated that, at that time, she was working on a casual basis, had a six month old baby and was suffering from post natal depression, which was diagnosed in August 2007. Ms J said that the Applicant brought the transfer to her attention during his 2007 and 2008 audits of the fund (which were completed at the same time in August 2008) and that he told her that the money had to be repaid to the fund. However, the money was ultimately not repaid until 2009. Ms J advised the Tribunal that to ensure such inadvertent transfers do not occur again, the Applicant told her that all future fund transfers must be in writing and all account numbers must be included.

72. With respect to the contraventions of SISA by the S Superannuation Fund No. 1 (as set out above in paragraphs 14 and 19), the Applicant asserted the following:

•: The Applicant questioned Mr S during the course of the audit with regard to the claim for the $1,098 (not $988) of insurance which had been paid by the fund and he was advised by Mr S that the policy was in the name of the fund. Whilst the Applicant did not verify this, he said that it is not in the nature of an audit for the auditor to be required to authenticate every transaction.
•: Mr S was subsequently advised that the amount for insurance paid in the financial accounts could not be claimed as an expense of the fund as the insurance policy was, in fact, in his name (and not the name of the fund). When Mr S told the Applicant about this error, the Applicant immediately advised Mr S to repay the insurance monies back to the fund and change the policy into the fund's name so the insurance payments could be claimed in future years. The Respondent did not impose any penalties in relation to this error.

73. The Applicant confirmed before the Tribunal that there was only a limited audit checklist in place in relation to the 2008 audit of the S Superannuation Fund No. 1 and that that checklist did not consider all the relevant financial and SISA compliance matters. The Applicant also expressed his view that the financial accounts of the fund were by themselves enough to verify the existence, ownership, valuation and use of the assets of the fund and that no further supporting documents was necessary. He also stated that he had verified at least 50% of the transactions which had occurred during the 2008 year (which was less than twenty), including bank charges, interest from the bank, interest income from third parties etc. However, he had not bothered to verify the insurance expense of $1,098, which he acknowledged was the only payment out of the fund in the 2008 year. Instead, the Applicant told the Tribunal that in relation to the insurance expense he had simply relied on what he had been told by Mr PS and that he had not independently verified the transaction. The Applicant said that he believed he only had to check things which were 'material'. According to the Applicant, his job was to audit, not to authenticate every transaction of the fund.

74. The Applicant made the following more general submissions in support of his view that the Respondent should revoke the disqualification order issued to him.

(i): Uncertainty of law; For the years in question (i.e. 2004 to 2008), the law in relation to the conduct of approved auditors of self-managed superannuation funds was unclear and unsettled. That is, during those years, it was widely accepted amongst the accounting profession that a single person was able to perform separate or multiple functions (i.e. that of accountant and auditor of those accounts, for example). More specifically, at the time he conducted the relevant audits the issues to be reported to the ATO were not clear or widely and clearly understood by the auditing/accounting profession in general. The applicable law and accepted procedure to ensure auditor 'independence' was not settled at the time the Applicant performed the audits concerned and it remains unsettled. This is supported by the fact that extensive guidelines and other publications have only recently been issued in an attempt to educate the profession. In any event, in the Applicant's submission, these guidelines and other publications are only statements of the views of the Commissioner and the professional accounting bodies concerned, they are not the law.
(ii): Contraventions not reportable to the ATO under current guidelines; On 1 July 2008 the Respondent published "Completing the Auditor/Actuary Contravention Report" which provides that under the financial threshold test if the total value of all the contraventions of the relevant fund was less than $30,000, then no contravention report is required to be provided to the Respondent by the fund's auditor (however, the trustee of the fund concerned must of course still be notified in writing of the contravention). As none of the contraventions by the L Superannuation Fund or the Q Superannuation Fund funds totalled more than $30,000, they would not be reportable to by the Applicant to the ATO under the Commissioner's current guidelines.
(iii): Contraventions of SISA not material; The quantum involved in each of the contraventions of SISA by the trustees of the L Superannuation Fund and the Q Superannuation Fund was very low and was not material. Therefore, the occurrence of the contraventions and the fact that the Respondent was not notified of them should be disregarded under the common law maxim of 'de minimus' (non curat lex), broadly meaning that the law is not concerned with trifles. In administrative law, this becomes the doctrine of substantial compliance.
(iv): Breaches technical rather than actual; The contravention (of section 129 of SISA) whereby the Applicant failed to notify the trustees of the L Superannuation Fund and the Q Superannuation Fund in writing of the breaches of SISA by the trustees was 'technical' rather than 'actual' as both parties (i.e. the auditor and the trustees) were one and the same person, namely the Applicant. This is because the Applicant is a director of the corporate trustee of the funds.
(v): No retirement savings were put at risk; The quantum of each contravention of SISA is minor and will have virtually no impact on the provision of retirement benefits to the members of the funds concerned. The contraventions did not, as suggested by the Respondent, affect the majority of the fund's assets, expose member benefits to great financial risk and restrict the funds' ability to adequately provide for the members in their retirement.
(vi): The Contraventions could be and were remedied; Every contravention of SISA by the trustees of the funds was capable of being and was remedied by the trustees of the funds.
(vii): No fund was declared non - complying; No fund audited by the Applicant was found by the Respondent to be non-complying.
(viii): ATO's disqualification decision unfair and unreasonable; The Applicant contended that for the following reasons the decision to disqualify him from being an approved auditor was not "fair and reasonable" in all the circumstances. According to the Applicant, as it now clear to him, since the publication of the various standards, guides and other documents discussed above (in paragraphs 37 to 54 above), that he cannot audit related party entities, he will not do so and that he would adopt the new, clear audit reporting standards and procedures now published by the Respondent and the relevant professional bodies. The Applicant submitted that he has re-educated himself in relation to the what is now required of an approved auditor when performing an audit of a self-managed superannuation fund and he is prepared to provide the ATO with an enforceable undertaking that he will conform will all required laws and procedures for approved auditors (including all audit documentation and contravention notification requirements) going forward. He also argued that the outcomes for the superannuation funds he audited were not adverse and there is no possibility of his earlier conduct being repeated.

75. In addition, the Applicant gave evidence that as a CPA he was required to undertake a minimum of 20 hours of continuing professional development ( CPD ) annually, although he generally undertook around 40 to 60 hours. The Applicant also gave evidence about his work history. The Applicant informed the Tribunal that before relocating to the south west of Western Australia from Perth, he had worked for several smaller Perth accounting practices and before that for one of the big accounting firms, PriceWaterhouseCoopers, where he had become a CPA and which firm had instilled in him the need to maintain high professional standards. The Applicant said that he had always made the time and an effort to undertake CPD over his working life. That is, he had been 'diligent' about keeping up to date with the professional standards required of him.

76. Further, the Applicant confirmed for the Tribunal that he had seen competency requirements for auditors of self-managed superannuation funds which were publicly available on the internet and, as a CPA member he had access to such information broadly similar to that which is contained in the competency document, referred to above in paragraph 48. The Applicant acknowledged that he had seen documents broadly similar to the independence guide for accountants and auditors (referred to above in paragraph 49) and he agreed that such resources were readily available to him as CPA member. However, he was unsure whether he had actually read that guide before now. The Applicant also confirmed that he had seen, but could not say definitively whether he had read, GS 009, discussed above in paragraph 50. Finally, the Applicant acknowledged that he was aware that he had always been bound by professional accounting standards.

CONCLUSION

77. As already stated, section 131(7) of SISA provides that the Commissioner must not revoke a disqualification order issued to a person under section 131(5) of SISA unless he is satisfied that both (a) the person concerned likely to carry out and perform adequately and properly the duties of an auditor under SISA or the SISR; and (b) the person is otherwise a fit and proper person to be an approved auditor for the purposes of the SISA.

( a ) Is the Applicant likely to carry out and perform adequately and properly the duties of an auditor under SISA or the SISR ?

78. As detailed above in paragraphs 13(i) and 19, the trustees of the L Superannuation Fund contravened sections 84 and 109 of SISA and as outlined above in paragraphs 13(ii) to (v) and 19, the trustees of the Q Superannuation Fund contravened section 65(1)(a) and (b) and section 17A of SISA.

79. Not only did the Applicant, as the approved auditor of those funds, fail to report those contraventions of SISA to the trustees of the funds and the ATO, as required by section 129 of SISA, he actually failed to identify those contraventions, in the first place, whilst performing his audit of those funds.

80. That is, by failing to report the trustee's contraventions of SISA, the Applicant did not fulfil his statutory duties under section 129 of SISA (refer to paragraph 24 above) and by failing to identify the contraventions to begin with, during the performance of his audit of the funds, the Applicant breached the standards set by the professional association of which he has been a member for 27 years, namely CPA Australia Ltd. In other words, the Applicant failed to carry out and perform adequately and properly the duties of an auditor on two levels - first, under SISA and second, according to the professional standards by which he is bound as an accountant and an auditor.

81. As set out in the Factual Background, to ascertain whether the Applicant had failed to carry out and perform his duties adequately or properly, the Respondent reviewed three audits undertaken by the Applicant, being the Applicant's audit of the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund. The outcome of those reviews was that the Respondent discovered that: (i) the Applicant had failed to identify and report the contraventions of SISA by the trustees of the L Superannuation Fund and the Q Superannuation Fund to the trustees and the ATO (as required by section 129 of SISA; and (ii) the Applicant had prepared little or no documentation to show that an actual audit of the three selected funds had been undertaken. More specifically, the Respondent's review of the Applicant's three audits determined that the Applicant's audit files/working papers for the funds did not contain any audit plan or checklist (although in the case of the S Superannuation Fund a limited audit checklist existed) or contain supporting demonstration that he had performed any audit tests in relation to the funds compliance with SISA or the SISR or that he had verified the existence, ownership, valuation or use of the assets. Further, in each case, despite the fact that there were breaches of SISA by the trustee of the funds the Applicant issued an unqualified audit report for the funds. This represents a failure by the Applicant to carry out and perform adequately and properly his duties as an auditor under SISA.

82. As noted above (in paragraph 37 above), all CPA members are required to adhere to the standards of the AUASB and the APESB. The AUASB standards provide that auditors must conduct a 'financial audit', according to applicable ASAs, as well as a 'compliance audit', according to applicable ASAEs. Of particular relevance is ASA 230 (effective for financial reporting periods from 1 July 2006) which addresses what audit documentation should be prepared by an auditor of self-managed superannuation funds. Specifically, ASA 230 requires an auditor to prepare documentation that is sufficient and appropriate to provide: (i) the basis for the auditor's report; and (ii) evidence that the audit was performed in accordance with ASAs, applicable ASAEs and applicable legal and regulatory requirements. It is clear from the Respondent's review of the Applicant's audits of the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund that the Applicant failed to carry out and perform this task adequately and properly.

83. Where an approved auditor has not prepared any audit documentation to evidence that an actual audit has been undertaken and to record the results of that audit, it is reasonable to conclude that that person has not carried out and performed adequately and properly duties of an auditor under SISA and the SISR. Documentation of an audit of a self-managed superannuation fund is clearly necessary to evidence that an audit has been properly conducted by the auditor concerned. This must be the case irrespective of whether the trustee(s) of self-managed superannuation fund being audited has or has not contravened the SISA or the SISR.

84. As detailed above (in paragraphs 39 to 44), CPA members, like the Applicant, have been bound by the Code of Ethics since July 2006 (subject to some exceptions, including section 290). The Code of Ethics provide that CPA members are required to comply with five 'fundamental principles', including 'integrity' and 'objectivity', the latter imposing an obligation on members not to compromise their professional or business judgment because of, among other things, a conflict of interest. The Code of Ethics makes it quite clear that a member's compliance with the five 'fundamental principles' may potentially be threatened in certain circumstances, including circumstances involving self-interest or familiarity (refer to paragraph 41 above).

85. In relation to the L Superannuation Fund and the Q Superannuation Fund, the Applicant was a director of the corporate trustee of the funds, a member of the funds, the tax agent for the funds and the auditor of the funds. The other directors of the trustee of those funds and the other members of those funds were all family members of the Applicant. By allowing this, the Applicant, by the standards of any profession, placed himself in a conflict of interest situation and in a situation where his objectivity could potentially be threatened. It also gives rise to a lack of independence of appearance', if not a lack of 'independence of mind', as required by the Code of Ethics by which he is bound (refer to paragraph 40 above). The Applicant failed to recognise this conflict of interest, potential threat to his objectivity and his lack of independence and he failed to rectify it.

86. With respect to the S Superannuation Fund, the Applicant was the tax agent for the fund as well as being the auditor of the fund. Again, this represents a potential conflict of interest situation and threat to the Applicant's objectivity in the discharge of his duties as an approved auditor of that fund. It also gives rise to a lack of 'independence of appearance' as required by the Code of Ethics (refer to paragraph 40 above). The applicant failed to recognise that there was any problem in him and acting in multiple roles in relation to the fund in this way and, therefore, failed to rectify the situation.

87. Consequently, the Applicant failed to comply with his ethical obligations as a CPA member by acting in multiple roles in relation to the L Superannuation Fund, Q Superannuation Fund and the S Superannuation Fund. On this basis, it may be said that the Applicant failed to carry out and perform adequately and properly his duties as an auditor under SISA and the SISR.

88. More recently (i.e. in 2008), the Code of Ethics had section 290, dealing with the concept of auditor 'independence', added to it. Section 290 makes an auditor's obligation to remain independent, in both mind and appearance, very clear. It was submitted by the Applicant that because the 'independence' requirements in the Code of Ethics (as well as the requirement to be independent, as set out in in ASAE 3100, GS 009 and PS LA 2010/2) were unsettled in the income years concerned (i.e. the years ended 30 June 2004 to 30 June 2008), his obligation to remain independent of the funds he was auditing was unclear to him such that he did not know or was unaware that he could not act in multiple roles in relation to the funds. That may be so, but the five 'fundamental principles' set out in the Code of Ethics, including 'objectivity', became effective on 1 July 2006 such that it is difficult to accept the argument that the Applicant was unaware during in the period in question that he should not act in a conflict of interest situation or in a situation which potentially threatens his objectivity as an auditor of self-managed superannuation funds.

89. In addition, by February 2008 the three main professional accounting bodies had issued a joint statement on competency requirements for auditors of self-managed superannuation fund which addressed the need for auditor independence (refer to paragraph 48 above of this decision) and by June 2008 the three main professional accounting bodies had jointly issued version 3 of an independence guide on the issue of auditor independence (refer to paragraph 49 above of this decision). Indeed, the first version of this guide was published in October 2005. Accordingly, it is difficult to accept the Applicant's contention that he didn't know or was unaware of his obligation to remain independent of the funds he was auditing and that the audit arrangements entered into by him were, in at least two, if not all three of the funds, compromised by reason of his lack of 'independence'. Despite this, the Applicant issued unqualified audit reports for the three funds concerned, which reports certified that he had conducted independent audits and that the audits were conducted in accordance with ASAs which require compliance with ethical requirements, including 'independence' in relation to audit engagements.

90. Further, by the Applicant's own admission, as a CPA he is required to undertake 20 hours of CPD each year, although he normally undertook around 40 to 60 hours, and he undertook such CPD in the years in question (refer to paragraph 75 above). Surely the Applicant became aware, through his CPD in the years in question, of the discussion that was occurring within the accounting profession around the issue of independence? Even if the matter had no yet been thoroughly settled it was nevertheless under discussion publicly. Consequently, it is difficult to accept the Applicant's submission that he was unaware, that it was unclear, that he should be independent of the funds he was auditing.

91. The ATO has since (in January 2010) issued a guide which clearly outlines the responsibilities of auditors of self-managed superannuation funds for the purposes of SISA as well as the ATO's expectations of such auditors, including auditor 'independence' (refer to paragraph 51 above of this decision). In addition, on 8 July 2010 the ATO issued PS LA 2010/2 which details factors the Commissioner will consider when deciding whether to disqualify a person from being an approved auditor under SISA. PS LA 2010/2 also provides practical examples of circumstances when the Commissioner would and would not find that an auditor had failed to carry out his or her duties as an auditor adequately or properly (refer to paragraphs 52 to 54 above). Applying the examples of non-compliance provided by the Commissioner in PS LA 2010/2, in performing his audit of the three funds concerned, the Applicant failed to carry out and perform his duties as an approved auditor adequately or properly for the purposes of SISA.

92. Finally, it is worth mentioning section 324CA of the Corporations Law, which has been effective since 1 July 2004, which section broadly provides that it is a contravention of the Corporations Law for an auditor, including a registered company auditor like the Applicant, to engage in an audit of a company when a conflict of interest situation exists. To determine whether a conflict of interest situation exists, regard may be had to the auditor's relationship with the company he is auditing. Although not directly applicable to the audit of self-managed superannuation funds, section 324CA of the Corporations Law is relevant for present purposes in the sense that it demonstrates that the concept that "registered company auditors" must not act when a "conflict of interest situation" exists and that they must act independently has been enshrined in legislation to which the Applicant is bound as a "registered company auditor" (of some 25 years) since July 2004. The Applicant gave evidence before the Tribunal that he had seen section 324CA of the Corporations Law before and was aware of its effect. For this reason, it is very difficult to accept the Applicant's submission that he was unaware that he shouldn't act as an auditor of the L Superannuation Fund and the Q Superannuation Fund for the reason that he lacked independence because he was also a director of the cooperate trustee of those funds, a member of those funds and the tax agent for those funds.

93. Although a number of clear and real conflict of interest issues were evident, the Applicant did not put any measures in place to mitigate the risks and ensure audit independence or, alternatively, take the step of withdrawing from his role as auditor of the funds. To perform an audit of an entity where a clear and obvious conflict of interest exists constitutes a failure to adequately and properly perform the duties of an auditor under SISA. It also raises the question as to the Applicant's fitness to perform professional audits of self-managed superannuation funds according to the provisions of SISA and the SISR, more generally. This issue is discussed in further detail below under heading (b).

94. The Applicant submitted that he will carry out and perform adequately and properly his duties of an auditor under SISA and the SISR in the future. He asserted that he is even willing to enter into an enforceable undertaking with the Commissioner to that effect. The Applicant submitted that as it now clear to him, since the publication of the various guides and other documents discussed above that he cannot audit related party entities, he would not do so in the future. He said that he has re-educated himself in relation to the what is now required of an approved auditor when performing an audit of a self-managed superannuation fund and that he would adopt the new, clear audit reporting standards and procedures recently published by the Respondent and other relevant bodies. He argued that there was no possibility of his previous conduct being repeated. In other words, the Applicant's position is that he is "likely to carry out and perform adequately and properly the duties of an auditor......under [SISA] or the [SISR]" going forward for the purposes of section 137(7)(a) of SISA. Even if that were so, as discussed above, section 137(7) of SISA states that the Commissioner (and presently the Tribunal sitting in the shoes of the Commissioner) must not revoke a disqualification order unless also satisfied that the relevant person "is otherwise a fit and proper person to be an approved auditor......for the purposes of [the SISA]". Whether the Applicant satisfies this second limb of section 137(7) of SISA and, therefore, whether his application before the Tribunal should succeed, is considered below.

( b ) Is the Applicant otherwise a fit and proper person to be an approved auditor for the purposes of SISA ?

95. As discussed above, the Applicant has failed to carry out and perform adequately and properly the duties of an auditor under SISA and the SISR. He has also failed to comply with the professional standards by which he is bound as a CPA member. In determining whether the Applicant is otherwise a "fit and proper person to be an approved auditor" for the purposes of SISA, regard may be had to whether such a failure is likely to occur again and whether the general community can have confidence that it will not occur again. Character and reputation can be indicators of likely future conduct: Australian Broadcasting tribunal v Bond and Toohey v Tax Agents' Board. A consideration of whether the Applicant possesses the qualities of honesty, knowledge, ability, diligence, professionalism, competence and integrity may also be relevant in reaching a conclusion on this issue: Hughes and Vale; Stasos v Tax Agent's Board and Re Sue v Tax Agent's Board.

96. The Applicant's actions as a whole in relation to his audit of the L Superannuation Fund, the Q Superannuation Fund and the S Superannuation Fund show a lack of competence by a failure to adhere to relevant statutory duties and professional standards and ethical obligations. An approved auditor, by the very nature of their office and the privileges, obligations and responsibilities that attach to it, should be a person of honesty, knowledge, ability, diligence, professionalism, competence and integrity. He or she should be a person who the community can entrust to audit their self-managed superannuation funds according to SISA and the SISR and according to professional accounting standards and ethics and that the ATO can rely upon to perform and report audits honestly, with professional competence and due care, objectively and independently: Hughes and Vale; Stasos v Tax Agent's Board; Re Su v Tax Agent's Board and Re Francesco Martino. The Tribunal is of the view, based on all of the facts and evidence before it, that the Applicant cannot be considered to be such a person.

97. The Applicant contended that the contraventions by the trustees of the L Superannuation Fund and the Q Superannuation Fund are not reportable under the ATO's current guidelines (issued 1 July 2008) which provide that no contravention report is required by an auditor where the total value of all the contraventions of the fund concerned is less than $30,000. Even if that is the case (and it is noteworthy that the ATO's guidelines on this issue are merely guidelines, they are not the law), the overall conduct of the Applicant is such that he cannot be said to otherwise be a fit and proper person to be an auditor for the purposes of the Act such that the disqualification order cannot be revoked because, in these circumstances, he will not satisfy the second limb of section 137(7)(b) of SISA.

98. The Applicant also asserted that the quantum of each breach was very low, no retirement savings were put at risk, all of the contraventions could be and were remedied and that no fund audited by the Applicant was declared non-complying by the Respondent. As discussed, the Applicant failed to carry out and perform adequately and properly his duties as an auditor under SISA and he breached the professional standards by which he is bound as a CPA member. Therefore, his overall conduct was such as to require action by the Respondent to protect the public and the integrity of the superannuation system: Fearon. There is a genuine public interest in affording protection to the members of funds by protecting the integrity of the superannuation system and it is not possible to say that a self-managed superannuation fund is an entirely private matter. Even where members of a fund are family members, as is the case here, they should be entitled to the same protection that non-related fund members would be: Re Preuss. The Applicant, by failing to carry out and perform adequately and properly his duties as the auditor of the L Superannuation Fund, the Q Superannuation Fund and S Superannuation Fund No.1, the Applicant failed to protect the members of those funds (regardless of the fact that they are family members) and it follows he failed to protect the integrity of the superannuation system generally.

99. Finally, the Applicant argued that his failure to provide the trustees of the L Superannuation Fund and the Q Superannuation Fund with written notification of the contraventions of SISA by those funds was 'technical' and not 'actual' as the information was already known by the trustee (i.e. because he was both the auditor and a director of the corporate trustee). This submission far from supports the Applicant's case. Rather, it merely emphasises his lack of integrity, objectivity, independence and professionalism in the performance of his duties as an approved auditor.

DECISION

100. For the above reasons, the Tribunal is not satisfied, as required by section 131(7) of SISA, that the Applicant is: (i) likely to carry out and perform adequately and properly his duties of an auditor under SISA and the SISR in the future; and (ii) otherwise a fit and proper person to be an approved auditor for the purposes of SISA.

101. Consequently, the Respondent's decision, dated 3 September 2010, to refuse to exercise his discretion in section 131(5) of SISA and revoke the disqualification order issued to the Applicant under section 131(1) of SISA is the correct or preferable one: Drake v Minister for Immigration & Ethnic Affairs (1979) 46 FLR 409.

102. Accordingly, the Tribunal affirms the decision under review.

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