Independent research is not as comprehensive or thorough as an audit. Audits carry "today’s" information about a manager and a fund and "today’s" information is updated and signed off by the auditors twice a year.

As a critical component of the strict regulatory requirements in Australia, external auditors are engaged to audit both the financial reports and the compliance plan of LM’s registered schemes (the technical term for an Australian registered managed investment fund, "fund/s") and the financial reports of LM Investment Management Ltd, the Manager.

Importantly, all investor assets (fund assets) must be held, audited and accounted for separately from that of the fund manager (LM). Investors hold a beneficial and legal interest in the fund in which they have an investment.

The auditors spend a good deal of time getting to know the Manager (LM) and its managed funds.

The auditors regularly meet with LM’s directors, CFO, corporate accountants, fund accountants and Information Technology department to ensure all processes are in order. In addition, they confirm valuation, recoverability and the lending process with LM’s commercial lending department.

They also check the existence of a strong overall framework and audit trail, and ensuring they have direct access to those responsible for managing it.

The auditors present and meet with LM’s executive directors as a final step prior to issuing the audit reports.

The financial reports are audited as at 30 June annually, the end of the Australian financial year. For each registered scheme (fund) with over 100 members, a further review is conducted each half year as at 31 December.

The financial statements for the LM Managed Performance Fund are audited as at 31 December annually.

The audited financial reports are made available to each member of the scheme (fund) and are also published on LM’s website, www.LMaustralia.com. They contain an independent audit opinion which confirms that the financial reports as prepared by the Manager give a true and fair view of the financial position of the schemes (funds) and the Responsible Entity as at each reporting period.

The financial reports of both LM and its registered schemes (funds) are prepared in accordance with Australian and International Accounting Standards and the Corporations Act 2001. The opinion provided by the auditors is in accordance with Australian Auditing Standards and International Standards on Auditing.

The auditors generally attend LM’s offices each quarter, and for several months each year in total, to conduct ongoing verification work and prepare for the finalised reports.

The type of verification work conducted by the auditors on the financial reports for the Responsible Entity (funds manager) and its registered schemes (funds) is extensive.

Fund assets are predominantly loans and the audit focuses on both the lending process, and the value of the loan security to substantiate the unit price of the fund for investors. A full listing of loans and reconciliations (which confirm the balance of each loan and investment held by the scheme (fund)) are provided to the auditors.

The auditors also obtain copies of each independent valuation to support the carrying value of each loan. Where a sales contract or offer to purchase a particular security value is in existence, a copy of this is also provided. An assessment is also conducted on each loan to ensure that any provisions for impairment are brought to account immediately, if required, to ensure that the correct carrying value of each loan is reflected in the financial statements.

In order to be offered as a registered managed fund in Australia, each scheme (fund) must register two main legal documents with the Australian Securities and Investment Commission (ASIC). These two documents are called the constitution and compliance plan, and legally bind the Manager to operate the fund in accordance with those two documents.

During the course of each audit, the auditors confirm that the schemes (funds) are being operated in accordance with these documents.

The compliance plan audit is a separate independent report signed by a different partner of the auditor to that who signs the financial audit.

The compliance plan of each registered scheme (fund) is audited annually as at 30 June.

The audit of the compliance plan is thorough and exhaustive and examples of the verification work are set out as follows:-

Auditors must ensure that the fund assets are clearly indentified as fund assets and held separately from assets of LM and any other LM fund.

Ensuring that fund assets are valued at regular intervals that are appropriate to the nature of those fund assets.

Ensuring that all payments from fund assets are made in accordance with the funds’ constitution and Corporations Act and within appropriate timeframes.

Reporting to ASIC any breaches of the Corporations Act that could have a materially adverse effect on investors.

Ensuring that LM as the Responsible Entity has, at all times, complied with the financial conditions of its licence. This includes LM’s holding minimum net tangible assets of AUD$5 million to ensure that the business remains financially sound.

Our inhouse compliance department also conducts monthly audits which are provided to the auditors for independent review.

Ensuring that any matters relevant to an investor’s investment are appropriately disclosed in the product disclosure statement.

The audit process is expansive. It provides investors with up to date comfort in relation to both the reported valuation and ongoing management of the investment.


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