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When the trustees only have an unsigned version of a document, such as loan agreement, what is the best practice regarding audit qualification/contravention reporting?
In this case, I have the executed bare trust deed, current year loan statements, and the unexecuted version of the loan agreement from the bank. I believe this is appropriate evidence to substantiate that an LRBA is in place.
However, is this insufficient evidence due to the loan contract being unsigned?
Would this warrant a qualification of S67a on the basis of insufficient evidence, or is it okay to proceed with an unqualifed audit report in this instance?
Thank you.
Hello Jason
Thank you for your follow up question.
Whilst appreciating the loan account number on the unsigned loan agreement and in the current year loan statements is the same, this does not provide confirmation that the loan as executed is the same as that reflected in the unsigned loan agreement.
If a change in terms had hypothetically occurred, it is distinctly possible that the loan account number would have remain unchanged.
Hello Jason
Thanks for the question.
Given the lender is an arm's length party (that is, a bank), there are loan statements in place, along with an executed bare trust deed, it is not in doubt that a loan is in place between the SMSF and bank and that the legal title of the asset funded by the loan is held by a custodian entity.
So far, so good.
The one thing that we cannot be certain of, however, is that the bank has no recourse in the event of default to anything other than the asset funded by the borrowing. Presumably the unexecuted loan agreement reflects that this is to be the case. Presumably, the arrangement that was entered into reflects the unexecuted loan agreement.... presumably!
Therein lies our problem.
You were right to raise matter as a query on the forum.
Regrettably, in the absence of an executed/signed loan agreement, it cannot be known (it can only be assumed) the loan agreement meets all the criteria to be a permitted borrowing under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
The existence of the loan (and the amount of the liability) is not in question. So, this does not lead to a qualification at Part A of the auditor's report. However, amongst other provisions, a failure to comply with section 67A of the SIS Act that is material, needs to be disclosed at Part B of the auditor's report.
It is submitted that the inability to confirm that the borrowing is limited recourse in nature is a material respect of a section 67A borrowing.
This is no doubt frustrating, as the likelihood is that the actual borrowing in place reflects the unexecuted loan agreement.
One would hope that the accountant/trustee of fund could provide a copy of the executed loan agreement as soon as possible if it was conveyed to them that failure to do so would mean a qualified audit report and an ACR.
Mindful that if we cannot obtain evidence of the limited recourse nature of the borrowing, assuming the borrowing represents more than $30,000 and/or more than 5% of the fund's total assets, it would also be necessary to lodge an ACR.
It would be interesting to hear the views of other fund auditors in relation to this matter.