Verifying the market values of unlisted investments

Verifying the market values of unlisted investments

On the 28th of August 2019, the Australian Taxation Office (ATO) released further guidance for auditors on verifying the market value of unlisted shares or units in trusts.  The ATO makes it very clear they expect SMSF auditors to both qualify Part B of their audit opinion and lodge an Auditor Contravention Report (ACR) where there is a material breach.

The guidance focuses on the obligation of SMSF auditors to confirm trustee compliance with regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 which requires trustees to value their assets at 'market value' when preparing the Statement of Financial Position.

The guidance emphasises that it is not the role of the auditor to value the assets held by an SMSF.  Instead, their role is to check that assets have been reported at market value by the trustees and assess whether the basis for the valuation is appropriate given the nature of the asset.  When doing this, the auditor needs to obtain sufficient and appropriate audit evidence to support their opinion.

For shares and units, the guidance states the evidence may include:

• An independent expert valuation of assets held in the company or unit trust.  If this is not available, evidence of how the market valuation was substantiated by the directors or trustees including objective and supportable data on which they relied, the valuation method they used and any assumptions made.
• A property valuation where property is the only asset of the company or unit trust.
• The date and price of the most recent sale and purchase of a share or unit between unrelated parties.

Auditor reporting obligations - Part B of the audit report

Where the SMSF auditor is unable to obtain sufficient appropriate audit evidence that the assets are valued at market value and hence whether the trustee has complied with regulation 8.02B, the guidance indicates the auditor must consider modification of the audit report by either qualifying the report if the auditor believes this could have a material impact on the fund, or issuing a disclaimer of opinion if the impact is both material and pervasive.

Where the SMSF auditor is able to obtain sufficient appropriate audit evidence about the valuation of an asset but the asset is not reported at its market value in the Statement of Financial Position, the auditor should either qualify the opinion if the auditor concludes the misstatement has a material but not pervasive impact on the fund, or issue an adverse opinion if it is both material and pervasive.

Auditor reporting obligations - Auditor Contravention Report

Where an auditor believes the value of one or more assets may be misstated, they should lodge an ACR if the reporting criteria have been met.  The relevant reporting criteria being where the contravention is greater than 5% of the assets of the fund or greater than $30,000.   It is relevant to note an auditor has to report to the ATO if they form an opinion there may have been a contravention.

Determining the value of the contravention for the ACR

Reporting a potential regulation 8.02B breach is difficult if the auditor is uncertain of the value of the contravention so the ATO guidance provides a couple of suggestions.

1. Report the asset value reported in the Statement of Financial Position.
2. Difference between the value reported in the financial statements and the auditor's own estimation of the market value of the asset.

In the majority of cases the auditor would be unaware of the value and hence the first option would be chosen.

What SMSF trustees can expect if an ACR is lodged

The ATO states they will take a risk assessment approach in response to a lodged ACR, looking at the type and number of contraventions reported and the amounts involved.  If contacted by the ATO during a review or audit they instigate, the trustee will have the opportunity to discuss the valuation difficulties they are having and if possible, come to a suitable rectification agreement with the ATO.

Conclusion

The decisions in Cam & Bear Pty Ltd v McGoldrick and Ryan Wealth Holdings Pty Ltd v Baumgartner have put SMSF auditors on notice about the consequences of not gathering enough evidence to support an unqualified audit opinion.

In relation to auditors' SIS compliance obligations, the ATO has now made their expectations clear and have shown they will take action against auditors.  Therefore, SMSF auditors who don't want to run the risk of being sued by the trustees or referred to ASIC for review, need to qualify both Parts A and B of the audit report and lodge an ACR where they have not been able to obtain sufficient and appropriate audit evidence about the value of material assets.