Dear Auditors Institute and fellow auditors,

I have a very important query regarding funds that invested in Digital Broadcast.

I already created a post "Limited Diversification and investment in digital broadcast" on 27/12/2023.

You mentioned in your response that "As you refer to, it is not your role as auditor to comment on the viability of the investment in Digital or Broadcasting licences". Your comment and response was very helpful.

However, today I have another query regarding this type of investment and the best way to protect myself as an auditor.

I sent an ethical letter to the previous auditor whom replied positively.

However, a few days later she sent me an email mentioning her concerns:

1. That I had been approached because she would not issue an unqualified audit report on the investments that these funds make.

   
   

2. That I should be careful of the risk (especially in light of the Melissa Caddick class action against her auditors).

She mentioned that the accountant looks after a number of funds for clients that have invested in various products and loans to BSM and Stryker. Funds in excess of $4m have been raised this way. Initially there were only a few investors. Over the last years this has increased. Hence her concern.  

She also mentioned that the accountant have sought to subrogate the auditor independence by moving the audit to some-one that may give an unqualified report. The investments have been made a number of years ago and are yet to return any income to the investors. Hence the business has not started nor received any income that confirms to her that it is possibly a scam or a Ponzi. She also doubt that Stryker holds an AFSL licence to raise funds the way it has been doing. Hence it may be illegal.

She finally shared that I should be aware that the supposed guarantee and refund policy (for what it is worth) ceases immediately the business commences. Of course if it commences and fails the guarantee/refund option lapses. That is something you mentioned in my first post regarding this investment ("so, it is assumed that valuing these investments is more problematic once full launch has occurred").

She also shared an extract of her qualified audit report:

Basis for Qualified Opinion

I have conducted my engagement in accordance with Standard on Assurance Engagements ASAE 3100 Compliance Engagements issued by the Auditing and Assurance Standards Board.

I believe that the evidence I have obtained is sufficient and appropriate to provide a basis for my qualified opinion.

The fund has breached Sections 62 & 31(1) of the SIS Act 1993 as referred to below:

Section 62 of the SIS Act           

The fund must be maintained for the sole purpose of providing benefits to any or all of the following:

·         fund members upon their retirement

·         fund members upon reaching a prescribed age

·         the dependants of a fund member in the case of a member’s death before retirement

Section 31(1) and Regulation 4.02 of the SIS Act               

The trustee of the Fund must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the Fund including, but not limited to, the following:

a)    the risk involved in making, holding and realising, and the likely return from, the Fund's investments, having regard to its objectives and expected cash flow requirements;

b)    the composition of the Fund's investments as a whole, including the extent to which they are diverse or involve exposure of the Fund to risks from inadequate diversification;

c)     the liquidity of the Fund's investments, having regard to its expected cash flow requirements;

d)    the ability of the Fund to discharge its existing and prospective liabilities;

e)    whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

An investment strategy is taken to be in accordance with sub-regulation (2) even if it provides for a specified beneficiary or class of beneficiaries to give directions to the trustee where the directions:

a)    relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the entity; and

b)    are given in the circumstances covered by regulation 4.02.

It is our view that the XXX  Superannuation Fund has not complied with the above two sections of the SIS Act. The Fund is therefore in breach in the Superannuation Industry (Supervision) Regulations."

I shared her concern with the accountant that contacted me (I had been working with her for 2 years though). I asked what she thought about the investments in BSM and Stryker and the previous auditor's concerns. I shared that I believe that her (the accountant) and I need to protect ourselves and I may need more details to complete the audits.

To start, I requested Stryker's AFL Licence and extended financial statements from the Digital Broadcaster.

I also asked her what other documents she thinks that we should be requesting from the trustees? 

She replied sharing her reasons for changing auditor:

1. A few internal changes in the auditor’s firm. They did a bulk of audits in July and August without any issues and became very slow in responding because they lost a couple of staff

2. Then the firm started to charge increased fees and issue qualified reports to the super funds without informing her what the problem was. The auditor told her the reason when she queried about the increased fee. She thought that it was quite unprofessional.

   
   
   
   

She shared "I totally understand your concerns and would like to work with you to find a solution to help those super funds. I am not shopping for auditor to get unqualified auditor reports, but really want to do the right thing for the super funds, so they can receive the correct advice and treatment".

She mentioned that Stryker doesn’t have AFL license as they are not selling financial products but digital licenses (that's what she had been told).

She spoke to the manager of Stryker and he agreed to provide the below:

1. The current term and condition agreement which outline the details of the products.

2. Updated market valuation report.

3. Estimated launch time line.

4. Letter to auditor (he said he is happy to write to me any questions I may have).

So far, as outlined from my previous post and your comments, I had requested the followings:

1. Invoices for the purchase of the Digital Broadcasts.

2. Investment Strategy considering this type of investment and the risk associated.

3. Market Value at 30/06/2023 (issued by the provider stating that cost base in the market value).

I would like to add that GST has been claimed on the purchase of the Digital Broadcasts and that GST will be payable on the sale of the investment. This matter has already been reviewed by the ATO (audit made by the ATO on a few funds regrading the GST registration) that aggreed with the registration. Therefore, I believe that the ATO is aware of this type of investment.

I also would like to add that the previous auditor had audited these funds for a couple of years and had never qualified the audit reports. However, she mentioned in her Management Letters that the Investment should be valued at Market value for next year.

I therefore requested a Market Value report that was provided by the Digital Broadcast Certificates issuer stating "There has been no resale of the Broadcast certificate in part or whole and is held within our

distribution corporate reservation lists for both Broadcasts and any pre allocated or prelaunch benefits.

There have been no refunds against this member account since purchase. The historic purchase price is the current market valuation of the broadcast consignment, as the price has not changed and is supported by a full unrestricted refund up until full launch of SmashBuy™ and UbeeChat™ applications and desktop software. All broadcasts will re-list upon launch of the applications and software at their full wholesale price plus."

I do not want to be involved between the accountant and past auditor. I just want to be sure that I provide the right advice to the trustees and that they are fully aware of the risk associated.

My first Management Letters included the following comments:

"I note that **% of the fund assets have been invested in Digital Certificates. While I make no comment on the viability of the investment, I note that this is the major asset of the fund. It is noted that this particular investment and the risk associated has been expressly contemplated in the fund’s investment strategy. However, I highly recommend you to diversify your investment strategy.

Please note that the trustees must ensure that assets are valued at their market value at the end of each income year as per Regulation 8.02B and section 35B(2) of the SIS Act. It is also noted that trustees have provided a basis upon which the historical cost is still considered to be reflective of market value.

Once the “full launch” of the applications has occurred, presumably the “unrestricted refund” feature ceases. So, it is assumed that valuing these investments will be more problematic once full launch has occurred and an independent market valuation may be needed to comply with the SIS Act."

I honestly don't believe that the audit reports should be qualified . However, I believe that further documents should be provided from the trustees to show that investment has been made in accordance with section 62 of the SISA.

Could you please advise what else you would request from the trustees (or from the Digital Broadcast certificates issuer)? Would you qualify the audit reports? What would you add in the Management Letter?

Please excuse my long post and thank you very much in advance.

Your assistance and opinion is really appreciated.

Kind Regards.