Administrative Law - Companies Auditors and Liquidators Disciplinary Board - appeal by auditor from decision of Administrative Appeals Tribunal from decision of Board dismissing application by Australian Securities Commission that company auditor be dealt with under s1292.

Corporations Law - Auditors - duty to carry out and perform adequately statutory duties - construction of s1292(1)(d) of the Corporations Law considered - whether audit certificate to statutory accounts of a Workcover Insurer misleading - whether necessary for Administrative Appeals Tribunal to consider whether auditor acted reasonably.

Workers Compensation - Workcover Insurance - whether statutory funds of Insurer held on statutory trusts - scheme of Workers Compensation Act 1987 (NSW) in relation to statutory funds of insurers considered.

Workers' Compensation Act (1987) NSW: ss195-201, 205-207, 208A Corporations Law: ss1292, 1317B(2) Companies (NSW) Code: ss267, 285 Administrative Appeals Tribunal Act: s44(1)

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN 29; referred to

AWA Ltd v Daniels (1992) 7 ASCR 759; referred to.

Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297; applied

Hughes and Vale Pty Ltd v The State of NSW (No 2) [1955] HCA 28; (1955) 93 CLR 127; applied

Stasos v Tax Agents' Board of NSW (1990) 90 ATC 4950; followed

Re Su and Tax Agents' Board of SA (1982) 82 ATC 4284; followed

Re Elizabethan Theatre Trust [1991] FCA 344; (1991) 102 ALR 681; discussed Occidental Life

Insurance Company of Australia v Bank of Melbourne (1993) 7 ANZ Insurance Cases; discussed

Wood Preservation Ltd v Prior (Inspector of Taxes) (1969) 1 WLR 1077;

Commissioner of Stamp Duties (Qld) v Joliffe [1920] HCA 45; (1920) 28 CLR 178; applied

Newcastle Club Ltd v Commissioner of Taxation (1994) 53 FCR 1; applied

Commissioner of Stamp Duties v Livingston [1964] UKPC 2; (1965) AC 694; referred to Fouche

v The Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609; distinguished Harmer v Federal Commissioner of Taxation [1991] HCA 51; (1991) 173 CLR 264;

Registrar of the Accident Compensation Tribunal v Commissioner of Taxation [1993] HCA 1; (1991) 178 CLR 145; discussed

Ingram v Ingram [1938] NSWStRp 25; (1938) 38 SR (NSW) 407; referred to

Counsel and Solicitors T Bathurst QC with R McHugh

Jacques

Counsel and Solicitors R McColl SC instructed by the

(1) The decision of the Tribunal be set aside and the matter be remitted

to the Tribunal for reconsideration in accordance with law.

(2) The first respondent to pay the applicant's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

HILL J Before the Court is an appeal from the General Administrative Division of the Administrative Appeals Tribunal ("the Tribunal") constituted by a Deputy President and two members.

2. Mr Davies is a senior partner in one of Sydney's leading accounting firms. At relevant times he was auditor of a group of companies, one of which was engaged in writing workers' compensation insurance under the Workers' Compensation Act (1987) (NSW) ("the Compensation Act"). By consent I ordered that the name of the insurance company, hereafter referred to as "the Insurer", be not published, having regard to the prejudice which might arise to it if publication should occur.

3. By application 22 January 1992 the Australian Securities Commission ("ASC"), the first respondent, applied to the Companies Auditors and Liquidators Disciplinary Board ("the Auditors' Board", the second respondent, pursuant to s1292(1)(d) of the Corporations Law ("the Law") that Mr Davies be dealt with in accordance with that section. Section 1292 provides relevantly as follows: 1292(1), 1292(9) and 1292(10) and (11)

"(1) The Board may, if it is satisfied on an application by

the Commission for a person who is registered as an auditor

to be dealt with under this section that, before, at or

after the commencement of this section:

(a) the person has:

(i) contravened section 1288 or a

corresponding previous law; or

(ii) ceased to be resident in Australia;

(b) a registration of the person under a previous

law corresponding to Division 2 has been

cancelled or suspended;

(c) the person has been dealt with under a previous

law corresponding to subsection (9) of this

section; or

(d) the person has failed, whether within or outside

Australia, to carry out or perform adequately

and properly:

(i) the duties of an auditor; or

(ii) any duties or functions required by an

Australian law to be carried out or

performed by a registered company auditor;

or is otherwise not a fit and proper person to

remain registered as an auditor;

by order, cancel, or suspend for a specified period, the

registration of the person as an auditor.

...

(9) Where, on an application by the Commission for a

person who is registered as an auditor, as a liquidator or

as a liquidator of a specified body corporate to be dealt

with under this section, the Board is satisfied that the

person has failed to carry out or perform adequately and

properly any of the duties or functions mentioned in

paragraph (1)(d) ... or is otherwise not a fit and proper

person to remain registered as an auditor, liquidator or

liquidator of that body, as the case may be, the Board may

deal with the person in one or more of the following ways:

(a) by admonishing or reprimanding the person;

(b) by requiring the person to give an undertaking to

engage in, or to refrain from engaging in, specified

conduct;

(c) by requiring the person to give an undertaking to

refrain from engaging in specified conduct except on

specified conditions;

and, if a person fails to give an undertaking when required

to do so under paragraph (b) or (c), or contravenes an

undertaking given pursuant to a requirement under that

paragraph, the Board may, by order, cancel, or suspend for a

specified period, the registration of the person as an

auditor, as a liquidator or as a liquidator of a specified

body corporate, as the case may be.

(10) Where, on an application by the Commission for a

person who is registered as an auditor, as a liquidator or

as a liquidator of a specified body corporate to be dealt

with under this section, the Board is empowered to deal with

the person as mentioned in subsection (9), the Board may so

deal with the person:

(a) if the Board is required to make an order under

subsection (6) on the application - in addition to

making such an order; or

(b) otherwise - in addition to, or instead of, cancelling

or suspending the registration of the person as an

auditor, as a liquidator or as a liquidator of that

body, as the case may be.

(11) The Board may exercise any of its powers under this

Division in relation to a person as a result of

conduct engaged in by the person whether or not that

conduct constituted or might have constituted an

offence, and whether or not any proceedings have been

brought or are to be brought in relation to that

conduct."

4. The complaint of the ASC, as originally made, related to the audit of the statutory accounts of the insurer as required by the Companies (NSW) Code ("the Code") for the financial years ended 30 June 1988, 1989 and 1990 respectively and the audit of financial returns required to be supplied by the insurer to the State Compensation Board, or its successor, the WorkCover Authority, in respect of the 1988 and 1989 years. The matters charged in respect of the statutory accounts for 1989 and 1990 and the WorkCover Authority return for 1989 are no longer in issue between the parties.

5. The Auditors' Board dismissed the application after a lengthy hearing. In summary it found, in respect of some of the charges, that there had been no failure on Mr Davies' part to carry out the duties or functions referred to in s1292(1)(d) and in respect of others that the conduct complained of was immaterial in regard to the overall operations of the group of companies of which the Insurer was a member, was of a minor nature or the matters complained of ultimately came down to a proper exercise of professional judgment.

6. The ASC, being dissatisfied with the Auditors' Board's decision, applied to the Tribunal for a review pursuant to s1317B(2) of the Law.

7. The Compensation Act, which was assented to on 10 June 1987 and commenced for relevant purposes on 30 June 1987, effected a substantial change in the manner in which workers' compensation business was transacted in New South Wales. To understand some of the arguments advanced, it is necessary to examine some features of the Compensation Act.

8. Supervision of workers' compensation insurance claims was initially entrusted to the State Compensation Board ("the Board") the body then charged with the general supervision and administration of workers' compensation insurance in the State. There was created a regime of "statutory funds" for licensed insurers. Section 195(1) obliged a licensed insurer to establish and maintain statutory funds in respect of the issue or renewal of workers' compensation policies. Relevantly, there was to be a separate statutory fund to be established in respect of policies of insurance issued or renewed during each financial year and other statutory funds were also contemplated. Power was conferred upon the Board to authorise an insurer to close a statutory fund and transfer the assets and liabilities of it and the policies of insurance to which those assets and liabilities relate to another statutory fund of the insurer.

9. Section 196 required, inter alia, premiums received by the insurer for policies of insurance in respect of which the statutory fund was maintained, interest paid by an employer for the late payment of a premium and other amounts paid to the insurer in connection with the policy; income arising from the investment of the assets of the statutory fund and other moneys required to be paid into the statutory fund or authorised to be paid to it to be carried to and become the assets of the statutory fund. The assets of that fund, by s197, could only be applied by the insurer for limited purposes which included the meeting of claims under the policies to which the fund related, the payment of direct expenses associated with such claims, the payment of management expenses relating to the statutory fund, the maximum amount of which could be determined by the Board, transfers of moneys in accordance with directions of the Board for pooling of premiums, payments for reinsurance, meeting income tax liabilities in respect of the income of the fund, meeting the costs of periodical actuarial investigations of the fund or the making of such payments as the Compensation Act might authorise to be made out of the funds.

10. Investment of statutory funds was dealt with by s198(1). They could be invested subject to directions given to the insurer by the Board in such manner as the insurer thinks fit. This was, however, subject to the power in the Board to direct an insurer only to invest in specific securities, not to invest in specified securities or to invest a specified percentage of the assets of any statutory fund in specified securities. There was a prohibition on the investing of amounts in the statutory funds in or by way of loans to related corporations. It was, however, specifically provided that the assets of all or any of the statutory funds of the insurer could be invested as a common fund.

11. Section 199(1) required the assets of statutory funds to be kept distinct and separate from all other assets of the insurer. They could not be mortgaged or charged otherwise than to secure a bank overdraft: s199(2). However, contravention of ss199(1) and (2) did not render a transaction invalid, although there was power conferred upon the Supreme Court of New South Wales on the application of the Board to declare invalid a mortgage or charge in contravention of s199(2) if such a declaration would not prejudice the rights of persons entering into the transaction bona fide without knowledge of the contravention.

12. Section 200 made a director of an insurer liable in the case of contravention of ss196, 197, 198 and 199 as if the director had been a trustee under a trust for the execution of the provisions of those sections and the appropriate policy holders had been beneficiaries of such a trust subject to a statutory defence contained in s200(2). The Board was authorised to bring proceedings against a director on behalf of the appropriate policy holders.

13. Section 201 required an insurer to keep such accounting and other records in relation to the business or financial position of the insurer (including records in relation to each statutory fund) as may be prescribed by regulations or directed by the Board. There was a requirement, imposed by s201(3) for returns to be lodged with the Board, including returns in relation to each statutory fund of the insurer, in a form prescribed. At the relevant time regulations had not been prescribed although draft regulations had been circulated which the parties agreed bound the Insurer. The reference to "accounting records" which were required by s201(1) to be kept is given content by the definition of that expression in s201(6) as including:

"invoices, receipts, orders for the payment of

money, bills of exchange, cheques, promissory

notes, vouchers and other documents of prime

entry and also includes such working papers and

other documents as are necessary to explain the

methods and calculations by which accounts are

made up."

14. Sections 205 to 207 of the Compensation Act dealt with a system of pooling of premiums between statutory funds of an insurer or between insurers. Briefly, these sections empowered the Board to direct that amounts be transferred from one statutory fund of an insurer to another or from the statutory funds of one insurer to the statutory funds of another insurer in order to pool premiums. Thus if the statutory funds of one insurer were in deficit a transfer could be ordered from the statutory funds of another insurer not in deficit to make up the deficit. Such a transfer was required to be made in an equitable manner. An insurer was required to comply with such a direction.

15. In the event that after a pooling arrangement had been implemented there was an overall surplus, the Board could direct distribution of that surplus in accordance with s206. The method of distribution included a distribution by way of profits to the insurers whose statutory funds were in surplus before the pooling arrangement began, for the benefit of policy holders, to the State Compensation Board Fund or to a premiums adjustment fund. On the other hand, if after the pooling process had been implemented there was an overall deficit, the Board was authorised to transfer from the premiums adjustment fund to any statutory fund in deficit such amount as the Board considered appropriate to ensure there was no default in payment of claims. The premiums adjustment fund could be topped up by a contribution from the government.

16. As originally enacted, and at times relevant to the present application, the Compensation Act did not operate in law to absolve an insurer from liability to pay the claims of policy holders with which that insurer had contracted. At least from a theoretical point of view, if at the end of the day there was a deficit in the statutory funds of a particular insurer and no funds were transferred to that statutory fund under the pooling arrangements, the insurer would be required, as a matter of contract with an insured person to meet from its own funds the deficit. Clearly, however, this theoretical possibility was not the way it was envisaged that the scheme would work in practice.

17. The system as operating in the 1988 year was subsequently amended by s208A of the Compensation Act. That section permitted an insurer liable to make payment under a policy to postpone that payment where there was insufficient money in the statutory fund. A policy holder to whom payment was not made was then entitled to be paid by the WorkCover Authority. The insurer became then obliged to reimburse the authority as soon as the relevant statutory fund had sufficient moneys in it to permit this course to be taken.

18. It was not in dispute between the parties that at least until October 1988 the records of the Insurer, in respect of the statutory fund for policies issued in that year, were not properly kept so as to enable there to be determined premiums receivable, interest payable by employers on premiums unpaid and doubtful debts. Nor is it in dispute that, at least until the same date, no audit had been conducted by Mr Davies or any person under his supervision of those matters.

19. The balance sheet of the Insurer was prepared in four columns. The first column set out under the usual headings of current and non-current assets, current and non-current liabilities etc, the situation with the statutory funds for 1988. The second set out, in respect of the same categories, the situation with respect to shareholders funds in that year. The third column was a total of the first two columns for 1988. The final column gave comparative figures for 1987. There having been no statutory funds in the 1987 year the comparative figures relate only to what the accounts refer to as shareholders' funds.

20. Under the heading "Current Assets" was an amount recorded as "receivables" of $34,581,227. A note to the accounts made it clear that this sum was made up of premiums receivable of approximately $30,000,000 and debtors which it is agreed represented interest payable on premiums unpaid. From this amount there was deducted an amount of $150,000 being provision for doubtful debts. These figures contrasted with current liabilities outside of the statutory funds of $53,226 in respect of total of assets of the company excluding statutory funds of $1,117,443. A note to the account under the heading "Statutory Funds" read as follows:

"The company is a licensed insurer under the NSW

Workers Compensation Act 1987 (the Act). In

accordance with the requirements of the Act, the

company has established and maintains statutory

funds in respect of the issue and renewal of

policies of insurance. The application of the

statutory funds is restricted to the payment of

claims, related expenses and other payments

authorised under the Act. The State

Compensation Board advises that the company has

no liability under the Act in the event of a

deficiency in the statutory funds. For these

reasons, the statutory funds are of a separate

and distinct nature and therefore the income,

expenses, assets and liabilities of the

statutory funds have been separately disclosed

in the accounts. This is the first year of

operations for the funds. Consequently there

are no comparative figures."

21. The accounts disclosed operating profit separately for the statutory funds account and for the other activities of the company. Income tax was calculated at the ordinary corporate tax rate applicable for the 1988 income tax year.

22. The auditors' report to members of the Insurer was in the following terms:

"We have audited the accompanying accounts,

including the balance sheet of (Insurer) as at

30 June 1988 and the related profit and loss

account for the year then ended, attached notes

and the statement by directors. Our audit was

made in accordance with Australian Auditing

Standards and, accordingly, included such tests

of the accounting records and such other

auditing procedures as we consider necessary in

the circumstances.

In our opinion the accounts referred to above

are properly drawn up in accordance with the

Companies (NSW) Code and so as to give a true

and fair view of:

(a) the state of affairs of the company at 30

June 1988 and of the profit of the company

for the year ended on that date;

(b) the other matters required by section 269

of that Code to be dealt with in the

accounts;

and are in accordance with Australian Accounting

Standards and applicable approved accounting

standards."

The report was dated 17 October 1988.

23. By that date, an audit had been completed in respect of all matters including statutory fund balances other than the items "premiums receivable", "other debtors" and "provision for doubtful debts". It was incomplete in respect of those three balances.

24. The WorkCover returns with accompanying audit certificate were prepared in April 1989. As already indicated, regulations had not then been prescribed, although a draft regulation had been forwarded by the Board to the Insurer on 25 November 1988. The case proceeded on the basis that the draft regulation was to be accepted as binding on all licensed insurers.

25. Clause 5 of the draft regulation required an insurer to:

"(a) keep such accounting records as correctly

record and explain the transactions and

financial position of the insurer and of

each statutory fund of the insurer;

(b) keep its accounting records in such manner

as will enable:

(i) the preparation from time to time of

the accounts referred to in clause

6; and

(ii) the accounts of the company to be

conveniently and properly audited in

accordance with the Act and this

draft Regulation."

26. The draft regulation required a return to be lodged with the Board together with the statutory accounts: cl6(1). The accounts required to be lodged with the Board were required to be audited and the regulation provided for there to be a report of the auditor thereon. That report was required, inter alia, to state (see cl9(4)):

"(a) ... Whether the accounting records of the

insurer appear to him to have been

properly kept and record and explain

correctly the financial position of the

insurer at 30 June, 19XX and the

transactions for the year ended on that

date and give particulars of accounting

records that appear to him not to have

been so kept and of transactions that

appear to him not to have been so

recorded;

(b) state whether the yearly statutory

accounts agree with the accounting records

of the insurer, have been prepared in

accordance with the provisions of the Act

and this draft Regulation and truly

represent the financial position of the

insurer as at the end of the financial

year and transactions of the insurer for

the year ended on that date and give

particulars of any matters that do not

appear to him to be so in accordance;".

27. The accounts were to be prepared in accordance with generally accepting accounting principles, applicable approved accounting standards and Australian Accounting Standards.

28. There is some controversy as to the state of the accounting records by the time the auditor gave his certificate with the return lodged with the Board. The reasons of the Tribunal make no reference to the controversy. Rather, the Tribunal states merely that the poor record keeping "still existed". I shall return to that matter later.

29. The auditors' certificate was in the following form:

"We have audited the statutory accounts of (the

insurer) for the year ended 30 June, 1988.

Except as discussed in the following paragraph

our audit was made in accordance with Australian

Auditing Standards and, accordingly, included

such tests of the accounting records and such

other auditing procedures as we considered

necessary in the circumstances.

We have not examined the adequacy of the

unreported claims provision as the insurer has

calculated this in accordance with the

directives of the State Compensation Board.

The statutory accounts report operating profit

and extraordinary items after tax of $60,828

whereas form 3 reports an operating profit of

$3,222,000. The difference has resulted from

management fees and the associated expenses

being reported by another (the insurer) group

company in its statutory accounts.

In our opinion, except for the effect of such

adjustments, if any, as might have been

disclosed had we examined the adequacy of the

unreported claims provision:

(a) The accounting records of the insurer

appear to us to have been properly kept

and record and explain correctly the

financial position of the insurer at 30

June, 1988 and the transactions for the

year ended on that date; and

(b) The statutory accounts agree with the

accounting records of the insurer and have

been prepared in accordance with the

provisions of the Workers Compensation Act

1987 and draft regulation - accounts,

returns, etc, and truly represent the

financial position of the insurer as at

the end of the financial year and

transactions of the insurer for the year

ended on that date.

Further, in our opinion

(a) We have obtained all information and

explanations requested from the insurer;

(b) We are satisfied that the apportionments

have been made in an equitable manner; and

(c) No part of the assets of the statutory

fund has been applied directly or

indirectly in contravention of the

provisions of the Act, the draft

regulation - account, returns, etc. or

conditions of licence."

30. It will be noted that the report is qualified in respect of unreported claims but no qualification has been made as to the correct keeping of records. To the contrary the report states positively that accounting records have been properly kept.

31. The Tribunal reversed the Companies Auditors and Liquidators Disciplinary Board decision. It found s1292(1)(d) of the Law applicable, both in respect of the 1988 statutory accounts and the 1988 return. The Tribunal thus determined to reprimand Mr Davies applying s1292(9). It is from that decision that Mr Davies appeals to this Court. The appeal is by virtue of s44(1) of the Administrative Appeals Tribunal Act 1975 ("the AAT Act"), an appeal "on", that is to say "limited to", a question of law.

32. As a preliminary matter the Tribunal considered the construction of s1292(1)(d) of the Law. It rejected a submission made on behalf of Mr Davies that it was necessary in determining whether s1292(1)(d) applied, not merely to find a failure to carry out or perform adequately and properly either the duties of the auditor or the duties or functions required by an Australian law to be carried out or performed by a registered company auditor, but additionally to find that by virtue of that failure the auditor was not a fit and proper person to remain registered as an auditor. It thus stated its conclusion that subparas(1) and (2) of s1292(4) are satisfied by a finding either that a person has failed to carry out or perform adequately and properly the general duties of an auditor or has failed so to carry out and perform adequately and properly his or her statutory duties. This was irrespective of whether such failure was or was not such as to lead to the conclusion that the auditor was not a fit and proper person to be registered.

33. In the Tribunal's view the general duties of an auditor were those discussed in Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN 29 at 51-53 and AWA Ltd v Daniels (1992) 7 ACSR 759 at 795. The statutory duties are those imposed upon an auditor by an Act of Parliament. This view was not challenged before me.

34. The Tribunal then turned to the conduct of Mr Davies in giving the auditor's report to the 1988 statutory accounts. It concluded that Mr Davies had failed to carry out his duties in that he had given a misleading certificate. The certificate was misleading because it implied that Mr Davies had in fact audited the accounts and misleading also in that it affirmed the adequacy of all the accounting records to which he had access. This breach was, in the Tribunal's view, both a breach of the auditor's general duties as an auditor and his specific statutory duties under the Code. It rejected a submission that shareholders were not misled on the basis that the duty of an auditor had to be defined by reference to potential users of the accounts. Such users, in the Tribunal's view, extended beyond the shareholders to the members of the public who held shares in the Insurer's parent company, creditors, securities analysts, competitors and the like.

35. The Tribunal was also of the view that Mr Davies had failed to carry out adequately and properly his duties in respect of the 1988 WorkCover returns. It concluded that it was incumbent upon Mr Davies to state in his audit report of 14 April 1989 that the records had not been properly kept. His failure to qualify the accounts in that way was, it was held, a breach of his general duty towards both the Board, the State Treasury and others concerned in the administration of the workers' compensation scheme.

36. One of the matters which the Tribunal considered in reaching its conclusion was the relationship between the Insurer and the statutory funds maintained for the purposes of the Compensation Act. This matter was relevant, inter alia, because of an argument advanced on behalf of Mr Davies that he was under no obligation to audit the 1988 statutory accounts in respect of the balances in the statutory fund. The argument advanced was that the Insurer merely managed the statutory funds on behalf of the Board and so the auditor of the Insurer was not obliged to report on them as part of the Insurer's own financial transactions. The Tribunal concluded that the statutory funds were impressed with "relevant trusts". It said that there could be no question but that "the statutory fund was a trust fund". It suggested that had the auditor had any doubts these would have been dispelled by his obtaining proper legal advice. Being trust funds Mr Davies was under an obligation to audit balances, particularly having regard to the provisions of ss267(1)(a) and 285(4) of the Code.

37. The Tribunal considered and rejected explanations advanced by Mr Davies, concluding that he had failed to carry out or perform adequately and properly his general duties, both in relation to the audit of the accounts of the Insurer and the duties or functions required of him by both the Code and his acceptance of the requirements of the Board. However, the Board did not view the breaches to be sufficiently serious as to merit cancellation or suspension. It thus exercised its powers under s1292(9), taking into account various matters including what it referred to as room for a genuine disagreement among auditors as to the way certain items in the statutory fund should be treated and Mr Davies' experience, ability and integrity. It thus reached the conclusion to which I have already referred, namely, that he should be reprimanded.

38. For Mr Davies it was submitted that the Tribunal had erred in law in the following respects:

* In construing s1292(1)(d) of the Law as requiring a finding only

of failure to carry out or perform the duties referred to in

subparas(1) and (2) without finding whether the failure was such

as to bring about the conclusion that the person so failing was

not a fit and proper person to remain registered as an auditor.

* In holding that the Insurer stood in a trustee relationship to the

* In failing to consider whether Mr Davies acted reasonably in

forming the view he did that it was unnecessary to audit the three

balances and so adequately and properly discharged his duties and

functions.

* In holding that the audit certificate given in respect of the

statutory accounts was capable of being misleading.

* By taking into account an irrelevant consideration in concluding

that the audit certificate in respect of the statutory accounts

was misleading, namely, the persons identified by the Tribunal as

users of the accounts.

* In holding that there was an obligation on Mr Davies to audit the

statutory funds or to form an opinion or qualify the accounts in

respect of inadequacy of books and records in respect of the

statutory fund.

* In failing to consider whether the state of the statutory funds or

the books and records relating thereto was material to the state

of affairs of the company.

* In concluding that there was no change in the state of the records

of the Insurer in the period between October 1988 and April 1989

when there was no evidence to support this finding and the

uncontroverted evidence was to the contrary.

* In failing to consider whether Mr Davies acted adequately and

properly in respect of signing the audit certificate in respect of

the 1988 returns.

39. The Commission, it can be said, generally supported the reasons of the Tribunal and denied that the Tribunal had fallen into error in any of the respects suggested on behalf of Mr Davies.

40. I turn now to deal with the submissions raised.

41. At the heart of the submissions on behalf of Mr Davies that the Tribunal erred in construing s1292(1)(d), are the words "or is otherwise" which appear at the end of the paragraph. It was submitted that the Tribunal in adopting the interpretation which it did, gave no operation to these words. It was said that the natural construction which emerges once these words are given their proper force is that there can be no "failure" within the meaning of the paragraph unless that failure is such as to render the auditor not a fit and proper person to remain registered as an auditor. It was said, further, that the general context of the provisions of the Law dealing with the registration of auditors gave support to the submission and that the construction advanced on behalf of Mr Davies put the provisions of ss1292 and 1280 in harmony.

42. No principle of interpretation could be better established than that a provision must be interpreted by reference to the context in which it appears: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at 304 per Gibbs CJ. No doubt for that reason it is proper in considering the interpretation to be given to s1292(1)(d) to see the context in which the subsection appears. Whether that context points to the interpretation contended for by Mr Davies is, however, another matter.

43. Registration of auditors and liquidators is dealt with in Part 9.2 of the Law. To secure registration as an auditor an applicant must fulfil three requirements. First, the applicant must have a particular professional qualification: s1280(2)(a). Secondly, the Commission must be satisfied that the applicant has had such practical experience in auditing as is prescribed: s1280(2)(b). Thirdly, the Commission must be satisfied:

"that the applicant is capable of performing the

duties of an auditor and is otherwise a fit and

proper person to be registered as an auditor":

s1280(2)(c).

Thus failure to demonstrate capacity will result in non-registration, as will failure to satisfy the Commission that the applicant is a fit and proper person.

44. It is unnecessary to dwell upon the use of the word "otherwise" in para(c) of s1280(2) for clearly in the context in which it appears in that paragraph it is necessary for an applicant to demonstrate both capacity and fitness. Probably the extent of capacity is to be judged from the point of view of fitness for registration. Once registered an auditor remains registered until he or she dies or the registration is cancelled. A registered person may, of course, request cancellation and this is dealt with in s1290(1). Cancellation, other than at the request of the registered person, may, however, come about by the application of s1292(1).

45. The submission sought to be made arising from this context was that because, apart from capacity and qualification, there is no qualification for registration other than fitness to be an auditor so likewise cancellation or suspension of registration should only arise if the auditor has so carried out or performed his or her duties that the auditor is no longer a fit and proper person to remain registered.

46. The phrase "fit and proper person" is a familiar one in the context of qualifications for offices or vocations. Discussing the phrase in the context of licences to use vehicles for the purposes of inter-State trade, Dixon CJ, McTiernan and Webb JJ said in Hughes and Vale Pty Ltd v The State of New South Wales (No 2) [1955] HCA 28; (1955) 93 CLR 127 at 156-7:

"But their very purpose is to give the widest

scope for judgment and indeed for rejection.

`Fit' (or `idoneus') 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 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' - Coke. When the question was

whether a man was a fit and proper person to

hold a licence for the sale of liquor it was

considered that it ought not to be confined to

an inquiry into his character and that it would

be unwise to attempt any definition of the

matters which may legitimately be inquired into;

each case must depend upon its own circumstances

...".

47. As I observed in Stasos v Tax Agents' Board of New South Wales (1990) 90 ATC 4950 at 4959 the content of what is necessary to constitute a person a fit and proper person to occupy a particular office or pursue a particular vocation will vary having regard to the office or vocation under consideration. Thus the characteristics required to show fitness as a tax agent were expressed by Davies J in Re Su and Tax Agents' Board of South Australia (1982) 82 ATC 4284 at 4286 as requiring that person to be:

"... a person of good reputation, has a proper

knowledge of taxation laws, is able to prepare

income tax returns competently and is able to

deal competently with any queries which may be

raised by officers of the Taxation Department.

He should be a person of such competence and

integrity that others may entrust their taxation

affairs to his care. He should a person of such

reputation and ability that officers of the

Taxation Department may proceed upon the footing

that the taxation returns lodged by the agent

have been prepared by him honestly and

competently."

48. Generally speaking it may be said that an auditor who fails to carry out adequately and properly his or her duties or functions as an auditor would not be a fit and proper person to remain registered, even if otherwise that person is a person of good fame and character. Perhaps it was for that reason that s1292(1)(d) was cast in the way it was. It was put, however, on behalf of Mr Davies that a case might well be imagined where a breach of duty had been committed of such triviality that it would not affect the fitness of the person to remain registered as an auditor. It is emphasised that the consequence of an adverse finding under s1292(1) is very severe, namely, cancellation or suspension of the registration. While this is to some extent alleviated by subsec(9) which permits admonition, reprimand or undertaking as alternative (as well as additional) forms of punishment even admonition could have severe commercial consequences for a company auditor.

49. The Tribunal's answer to this proposition was that the Tribunal, acting in place of the Auditors' Board, is not compelled to impose any penalty under s1292(1), although it is empowered so to do. It has a discretion. It has, too, an additional discretion under subsec(9) in that it could, if a penalty were appropriate, impose a penalty falling short of cancellation or suspension.

50. The Tribunal in its reasons referred to the history of s1292 of the Law. I do not repeat that discussion in detail. Reference was made to the Companies Act 1961 (NSW), s9, which dealt with disciplinary action against auditors in terms completely different from the present section. In my view, reference to it and cases decided under it such as Laycock v Companies Auditors Board (1978-80) 4 ACLR 125 provide no assistance. The Code which replaced the 1961 Companies Act was expressed in terms substantially similar to the present ss1292(1) and 1292(9) of the Law: see s27(4)(b) and s27(9) of the Code. However, there appear to have been no cases decided under the provisions of the uniform Code which throw light on the force to be given to the words "is otherwise not a fit and proper person to remain registered as an auditor" appearing in s27(4)(b) of it or explain the reason for their adoption. I thus do not find reference to the legislative history to be of assistance.

51. With respect to the submissions put on behalf of Mr Davies there is an obvious difficulty in the construction which is urged on his behalf. Had the legislature intended that it be necessary before s1292(1)(d) was attracted that it be shown that a registered person was not a fit and proper person to be an auditor, it would have been easy for the legislature to have merely stipulated in s1292(1)(d) that the person be found not to have been a fit and proper person to remain registered. It would have been unnecessary to have mentioned the specific matters in cll(i) and (ii) of the subclause. This is a difficulty in the way of the construction urged by counsel for Mr Davies at least as great as the difficulty thrown up by the use of the words "or is otherwise" for the construction adopted by the Tribunal.

52. Ultimately the question is one of impression. However, I think the better interpretation is that for s1292(1)(d) to be attracted there are three separate and independent alternatives. The first is a failure to carry out or perform adequately and properly the duties of an auditor. The second is a failure to carry or perform adequately and properly the duties or functions referred to in subpara(2) and the third and alternative requirement is that it be shown that the registered person is not a fit and proper person to remain registered. If the words "or is otherwise" have any significance at all it is to express a legislative view that a person who does not carry out or perform adequately and properly the duties or functions referred to in subparas(1) and (2) will ordinarily not be a fit and proper person to remain registered as an auditor. To the extent that there are cases which do not warrant cancellation or suspension, these may be dealt with either by the general discretion conferred upon the Board in s1292(1) or the power to impose a lesser disciplinary punishment contained in s1292(9).

53. It follows that I agree with the Tribunal when it concluded that the reference to "fit and proper person" provides a separate basis for the Board being empowered to cancel or suspend an auditor's registration.

WHETHER THE PROVISIONS OF THE COMPENSATION ACT IMPOSED A TRUST

54. Although the Tribunal appeared to regard this question as being relatively free from difficulty, I find the question extremely difficult.

55. The question whether the provisions of the Compensation Act impose upon an insurer a trust of the statutory funds must be decided by reference to the whole set of obligations and requirements laid down in the Compensation Act. No one section will be determinative.

56. It is true that a requirement that a fund be kept separate and apart from other assets of a person will be a significant factor in determining whether those funds are subject to a trust. Conversely if there be no requirement that the funds be segregated it will tend against the conclusion that a trust arises: Re Australian Elizabethan Theatre Trust [1991] FCA 344; (1991) 102 ALR 681 at 689 per Gummow J and the cases there referred to. It is equally clear, however, that the mere fact that a fund is required to be kept separate from other assets does not require the conclusion that a trust arises. So much follows from the decision of the Full Supreme Court of Victoria in Occidental Life Insurance Company of Australia Ltd v Bank of Melbourne (1993) 7 ANZ Insurance Cases 61-201.

57. A question which arose in that case was whether the assets of a statutory fund of a life insurance company were the subject of a trust. The Life Insurance Act 1945 (Cth) in provisions which obviously inspired the draftsman of the Workers' Compensation Act, provided for there to be kept separate from the assets of a life insurance company, statutory funds. All amounts received by the insurance company in respect of the particular class of life insurance business to which a particular statutory fund related were to become assets of the fund and were not, while the company carried on that particular class of life insurance business, to be available to meet any liability or expenses of the company other than liabilities or expenses referable to the particular class of life insurance business or to be applied for any purpose other than the purposes of that class or those classes of life insurance business. There are many similarities between the provisions of the Life Insurance Act on the one hand and the statutory fund provisions of the workers' compensation legislation, on the other. There is, in substance only one important difference, that being that there is no provision in the life insurance legislation for premium pooling.

58. Notwithstanding, however, the provisions of s38(6) of the Life Insurance Act, which require the assets of each statutory fund to be kept separate and distinct from all other assets of the company, it was held in Occidental that no trust was created. It should be said that counsel who appeared for the party seeking in that case to establish a trust disclaimed any suggestion that the Life Insurance Act created a trust of the statutory funds other than by virtue of the operation of s38(8), a subsection which is in substantially similar terms to s200(1) of the Compensation Act. Brooking J, with whose reasons Fullager and Tadgell JJ agreed, did however express the view that the concession was rightly made. In the result it was held that the statutory funds of Occidental Life Insurance Co of Australia Ltd were not property subject to a trust.

59. Counsel for the Commission relied particularly on the provisions of s197 of the Compensation Act which prohibits the assets of the statutory fund being applied other than for the purposes specified in the section as signifying that the workers' compensation insurer was no longer the beneficial owner of the assets of the fund because it was unable by force of the statute to deal with the assets as its own. Wood Preservation Ltd v Prior (Inspector of Taxes) (1969) 1 WLR 1077 at 1097, cited in favour of this proposition, provides scant support. That case held that the owner of shares the subject of a conditional contract of sale by that person was no longer the beneficial owner of those shares for the purposes of a particular provision of the Finance Act 1954 (UK) concerning losses. It does not go so far as to hold that the vendor under a conditional contract of sale is a trustee and if it did the case would seem inconsistent with what the High Court held in K.L.D.E. Pty Ltd v The Commissioner of Stamp Duties (Qld) [1984] HCA 63; (1983) 155 CLR 288 where the view that a purchaser under a contract for the sale of land has a beneficial interest in the land, albeit conditional upon payment of the price, depended upon the contract in question being an unconditional contract.

60. Be that as it may, the fact that the statutory funds can only be dealt with in a particular way or for particular purposes does not necessitate the view that a trust is created. That, too, would be inconsistent with the judgment of the Supreme Court of Victoria in the Occidental Life case.

61. Where a question arises whether a private trust exists, that question will ordinarily be determined by inquiring whether there was an intention to create a trust: Commissioner of Stamp Duties (Qld) v Joliffe [1920] HCA 45; (1920) 28 CLR 178; Re Australian Elizabethan Theatre Trust (supra) at 503; Newcastle Club Ltd v Commissioner of Taxation (1994) 53 FCR 1 at 6. It will be necessary to identify trust property and there will be a need to find certainty of object, that is to say, it must be possible to ascertain at least at the time of distribution those persons who are entitled to the trust property: see Newcastle Club Ltd (supra).

62. It is difficult to glean from the terms of the Compensation Act who would be the relevant beneficiaries of the trust. Presumably they would include the Insurer, the Board and perhaps other companies writing workers' compensation insurance. Perhaps policy holders could also be beneficiaries, although it is hard to see policy holders having standing in a court of equity to obtain due administration of a trust let alone, if unpaid, seeking an account. If there were found to be a trust its terms would be those set out in the statute. There would be no need for there to be found beneficiaries presently entitled, nor would there be a need to find any person having a beneficial interest in the trust fund: cf Commissioner of Stamp Duties (Qld) v Livingston [1964] UKPC 2; (1965) AC 694.

63. Reference was made by counsel to a number of cases in which the High Court has suggested that particular statutory provisions have created trusts for statutory purposes. If a trust is to be found these cases could offer some guidance.

64. Fouche v The Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609 concerned the Superannuation Act 1938-1950 (Tas) which provided for the establishment of a superannuation fund under the management of a board charged with the duty of investing the moneys of the fund. It was held that a mortgage and advances under it constituted a breach of trust in that the investment by way of advances, on the facts of the case, was one which should not have been made at all. It was also held that the members of the board of the company administering the superannuation fund were personally liable to make good any loss. In discussing the duty of the board, the joint judgment of Dixon, McTiernan and Fullager JJ commented that contributors to the fund were not beneficiaries in the proper sense, although their Honours suggested they would have an interest in the trust fund such as to give them standing in a court of equity. Their Honours continued (at 640):

"The trust is not a trust for persons but for

statutory purposes."

65. There seems to have been no doubt in the case that a trust existed and it is hard to see how any doubt could have been entertained.

66. Fouche was cited with approval by the Full High Court in Harmer v Federal Commissioner of Taxation [1991] HCA 51; (1991) 173 CLR 264. In that case money was held by a solicitor (on order of the Supreme Court of Western Australia) in circumstances where the money had been paid into court pending the determination of competing claims. There could again have been no doubt but that the solicitor was a trustee. Certainly the solicitor could not have been heard to say that the money was held beneficially. By the time the matter came to be decided by the High Court it was accepted that the solicitor was a trustee, although that had been a matter contested in this Court (see Commissioner of Taxation v Harmer (1990) 24 FCR 237 at 246-7). The concession that a trust existed was said by the High Court to have been correctly made.

67. The reference to Fouche in Harmer came not in the context of whether a trust existed but in the context of whether the beneficial ownership of the moneys lay in the litigants. It was in this context that the Court said (at 274):

"Once the moneys were deposited with the

Building Society in the names of the appellants

holding as trustees, the moneys were held by

them in that capacity to be dealt with in

accordance with the order of the Court and not

otherwise. It is unnecessary to consider

whether the contingent interests of the

claimants in the moneys paid into court could be

aggregated into a totality of beneficial

ownership or whether the powers of the Supreme

Court to make orders affecting the moneys,

including orders as to costs, meant that one of

the elements of an ordinary non-purpose trust

was lacking. It suffices to say that the trust

upon which the moneys were held was a trust for

statutory purposes (see Fouche v Superannuation

Fund Board [1952] HCA 1; (1952) 88 CLR 609 at p640) and that

the legislative provisions, including Rules of

Court, applicable to govern the payment of the

moneys into court and their subsequent

application effectively overrode any need of

that element."

68. Still more recently the High Court found in Registrar of the Accident Compensation Tribunal v Commissioner of Taxation [1993] HCA 1; (1991) 178 CLR 145 that the Registrar, to whom the Accident Compensation Act 1985 (Vic) entrusted the administration of compensation moneys payable to claimants under that Act, was a trustee of those moneys. In reaching its conclusion the Court said (at 165-6):

"A trust may be created without use of the word

`trust'. And, unless there is something in the

circumstances of the case to indicate otherwise,

a person who has `the custody and administration

of property on behalf of others' or who `has

received, as and for the beneficial property of

another, something which he is to hold, apply or

account for specifically for his benefit' is a

trustee in the ordinary sense."

69. As the Court makes clear however, (at 167) the question is a matter of ascertaining the intention of the legislature with respect to the holding of the relevant funds.

70. It may be observed that in each of the cases to which reference has been made that it was clear beyond doubt that the person or entity found to be trustee could not be said to have been intended to receive the funds beneficially. Where doubt existed, that doubt related only to the question whether there was a need to identify beneficiaries. The requirement of certainty of object required of private non- charitable trusts could be overruled by statutory provision such that the trust became one for purposes, those purposes being found in the relevant legislation.

71. The present case is, however, somewhat different. An insurer contracts in its own right with an employer for the provision of workers' compensation insurance. Upon a contract being entered into that insurer becomes personally liable under that contract. As a result of the contract the insurer becomes entitled, beneficially, to receive the premium from the employer. That premium would represent the insurer's gross income from the insurance business.

72. There is no particular reason to conclude that the legislature intended, by the establishment of a regime of statutory funds, to divest the insurer of the beneficial ownership of the premium and create the insurer trustee of the statutory fund constituted by that premium. By virtue of the Compensation Act the insurer is subject to restriction as to the manner in which the funds may be used and as to the manner in which they may be invested. However, in my view until the insurer is directed to transfer moneys from the fund to some other statutory fund pursuant to the pooling provisions, the assets of the statutory fund remain the assets of the insurer and are not impressed by a trust. Once a notice under the pooling arrangements is given and funds are required to be transferred and are transferred the funds would presumably cease to be the beneficial property of the Insurer. What then becomes of them is not a question which it is necessary in the present case to determine. It may be that they become the beneficial property of another insurer to whom they may be paid. It may be that the other insurer holds them upon trust. It may be they become vested in the Board. That is a problem for another day.

73. Any other treatment would impose an accounting morass for insurers. Having derived gross income upon entering into the insurance contract, the insurer would suffer an immediate loss upon receipt of that premium as the moneys on receipt would be divested from the insurer's beneficial ownership and became impressed with a statutory trust as suggested by the Tribunal. The balance sheet of the company would continue to show liabilities under the policies and no beneficial assets, other than a claim against the Board. Income arising from the statutory fund would be excluded from the profit and loss account of the company, although not really relevant to the legal analysis. Presumably, it would be taxed not at corporate rates but at the maximum rate of tax applicable to trusts where no person is presently entitled to income. That is certainly not the way the accounts calculated the tax provision.

74. The fact that an accounting morass is created is not, of course, determinative of the present issue although it does assist in concluding that it could not have been the statutory intention to create insurers trustees of the statutory funds which prima facie they use to meet their own liabilities.

75. I am of the view that the Tribunal erred in holding that the Insurer held the statutory funds as trustee.

76. During the course of argument I was inclined to the view that the question whether or not the employer was a trustee was of little or no relevance. The argument that this is so may be shortly stated. The duties of a company auditor in reporting upon the accounts of that company are set out in s285 of the Code. Relevantly it is the duty of an auditor to form an opinion whether proper accounting records and other records, including registers, have been kept by the company as required by the Code: s285(4)(b). If he or she forms the view that there is any deficiency, failure or shortcoming in this respect he or she is obliged to state that in the report.

77. A company's obligations to keep proper accounting records are detailed in s267 of the Code. Subsection (1)(a) provides:

"(1) A company shall -

(a) keep such accounting records as

correctly record and explain the

transactions of the company

(including any transactions as

trustee) and the financial position

of the company;".

78. If the Insurer were, as the Tribunal considered, a trustee of the statutory funds, s267(1)(a) would oblige it to keep records such as to explain its trustee transactions. That was the view the Tribunal took. If, on the other hand, the assets of the statutory fund were its beneficial assets, then nevertheless it would be obliged to keep such accounting records as would correctly record and explain its own transactions. In either case a breach of s285(4)(b) of the Code would have arisen.

79. A submission was advanced on behalf of Mr Davies that there was an intermediate situation, namely, that the Insurer was but a manager of workers' compensation business on behalf of the Board. In my view, the foundation for such an intermediate position is not to be found in the Compensation Act. Nothing in it suggests that an insurer contracts for workers' compensation insurance as agent for the Board. The insurer is liable directly as principal to an employer in respect of claims under the policy. It is not required directly to account to the Board for the premiums it receives.

80. However, in two respects the Board's finding that the Insurer was a trustee may have been critical to the ultimate decision. First, the Board rejected a submission on behalf of Mr Davies that he was under no obligation to audit the particular balances because they lacked materiality on the specific ground that the balances were trust property belonging to the Board so that the size of the amounts was irrelevant. Materiality would not appear relevant to trust moneys. Secondly, the conclusion that the funds were trust property could well have been relevant to the Tribunal's view as to the appropriate penalty to be exacted and as to the way in which it applied s1292(9).

81. I am thus of the view that the conclusion reached by the Tribunal as to the existence of a trust was a conclusion material to its decision. It being erroneous, the matter must accordingly be remitted to the Tribunal for reconsideration.

WHETHER THE AUDIT CERTIFICATE TO THE 1988 STATUTORY ACCOUNTS WAS MISLEADING

82. The conclusion of the Tribunal that the audit certificate in respect of the 1988 statutory accounts was misleading was based on two matters. The first was that it stated that the accounts had been audited whereas, as a matter of fact, the audit had not been completed of the three balances in the statutory funds, to which reference has already been made. The second reason was that the certificate affirmed the adequacy of all the accounting records to which the auditor had had access. There seems little doubt that, at least until October 1988, the records kept by the Insurer were inadequate. Yet the audit certificate contained no qualification.

83. With respect to counsel for Mr Davies, it is hard to see how issue could be taken with the Tribunal's conclusions that the audit certificate was misleading in these two respects.

84. The answer given on behalf of Mr Davies in the Tribunal was that Mr Davies was under no obligation to audit the statutory funds, both because the assets of those funds were not assets of the Insurer but merely assets managed by the Insurer and because, in any event, the accounts were prepared for the benefit of the shareholder of the Insurer, its parent company, and that company was not misled. In my opinion, the Tribunal was correct in rejecting both of these submissions. As I have already pointed out, the assets of the statutory fund were assets of the Insurer. The transactions in or forming part of the statutory funds were transactions of the Insurer. As such the auditor was bound to conduct an audit of them.

85. It is no answer to say that the shareholder to whom the audit report was addressed was not misled. The auditor had a statutory duty to note any shortcoming in records. The audit report made no such qualification.

86. Further, an inspection of the accounts themselves indicates that the accounts treat the statutory fund as assets of the Insurer. The mere fact that the accounts separate out the statutory funds from what is referred to as the shareholder's funds does not lead to the conclusion that the audit certificate relates only to the shareholders funds. On the face of the certificate, in the context of the accounts, it was clearly misleading.

87. It was further submitted that the Tribunal in reaching its conclusion took into account an irrelevant matter in that it concluded that the persons to whom the audit certificate was intended addressed beyond the parent company to other classes of persons including shareholders of the parent company, creditors, competitors, the Compensation Board and the New South Wales Treasury. It is unnecessary for me to consider whether all of the persons indicated by the Tribunal were properly persons who could be referred to as "users" of the accounts. If it be necessary to determine who relevant users of the accounts are, in determining whether a particular audit certificate is misleading, then no doubt in the present case the Compensation Board, to whom a copy of the statutory accounts were required to be supplied, is properly to be taken into account. Certainly the class of persons is, as the Board held, a class wider than merely the parent company. However, for the purposes of determining whether or not the certificate was misleading, it was sufficient for the Tribunal, and is sufficient for me, to say that it was on its face misleading and it is unnecessary here to have regard to the question of by whom the accounts were intended to be used.

WHETHER THE TRIBUNAL WAS BOUND TO CONSIDER WHETHER MR DAVIES ACTED REASONABLY

88. It was submitted on behalf of Mr Davies that it was incumbent upon the Tribunal to consider whether Mr Davies acted reasonably in forming the view he did that it was unnecessary to audit the three balances in the statutory accounts.

89. It may be noted that nothing in s1292 specifically permits an auditor to raise as a defence that a relevant failure to perform duties or functions as an auditor was reasonable and thus ought to be excused. That is not to say that the question whether an auditor acted reasonably would be irrelevant. At the very least it would be relevant in determining whether to punish the auditor at all, as well as to the question whether the alternative penalty under s1292(9) should be applied and the extent of that alternative penalty.

90. Reasonableness may, however, additionally be imported in two other ways. It may be imported in the concept of "failure" to which s1292(1)(d) refers or it may be imported through the words "adequately and properly" in the subsection.

91. As Sir Frederick Jordon CJ demonstrated in Ingram v Ingram [1938] NSWStRp 25; (1938) 38 SR(NSW) 407 at 410 the word "fail" may have different meanings in different contexts. Relevantly it may mean something other than mere omission to do the thing in question irrespective of the reason for that omission. Thus the offence of failing to furnish information contained in the then s223(1) of the Income Tax Assessment Act (1936-1972) was not made out merely by virtue of the non-supply of that information if the time within which it was required to be supplied was not reasonable: Deputy Commissioner of Taxation v Ganke (1975) 1 NSWLR 252.

92. Some scope for the importation of a requirement of reasonableness may arguably also be found in the present context in the word "adequately" in that it imports an element of judgment and degree.

93. Because the provisions of s1292(1) are brought into play upon it being shown that the duties or functions to which s1292(1)(d) relate have not been performed in such a way as may be described as adequate and proper, I do not think that any concept of reasonableness is imported through the use of the word "failed". Nor do I think merely because the legislature has used the word "adequately" that some concept of reasonableness has been imported.

94. The question whether duties or functions of an auditor have been carried out or performed "adequately" is obviously a question which involves judgment in a particular case. If the complaint were that the auditor had failed in his duties by certifying to accounts that were inaccurate in some way then it could well be appropriate to consider relevant accounting standards and if it could be shown that a particular transaction was not "material", in a relevant sense, it could then be said that the auditor's breach of duty did not involve a failure to carry out or perform adequately the duties of an auditor.

95. The submission in the present case was that the Tribunal should have concluded on the evidence that the failure to audit the particular balances in the statutory funds was not such as to be material, having regard to relevant accounting standards. There are two problems with the submission. First, the question of materiality can have no part to play in determining whether an auditor has breached a statutory duty. Where, as here, the Code placed an obligation upon the auditor to refer to a failure to maintain proper records in the certificate, that obligation was not satisfied and the "failure" cannot be explained away by reference to concepts of materiality contained in accounting standards. Those concepts of materiality deal rather with the presentation of the accounts themselves than with the criteria for fulfilment of statutory obligations; see, for example, Statement of Auditing Practice Materiality and Auditing Risk, AUP 27 published by the Australian Accounting Research Foundation Auditing Standards Board.

96. If the failure to perform a statutory or other duty was such as to be insignificant, de minimis or trivial, it could perhaps be possible to argue that the auditor had not failed to carry out or perform the relevant duty or function adequately. But that is not the present case.

97. It is correct to say, as counsel for Mr Davies does, that there was, consequent upon the introduction of the Compensation Act with its system of statutory funds, doubt as to the proper method of accounting for those funds and the profit and loss occasioned in respect of them in the statutory accounts. In part that difficulty flowed from the need to come to a conclusion as to the relationship of the statutory funds to the Insurer. It is a difficulty reflected by the fact that the Tribunal and I differ as to the proper legal relationship in which the Insurer stood with respect to the assets of the statutory fund.

98. The Tribunal in its reasons adverts to the fact that Mr Davies, in common with a number of other auditors acting for licensed insurers, was troubled about the way in which the accounts should be presented. It appears that there was an ad hoc committee of insurers formed and a request was made under s273 of the Code that insurers be relieved from complying with the provisions of subsecs269(1),(2),(3) and (8) of that Code, in so far as those provisions required the incorporation of the statutory funds into the statement of profit and loss and assets and liabilities of an insurer. The view, presumably of that committee, was that, having regard to the provisions of the Compensation Act, the statutory funds should be disclosed separately from, rather than combined with the other financial details of the insurer.

99. Following upon that application a class order was made to that effect, conditionally upon the accounts containing a separate profit and loss statement in respect of the statutory funds and disclosing the assets and liabilities of the statutory funds in a separate column of the balance sheet of the insurer. Compliance with the class order was not obligatory. It offered, as the Tribunal observed, an alternative method of disclosure. This alternative method indeed was that used by the Insurer in the present case. It may, by way of an aside, be observed that had the correct relationship between the insurer and the statutory funds been, as the Tribunal believed, one of trustee, it would have been totally inappropriate for the assets of the statutory funds to have been treated directly as assets of the Insurer. Likewise, if as counsel for Mr Davies sought to submit, the Insurer were merely a manager of funds belonging to the Compensation Board, neither method of accounting would have led to the accounts giving a full and fair view of the Insurer.

100. All of these matters, as well as the fact that the auditor bona fide believed he was not required to audit the three balances in question or to advert to the failure to keep records in relation to those balances (if the Tribunal reached such a conclusion) would clearly be relevant both to the Tribunal determining not to proceed to impose any penalty as well as to the Tribunal proceeding under s1292(9). However, in my view, there was no error on the part of the Tribunal in the approach it took in taking no account of reasonableness and bona fides in determining whether there had been a failure of the auditor adequately and properly to perform the duties and functions of which s1292(1)(d) speaks.

OTHER SUBMISSIONS RELATING TO THE STATUTORY 1988 ACCOUNTS

101. The remaining submissions, so far as they relate to the 1988 statutory accounts, raise no different issues from those which I have already discussed. In my opinion there was a clear obligation on Mr Davies to audit the statutory funds. There was also a clear obligation on him to form an opinion and refer in his audit report to the inadequacy of the Insurer's books and records. However, that was not ultimately the gravamen of the Tribunal's finding. What the Tribunal found was that the auditor's report was misleading because it implied, contrary to the fact, both that the statutory balances had been audited and that the books and records were adequately kept. In my view the Tribunal did not err in so holding.

102. It follows also from what I have said above that it was not incumbent upon the Tribunal in considering whether the audit certificate was misleading to consider whether the balances unaudited or the books and records relating thereto were material to the state of affairs of the company. I should say, however, that it is hard to see how any conclusion could in the circumstances be reached other than that these were material matters.

103. It is submitted on behalf of Mr Davies that there was no evidence to support the finding made by the Tribunal that there had been no change in the state of the records of the Insurer in the period between October 1988 and April 1989 when the audit report to the WorkCover returns was signed. Indeed it is said that the uncontroverted evidence was to the contrary. The finding is crucial to the Tribunal's conclusion in relation to the audit certificate of the returns.

104. The matter was dealt with very briefly by the Tribunal. After setting out the text of the audit report the Tribunal continued:

"This certificate is qualified in relation to

unreported claims but not otherwise. In fact,

however, all the poor records that had been

responsible for the incomplete Companies Code

report still existed. It was incumbent upon the

auditor to state in his report of 14 April 1989

that the records had not been properly kept.

His failure to do so amounted to a breach of his

general duty as an auditor. The 3 statutory

fund balances to which we have referred in

relation to the Companies Code audit, were still

in a state of incompleteness."

105. In support of the submission I was taken to the evidence said by counsel for Mr Davies to be relevant to the issue. Counsel for the Commission was invited to provide references to any other relevant evidence but indicated subsequently in writing that she did not wish to refer to any other passages.

106. First there was the evidence of Mr Sherlock who was the officer employed by the parent company of the Insurer responsible for preparation of the WorkCover return. Mr Sherlock speaks of a report prepared to verify outstanding debtors. He says that an initial report had been inadequate because it had not picked up all relevant transactions but that ultimately, after a number of revisions, by April 1989 it was acceptable. Mr Sherlock discusses also the calculation of interest on overdue premiums, the difficulty in obtaining this information through the computer system and its ultimate computation on a manual basis. Mr Sherlock's evidence does not go so far as to found a conclusion that the records were properly kept as at 14 April 1989.

107. Mr Robertson was an audit manager employed by Mr Davies' firm in connection with the audit. His statement, like that of Mr Sherlock, was tendered without objection in the Tribunal. In summary he says that by February 1989 a detailed debtors' listing was capable of being produced. His evidence also discusses the steps taken to determine penalty interest accruals. If a detailed debtors' listing could be produced then it would seem that the records in this respect were, by February 1989, in order. The evidence about interest accruals is somewhat equivocal.

108. Mr Lamble was a partner of Messrs Cooper & Lybrand who gave evidence for the Commission. In cross-examination he discussed the accounting problem involved. From his evidence and the evidence of others, the problem can be easily understood. Before Workcover, most insurers kept separate accounting records of policies issued by reference to brokers through whom the policies were negotiated and renewed, rather than either on an employer by employer basis or policy by policy basis. However, after Workcover, where interest was payable on premiums in arrears, it was necessary to be able to determine, on a policy by policy basis, which premiums on individual policies were in arrears so that interest could be calculated. In many cases, and this was so of the Insurer, it was thus necessary to change the entire accounting system to account separately on a policy by policy basis. Until that change was implemented the only way arrears of premiums, the timing of those arrears and the penalty interest could be calculated was to work manually from the prime records, presumably the policies themselves, the cash book, moneys for premiums and bank deposits.

109. Mr Lamble was of the view that the records of the company did not, as at 14 April 1989, enable aged debtors to be ascertained and penalty interest to be calculated. By this, it may be assumed, he meant other than manually. He did not explain his conclusion.

110. Mr Davies' own evidence, however, was that the records were such that it was possible, by April 1989, to dissect the policies and the premiums paid in respect of them. This was corroborated by Mr Robertson who, in cross-examination, said that he was satisfied that the accounting system could not only produce an accurate balance sheet and profit and loss account, but by April 1989 all figures, including penalty interest and accruals, could be verified and outstanding debtors listed. Mr Davies said, in chief, that while the accounts were not such as to be capable of audit in the period between October 1988 and March 1989, by April 1989 he was able to go through the accounts and actually calculate penalty interest accruals. He said also that a satisfactory debtors' listing existed by April. Later in cross-examination he indicated that by February 1989 he received a debtors' list identified by reference to policy numbers and his recollection was that the listing was transaction by transaction.

111. In summary, there was evidence that by April 1989 the company's records showed debtors, both in respect of premiums and unpaid interest and a check had been performed by way of a sampling process of bad debts.

112. Mr Robertson, in re-examination before the Auditors' Board, had been asked whether he had obtained knowledge of the dates of all relevant transactions concerning payments of premiums on policies before the April certificate. To this he replied that he had that information without which it would have been impossible to calculate the individual penalty accruals which were shown in the WorkCover return. He said that by the time the 1988 return was "signed off" and its audit completed, all information was available to him. That would suggest that the records of the Insurer permitted the information to be obtained.

113. Finally, Mr Lobenstein, who was the manager of the Insurer, in a written statement tendered gave evidence which went to the difficulties of computing the interest payable on individual overdue premiums. His evidence was not determinative of the question.

114. I do not think that it can be said that the evidence, summarised above, was so unequivocal that no conclusion was open other than that by April 1989 the accounting records were in order. But clearly there was evidence that they were, particularly the evidence of Mr Davies and Mr Robertson. To find that the records were still inadequate it would be necessary to reject their evidence.

115. It is not the function of this Court to find the facts. That is the function of the Tribunal and the Court will not interfere with a finding of fact where there is some evidence to support the finding, notwithstanding that the Court, if faced with the task of finding the facts, might have reached a different conclusion. However, where there is conflicting evidence (as is here the case) it is incumbent upon the Tribunal at least to indicate its reasons for preferring the evidence of one witness from that of another.

116. Section 43(2B) of the AAT Act requires the Tribunal to give written reasons for its decisions including "reference to the evidence or other material on which those findings were based". In my view, the Tribunal has not, in the present case, complied with this obligation. It may well be that in argument little attention was given to the matter and that the Tribunal's failure to discuss the evidence stems from this. I do not know. But even accepting that s43(2B) should be sensibly interpreted (cf Dornan v Riordan (1990) 24 FCR 564 at 567 and Bisley Investment Corporation Ltd v Australian Broadcasting Tribunal (1982) 59 FLR 132), the section was not, in my view, complied with in the present case.

117. There is a question whether non-compliance with s43(2B) itself is an error of law. In some cases the remedy may perhaps be only to refer the matter to the Tribunal to state its reasons: cf Repatriation Commission v O'Brien [1985] HCA 10; (1985) 155 CLR 422 at 445-6 per Brennan J. But, as the Full Court in Dornan v Riordan makes clear, substantial failure to state reasons will be an error of law. This will be the case where the failure concerns a crucial issue in the case.

118. The present is a case clearly on the borderline. As, in any event, the matter must be remitted to the Tribunal for further consideration, it matters not here whether the failure to give reasons was of sufficient moment as to constitute an error of law. I content myself with saying that the Tribunal should, after reconsidering the matter, address the factual issue more fully and, if still of the view that the records were inadequate as at April 1989, discuss the evidence and give its reasons for preferring one lot of evidence to another.

119. I would accordingly allow the application, set aside the decision of the Tribunal and remit the matter to the Tribunal for reconsideration in accordance with law. The costs of the applicant should be paid by the first respondent.