Alexander v Minister for Home Affairs

Superannuation Industry (Supervision) Act 1993 (Cth)

Superannuation Industry (Supervision) Regulations 1994 (Cth)

Alexander v Minister for Home Affairs [2022] HCA 19; (2022) 96 ALJR 560

Australian Securities and Investments Commission v Galliland [2022] FCA 1421

Benbrika v Minister for Home Affairs [2023] HCA 33

Frugtniet v Australian Securities and Investments Commission (2019) 93 ALJR 629; [2008] HCA 31

Masu Financial Management Pty Ltd and Australian Securities and Investments Commission [2017] AATA 97

Olive Financial Markets Pty Ltd and Australian Securities and Investments Commission [2022] AATA 5229

Schroeder and Australian Securities and Investments Commission [2020] AATA 2453

Whittle and Australian Securities and Investments Commission [2018] AATA 1861

Accounting Professional and Ethical Standards Board Ltd, Compiled APES 110 Code of Ethics for Professional Accountants, paragraphs 290.104, 290.127 290.4, 290.6, 290.7, 521.5

1. Janette Townshend is an experienced accountant. Since 2013, she has been registered under s 128B of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) as an auditor of self-managed superannuation funds. As an 'approved SMSF auditor', she has a range of obligations. One of those obligations is set out in s 128F(d), which refers to "comply[ing] with the auditor independence requirements prescribed by the regulations". A delegate of the Australian Securities and Investments Commission (ASIC) concluded the applicant failed to meet that obligation because she undertook audits of the Slaverio superannuation fund in relation to its affairs in the 2015-2020 income years.[1] Slaverio is a self-managed superannuation fund. The applicant's husband was a member of the fund during those years, and he was a director of the fund's corporate trustee. The delegate said the applicant should have known the relationship with her husband precluded her from auditing the fund given the auditor independence requirements.
2. The ASIC delegate exercised the discretion in s 130F(2) to disqualify the applicant as an approved SMSF auditor. That decision was affirmed by another delegate.
3. At the hearing, Ms Martin, the applicant's counsel, confirmed the applicant now accepts she failed to meet the auditor independence requirements. It follows the applicant accepts the discretion contained in s 130F(2) to disqualify or suspend has been enlivened. However Ms Martin says disqualification is not the correct and preferable outcome in all the circumstances. She argues disqualification is an overreaction to what was simply a misunderstanding on the applicant's part - a misunderstanding the applicant acknowledges could have been addressed if she had been more diligent in seeking clarification of any doubt that might exist about her obligations. Ms Martin adds there is no legitimate regulatory purpose served by disqualification, and she points to the applicant's extensive experience and otherwise spotless record.
4. Ms Martin noted ASIC had seen fit to respond by imposing conditions under s 128D in other cases where auditor independence issues arose. She acknowledged there is some doubt over whether the power under s 128D is available in review proceedings that focus on the exercise of the discretion under s 130F.
5. I have decided to affirm the disqualification decision. I explain my reasons below.

1. The facts in this case are not in dispute. They are set out in the statements of facts, issues and contentions and discussed in a statement provided by the applicant, Ms Townshend. Ms Townshend also gave evidence at the hearing. What follows is drawn from that material.
2. Ms Townshend has worked as an accountant for over 30 years. She holds appropriate academic qualifications. I understand she has routinely met her professional development obligations. She has been a certified practising accountant (CPA) since 2013. Prior to that, she was a member in good standing of another professional organisation. I understand she has an otherwise unblemished professional record over the years.
3. On 7 March 2013, ASIC registered the applicant as an approved SMSF auditor. As I understand the evidence, she had been involved in SMSF audits before 2013 but it was accepted she required the registration to undertake audits thereafter.
4. Ms Townshend's registration was subject to several conditions (reproduced in document T24) including the following, which dealt with the auditor independence requirements:

The approved SMSF auditor must comply with auditor independence requirements produced by the Accounting Professional and Ethical Standards Board Limited set out in the APES 110 Code of Ethics for Professional Accountants.

1. It follows that complying with the Code of Ethics is a condition of registration. The obligation to comply with the APES 110 Code of Ethics arises in another way. I have already mentioned s 128F(d) of SISA refers to regulations specifying auditor independence requirements. The regulation in question is found in the Superannuation Industry (Supervision) Regulations 1994 (the Regulations) at Reg 9A.06 which provides:

For paragraph 128F(d) of the Act, the auditor independence requirements produced by the Accounting Professional and Ethical Standards Board Limited and set out in the APES 110 Code of Ethics for Professional Accountants (including Independence Standards) are prescribed for all approved SMSF auditors.

1. The Code has gone through several iterations although ASIC points out the relevant provisions remained substantially the same over the period under consideration in this case.
2. Paragraph 290 of the 2013 compilation of the Code describes a 'Conceptual Framework Approach to Independence' which emphasises the public interest in audit teams, firms and network firms being independent of audit clients: at 290.4. Paragraph 290.6 goes on to explain:

Independence comprises: > > Independence of Mind > > The state of mind that permits the expression of a conclusion without being affected > > by influences that compromise professional judgement, thereby allowing an > > individual to act with integrity and exercise objectivity and professional scepticism. > > Independence in Appearance > > The avoidance of facts and circumstances that are so significant that a reasonable > > and informed third party would be likely to conclude, weighing all the specific facts > > and circumstances, that a Firm's, or a member of the Audit Team's, integrity, > > objectivity or professional scepticism has been compromised.

The conceptual framework approach shall be applied by Members to:

(a) Identify threats to Independence;

(b) Evaluate the significance of the threats identified; and

(c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an Acceptable Level.

When the Member determines that appropriate safeguards are not available or

cannot be applied to eliminate the threats or reduce them to an Acceptable Level,

the Member shall eliminate the circumstance or relationship creating the threats or

decline or terminate the Audit Engagement.

A Member shall use professional judgement in applying this conceptual framework.

1. The substance of the prohibition on conflicted engagements is found in paragraph 290.104 of APES 110 as it appeared in both the 2013 and 2017 iterations. The provision said:

If a member of the Audit Team, a member of that individual's Immediate Family, or a Firm has a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Therefore, none of the following shall have a Direct Financial Interest or a material Indirect Financial Interest in the client: a member of the Audit Team; a member of that individual's Immediate Family; or the Firm.

2. The terms 'Financial Interest', 'Direct Financial Interest' and 'Indirect Financial Interest' are all defined terms, though they are not in dispute here.
3. If there was any doubt about the meaning of paragraph 290.104, paragraph 290.127 said:

When an Immediate Family member of a member of the Audit Team is:

(i) A Director or Officer of the Audit Client; or

(ii) An employee in a position to exert significant influence over the preparation of the client's accounting records or the Financial Statements on which the Firm will express an Opinion, or

(iii) was in such a position during any period covered by the engagement or the Financial Statements,

the threats to Independence can only be reduced to an Acceptable Level by removing the individual from the Audit Team. The closeness of the relationship is such that no other safeguards could reduce the threat to an Acceptable Level. Accordingly, no individual who has such a relationship shall be a member of the Audit Team.

1. The most recent iteration of the Code published in November 2018 has been reorganised somewhat but the key provision for present purposes is found at paragraph 521.5. That provision says:

An individual shall not participate as an Audit Team member when any of that individual's Immediate Family:

(a) Is a Director or Officer of the Audit Client;

(b) Is an employee in a position to exert significant influence over the preparation of the client's accounting records or the Financial Statements on which the Firm will express an Opinion; or

(c) Was in such position during any period covered by the engagement or the Financial Statements.

1. I will discuss the application of the Code to the facts of this case in due course.
2. Ms Townshend said in her evidence at the hearing that she undertook perhaps a dozen audits of SMSFs each year during the period she has been registered. She said she typically derived between 5-10% of her annual professional fees from these activities. These proceedings - and these reasons - focus on the audits she conducted in relation to the Slaviero super fund in respect of the 2015-2020 income years. (The parties accept I should disregard the audits that occurred in relation to the 2008-2011 years because they pre-dated the enactment of Regulation 9A.06.) The relevant audits were completed on:
   • 27 March 2017
   • 3 April 2017
   • 10 December 2018
   • 19 August 2019
   • 17 November 2020 and
   • 3 March 2021.
3. The applicant's husband was a director of the corporate trustee of the superannuation fund when she completed these audits, and he was also a member of the fund.
4. On 13 April 2022, the Australian Taxation Office wrote to the applicant to advise it was concerned she had breached the auditor independence requirements in relation to the audits of the Slaviero superannuation fund. The letter explained the Deputy Commissioner was considering a referral to ASIC. The referral was subsequently made on 11 May 2022. ASIC's disqualification decision was made on 25 August 2022, and that decision was confirmed on reconsideration dated 27 October 2022.
5. ASIC noted in its disqualification decision (and again on reconsideration) that Ms Townshend had submitted she had no interest in the fund. She had also claimed her "performance as an auditor was of a mechanical nature." ASIC argues that description of the role suggests the applicant misunderstands what auditors do.

1. There is no doubt Ms Townshend was in breach of the audit independence requirements when she audited the Slaviero superannuation fund in respect of the 2015-2020 income years. She now accepts as much. That means she did not comply with a condition of her registration, and she also failed to comply with a duty imposed on her under the SISA regime. That essentially uncontested finding enlivens the discretion in s 130F of SISA to disqualify her or suspend her registration as an approved SMSF auditor (although the decision-maker may elect to not do either of those things).
2. I note the applicant has suggested I consider whether it would be possible - presumably as an alternative to action under s 130F - to impose conditions on Ms Townshend's registration pursuant to s 128D. I am not satisfied I have the power to impose conditions in these proceedings. While it is open to the regulator (ie, ASIC) to impose such conditions under that provision at any time, I do not step into ASIC's shoes for that purpose in these proceedings. Doing so would impermissibly change the question before me on review so that it was different in nature to the question before the original decision-maker: see Frugtniet v Australian Securities and Investments Commission (2019) 93 ALJR 629; [2008] HCA 31 at [15] per Kiefel CJ, Keane and Nettle JJ and [51] per Bell, Gagler, Gordon and Edelman JJ; see also Schroeder and Australian Securities and Investments Commission [2020] AATA 2453 at [29] per Thomas J and DP McCabe. I will therefore not further consider whether the imposition of conditions under s 128D is an available alternative.
3. When considering the appropriateness of regulatory action, one must keep in mind the objects of SISA. Section 3 of SISA confirms the SISA regime is intended to provide for the "prudent management" of superannuation funds covered under SISA by the regulators[2] in light of the fact "the supervised funds and trusts may become eligible for concessional taxation treatment." ASIC's decision-making - and that of the Tribunal on review, since I step into ASIC's shoes - is also informed by s 4 of SISA, which includes a 'simplified outline of supervision responsibilities' under the regulatory regime. The section provides (relevantly):

ASIC is generally responsible for protecting consumers from harm, market integrity, disclosure and record keeping.

4. That objective is consistent with ASIC's object in s 1 of the Australian Securities and Investments Commission Act 2001. Relevantly, that provision says ASIC:

(a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy ...

1. Of course, the interests of consumers of superannuation providers are not the only concern. SMSFs are the beneficiaries of significant taxation benefits. The integrity of the taxation system is also at issue. Section 4 of SISA makes clear the Commissioner of Taxation will focus on revenue integrity, but ASIC cannot ignore the issue as it discharges its own functions.
2. It almost goes without saying that auditors are integral to the proper operation of the regulatory scheme. The integrity of the taxation system and the protection of consumers will be compromised if auditors of SMSFs cannot be trusted to perform their role with skill, independence, and integrity. That is why the auditor independence requirements are expressly referred to in s 128F and Regulation 9A.06. But the auditor independence requirements merely articulate what is inherent in the role of an auditor. Any competent auditor would surely appreciate the obvious conflict which precludes them from auditing an entity in which they or their relatives have a financial interest. Of all people, auditors should appreciate the problem created by the conflicted relationship.
3. Informed by the objects of the regulatory regime (and the objects of the regulator), I acknowledge several considerations are relevant to the exercise of the discretion. These include:
   • the applicant's professional record and her personal circumstances;
   • the seriousness of the conduct and the period over which it occurred;
   • evidence of insight into the problem and the extent of cooperation with the regulator;
   • the need to deter the applicant from engaging in that or similar behaviour in the future (ie, specific deterrence);
   • the need to 'send a message' to others that will assist in achievement of the regulatory objectives (ie, general deterrence); and
   • any other mitigating factors.
4. The discretionary power contained in s 130F (and vested in ASIC and the Tribunal as executive decision-makers) is not available to inflict punishment: see, generally, Benbrika v Minister for Home Affairs [2023] HCA 33 which explored the boundary between executive and judicial power. I acknowledge regulatory action under s 130F may result in an applicant feeling punished. But that is never the intended effect. Regulatory action under s 130F of SISA is in no sense retributive: cf Benbrika at [22]-[25] per Kiefel CJ, Gageler, Gleeson and Jagot JJ; see also Alexander v Minister for Home Affairs [2022] HCA 19; (2022) 96 ALJR 560. Regulatory action under s 130F is, first and foremost, protective. That protection might be achieved in a variety of ways. If the applicant is suspended or disqualified from further participation in the regulated activity, the public will be protected from the applicant to that extent. The regulatory action may also have a specific or general deterrent effect which achieves the regulatory purpose.
5. Ms Townshend says she has a blameless record over a long period. That generally counts in her favour given one would expect an experienced person to have insight and be predictable, although - as I shall explain - her long experience also suggests she should have known better than to audit her husband's super fund. Her personal circumstances are such that she will not be prevented from continuing to conduct her accounting practice, although she will experience reputational impact that will depend in part on the action taken against her. The extent of the direct financial impact if she is unable to accept engagements as an auditor is less serious. She said in her evidence that she routinely audits up to a dozen SMSFs each year. Those engagements generate around 5-10% of her annual professional income. It follows disqualification or suspension will not have the effect of depriving Ms Townshend of her livelihood, although it would involve some financial cost and deliver a blow to her professional standing.
6. The conduct in question is serious. As I have explained, auditors play an important role in the regulation of the SMSF sector. Auditors must be independent, and they should be seen to be independent. A failure to act independently - or to act in a way that calls the auditor's independence into question - is a very serious matter.
7. A wilful disregard of the independence requirement would be especially serious, but I accept that is not what happened here. Nor is there any suggestion that Ms Townshend failed to conduct the audits appropriately, or that she or her husband derived any advantage from her engagement (apart from any professional fees charged in respect of the audits in the ordinary course). Having said that, the applicant's failure to appreciate there was a problem with undertaking the audits over several years is itself a matter of real concern. She should have known better, and the fact she did not raises question about her judgment. Her comment to the ASIC decision-maker 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.
8. I note the applicant has subsequently withdrawn the suggestion that the auditor's role was "mechanical in nature", as well she might. While that belated insight into the seriousness of the auditor's role is welcome, I am less impressed by her insistence the conduct was to some extent excused or explained because it was common in the industry.
9. The applicant pointed out 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. She argued that language did not clearly apply to auditors of SMSFs because they ordinarily worked on their own rather than as part of a team. She suggested in cross-examination that her misunderstanding was compounded by the failure of her professional association (and perhaps ASIC) to bring the detail and meaning of the independence requirements to her attention. That argument is untenable. Ms Townshend is an experienced practitioner. She is expected to bring diligence and an eye for detail to her role. She reluctantly admitted that the auditor independence requirements were available for perusal, and she confirmed she had read them. Indeed, she certified in the relevant audit reports that she had done so. She has now (reluctantly) accepted any doubts she might have had about the scope or application of the relevant provision should have been resolved by making appropriate enquiries.
10. Ms Townshend's interaction with ASIC is relevant because the regulatory regime assumes auditors will cooperate with the regulator. It took her some time to accept she was in error, and that the error was a serious one. I accept she has now acknowledged the error, at least, so this consideration does not weigh for or against her.
11. There are no other questions over Ms Townshend's credentials or competence, or in relation to her integrity and diligence apart from the questions arising out of her decision to undertake the audits of the Slaviero superannuation fund in the years in question.
12. I accept it is unlikely the applicant will repeat these specific mistakes if she is allowed to continue as an approved SMSF auditor. Her problematic conduct was the product of ignorance over the application of the auditor independence requirements. Whatever doubts she had about the requirements in the past, those doubts have undoubtedly been resolved by her experience of dealing with ASIC and the Tribunal thus far. A disqualification decision is not necessary to deter her from engaging in future conduct in contravention of the requirements. (Of course, if the applicant's disqualification is affirmed by the Tribunal, the disqualification would not deter the applicant in the relevant sense because she would no longer be permitted to undertake the role. The only specific deterrent effect would occur if the disqualification decision was subsequently revoked pursuant to s 130F(8)). Having said that, the applicant's discussion of her understanding of the auditor independence requirements (in her submissions to ASIC and before the Tribunal) raised questions over whether she needs to undergo some further education about her obligations.
13. That brings me to the question of general deterrence. There is no question that general deterrence is a factor which should be considered in the exercise of the discretion: see Australian Securities and Investments Commission v Galliland [2022] FCA 1421 at [37] per Collier J.
14. I was told many others in the industry shared Ms Townshend's misapprehension about the application of the auditor independence requirements to approved SMSF auditors. She said there was confusion at various professional development events she attended in relation to this issue. Ms Martin, for the applicant, also referred to decisions where ASIC appears to have taken a more lenient approach. For its part, ASIC referred me to the Tribunal's decision in Whittle and Australian Securities and Investments Commission [2018] AATA 1861 where Ms Whittle audited funds in which her father and brother had interests. In that case, the Tribunal affirmed the disqualification of Ms Whittle as an approved SMSF auditor.
15. If 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 the Tribunal explained in Masu Financial Management Pty Ltd and Australian Securities and Investments Commission [2017] AATA 97 at [48], a cancellation or disqualification power:

... is (amongst other things) a tool for exhortation and correction that the regulator can use as each licensee engages with the never-ending task of adapting and improving its individual arrangements to meet the challenges it faces. The sting of the lash contained in s 915C [of the Corporations Act 2001] can help focus the mind of compliance laggards; the report of the lash will also serve an example pour encourager les autres.

16. Suspending or disqualifying Ms Townshend would send a clear message to the rest of the audit profession that independence is crucially important. The need for general deterrence makes that essential.
17. The Tribunal acknowledged in Olive Financial Markets Pty Ltd and Australian Securities and Investments Commission [2022] AATA 5229 that a balancing exercise was required when deciding on a regulatory response. It explained (at [249]):

We acknowledge cancellation of a licence is a serious step. It should not be taken where it would be a disproportionate response to the conduct if a lesser response - such as suspension or enforceable undertakings - would adequately address the shortcomings and otherwise achieve the objects of the legislation. That is the message of [the Tribunal's decision in Sovereign Capital and Australian Securities and Investments Commission [2008] AATA 901]. But the deterrent value of a particular form of regulatory action is an important and relevant consideration. The value of deterrence is, if anything, more obvious in the wake of the report of the Hayne Royal Commission.

18. I have already discussed Ms Townshend's otherwise unblemished record and the fact her error was the product of a misunderstanding, albeit one that she should not have made (or should have corrected quickly if she had been diligent). The error was all the more troubling given the extent of her experience. I am also conscious that her auditing work does not account for a large part of her professional practice. Having said all that, the importance of the audit independence requirements means that disqualification is the appropriate response, just as in Whittle. That regulatory action will communicate a clear message to others about the importance of complying with the requirements. I am not aware of any mitigating circumstances that make that response disproportionate or otherwise inappropriate given the importance of the audit independence requirements to the regulatory objectives.

I certify that the preceding 45 (forty-five) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe.

.................................[SGD].......................................

Australian Securities and Investments Commission

[1] The applicant had undertaken audits of the fund in earlier years but ASIC accepts the auditor independence requirements may have been less clear-cut during those periods, so this review focuses on the period from 2015.

[2] SISA contemplates different regulators making decisions under SISA for different purposes. The other regulators include the Australian Prudential Regulatory Authority and the Commissioner of Taxation.