I am auditing a fund that lent money to an unrelated private company (company A). This loan is unsecured. Company A on-lent to another private company (company B) who on-lent to others.

First loan was for $50,000 in the 2015 year. A loan agreement was in place. Interest was paid to the super fund quarterly, no principal payments were made. Loan term was extended and additional amounts lent over the years, to bring loan to $100,000. They always got their interest. I have always put in my audit letter to the trustees that they should make their own investigations to ensure that the loan can be repaid on maturity. For the 2021 and 2022 year the company A was audited and I was provided with a copy of the audit report that reported no issues.

I am now doing the 2023 audit. They did not physically receive interest for the June quarter, this was added to the loan, so now loan $100,835.  The maturity date of this loan is 31/10/2024. This represents 7.5% of the SMSF’s assets. 

I requested a copy of the 2023 audit report for Company A and it was at this time that I was made aware that the company was in difficulty. This SMSF is not the only lender. Company A currently owes its lenders $27million and on-lent $36million to Company B who then on lent to others and is now struggling to be repaid. This was outlined in a lenders update report sent to all investors in November 2023 by Company A. They also sent one in July/August 2023 which was the first time they advised that there were issues (I have not sighted this report though). The November 2023 report states the Company A "cannot provide you with any assurance as to when the next capital distribution will take place". They are going though legal proceedings, putting caveats on assets, and are under taking an internal investigation into the previous managing director who resigned in February 2023. None of this sounds promising.

With all this in mind (and recent court cases) would you recommend qualifying Part A (financial audit)  and lodging a contravention report with ATO, since it looks like this investment may not be recoverable.  Is it also a breach of R8.02 as the value of the asset can not be verified. Or an I saying the SMSFs financial position is unsatisfactory as it might lose $100,000?  Just not sure what really applies here.