It could be argued that the complexities of running your own super fund are enough to turn many people away from self managed superannuation funds (SMSFs), particularly when considering the raft of rules and regulations imposed by the governing legislation. However, with in excess of half a million SMSFs, representing 31% of the $1.7 trillion held in superannuation, clearly many people prefer the SMSF structure to other superannuation options.
With much of the focus on compliance, considerable time and attention is given to trust deeds, investment strategies and the types of assets best suited to provide for retirement. Yet, very little attention is afforded to internal controls. Generally, the mindset of the average SMSF trustee is – I won’t steal from myself, so therefore internal controls are not necessary! The premise for this mindset is FALSE. Firstly, there are numerous cases where one trustee has cleaned out the SMSF unbeknown to the other. I am often told “my wife or husband would not do that we are happily married?”. The fact is that trust is not an internal control and should not be relied on as a safeguard. More often, than not, trust is a common denominator in fraud cases.
With in excess of $520 billion held in SMSFs with an average balance of $1 million per SMSF that have little or no internal controls, there is a pool of money that is incredibly enticing for fraudsters. Why rob a bank or perpetrate a lengthy Nigerian style scam which is likely to yield nickels and dimes, when millions of dollars can be cherry picked from SMSF trustees who are normally unsuspecting and often unsophisticated investors.
The types of fraud being perpetrated on SMSFs range from sophisticated bogus investment scams where trustees are encouraged to invest in entities that don’t exist to direct theft by trusted advisors and even family members. On a small scale one advisor who was sentenced to four years jail was setting up SMSF for clients and within the documents was a power of attorney which gave the advisor the authority to withdraw the money from the SMSF. On a much grander scale we saw the directors and advisors of TRIO Capital steal $176 million from SMSF investors.
So what can be done? Implement internal controls such as two signatories, make sure you are using reputable high quality professionals for your accounting and advisory needs. Ensure you use an independent, suitably qualified auditor that will conduct a thorough audit. Undertake regular due diligence, and get second opinions if in doubt. Don’t get caught by scammers offering unsolicited advice. ASIC have also issued warnings to SMSF trustees, flagging the fact that if an SMSF falls victim to theft or fraud, there is no compensation scheme available.