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Who watches the watchers? Challenging a disciplinary investigation through the court

The recent case of R (on the application of (1) Baker Tilly UK Audit LLP (2) Richard Hamilton King (3) Steven Laurence Railton) v (1) Financial Reporting Council (2) Financial Reporting Council Conduct Committee (3) Executive Counsel to the Financial Reporting Council [2015] EWHC 1398 (Admin) considered the circumstances in which an accountant could challenge the decision of a disciplinary scheme by means of judicial review.

Facts

Since 2005 the First Claimant, Baker Tilly UK Audit LLP (“Baker Tilly”) had audited the accounts of Tanfield Group plc (“Tanfield”), a company listed on the Alternative Investment Market.  Between November 2007 and July 2008, Baker Tilly accordingly carried out audit work on Tanfield and two of its subsidiaries, Tanfield Engineering Systems Limited (“Tanfield Engineering”) and SEV Group Limited (“SEV”).

The Second Claimant, Richard King, signed the audit opinion in respect of Tanfield’s 2007 financial statements on 21 April 2008; and on the same day the Third Claimant, Steven Railton, signed the audit opinion in respect of Tanfield Engineering and SEV’s 2007 financial statements.  All of the audit opinions were unqualified.

However, in 2007 Tanfield had acquired a subsidiary in the USA called Snorkel.  In the second half of 2008 Tanfield was heavily exposed to the residential construction market in the USA, and as a result of the economic downturn there Snorkel was subject to a significant write down of the value of its goodwill and inventory.  Tanfield’s profit itself was unaffected, but Snorkel’s write down was treated as a charge on profit under accounting rules, leading to a loss of £88.8m in Tanfield’s financial statements for 2008.

In September 2009 the Accountancy and Actuarial Discipline Board (“the AADB”, as it was then) informed Baker Tilly that it would investigate the preparation, approval and audit of Tanfield’s financial statements for 2007 and 2008.  Following some initial investigations between 2009 and 2011, no decision had been made about whether to file a formal complaint.  The First Defendant, the Financial Reporting Council (“the FRC”), superseded the AADB in July 2013, and in October 2013 the Claimants finally received a proposed formal complaint.  In short, the complaint alleged misconduct in respect of the 2007 financial statements for Tanfield, Tanfield Engineering and SEV, in that whilst the financial statements were not materially misstated the Claimants had nevertheless failed to carry out their audit properly for a variety of reasons and in breach of the requirements of the relevant auditing and professional standards.

The formal complaint was formally served on the Claimants on 3 June 2014 and would ordinarily be determined by a disciplinary tribunal.  However, the Claimants objected and sought the Court’s intervention by way of a judicial review.  They alleged that the FRC’s guidance on delivering formal complaints was unlawful; that the formal complaint was fundamentally wrong in its use of “misconduct”; and that there had been such a long delay in bringing the formal complaint that it would not be in the public interest for the formal complaint to be brought.

Decision

After a detailed review of the disciplinary scheme and meaning of “misconduct”, the Court dismissed every aspect of the Claimants’ judicial review application.

The Court held that the FRC’s guidance was not “inherently and necessarily unlawful in all cases”, as would be required for the Claimants’ first objection to succeed.  This was in part because the formal complaint had not been mistaken in its use of “misconduct” and its meaning, which was consistent with the authorities that the Court considered.  The Court was prepared to allow the FRC a significant degree of latitude in whether there had been “misconduct” in this case as it would depend on the specific facts, and was ultimately for the Disciplinary Tribunal to determine; the Court accordingly refused to stop the case proceeding to the Disciplinary Tribunal.  The Court also accepted that there were many reasons why bringing a formal complaint could be in the public interest and so a delay in progressing it did not necessarily make it contrary to the public interest.

Finally, the Court noted that cases such as this one should normally be determined by a Disciplinary Tribunal and so any successful challenge by judicial review to a decision to bring a complaint would be very rare.  The Disciplinary Tribunal is well-placed to determine whether a formal complaint should succeed or not, and the Courts will be reluctant to interfere with that process.

Comment

As professional indemnity policies increasingly offer some form of cover to accountants subject to disciplinary proceedings, and some claimants use a complaint strategically in an effort to support a related civil claim, this case provides a very helpful overview of what is required in the way of “misconduct” for a complaint to proceed.  It reminds us that generally more is required than mere negligence, but it need not be as severe as a lack of integrity (although it can have a moral dimension).

This case is also a reminder of the limits of judicial review and how reluctant the Courts are to interfere with a professional disciplinary scheme.  In most cases, costs will best be spent and time saved by investigating the complaint thoroughly and defending it robustly at the earliest possible stage (especially since the context of the accountant’s conduct is essential, and the success of any defence is highly dependent on the facts), rather than challenging whether the complaint should be brought in the first place. 

For accountants, this case highlights how the Courts will support professional bodies in bringing disciplinary actions even where there may not have been any negligence, or that negligence has not caused any loss.  It is therefore vital for accountants to bear the full breadth of their professional responsibilities in mind when acting for clients in order to manage their risk; and insurers may benefit from checking what steps their insured accountants take in that regard.

Contact

For more information please contact Jonathan Hyde on +44 (0)20 7280 8927.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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