Guidance on the Guidance: The Court of Appeal interprets the FRC Guidance on the delivery of Formal Complaints
In the recent case of Baker Tilly UK Audit LLP and Ors v Financial Reporting Council and Ors  EWCA Civ 406, the Court of Appeal considered the factors that the Financial Reporting Council ("FRC") should address in determining whether a complaint should be referred to its Disciplinary Tribunal, and the precise interpretation of paragraph 12(1)(f) of the FRC's Guidance.
Baker Tilly were the auditors of Tanfield Group plc ("Tanfield"), a company listed on the Alternative Investment Market. Baker Tilly provided an unqualified audit opinion in respect of Tanfield's accounts for the 2007 and 2008 financial statements. Due to the economic downturn in 2008, a significant write-down in the value of a subsidiary led to a loss of £88.8m in Tanfield's financial statements for 2008. The FRC investigated Baker Tilly's audit reports and, in June 2014, served a formal complaint on Baker Tilly. Baker Tilly sought a Judicial Review of the FRC's decision, which was dismissed by the High Court in 2015 (see our previous update here).
On appeal, Baker Tilly sought to argue that Paragraph 12(1)(f) of the FRC's Guidance on the delivery of Formal Complaints ("the Guidance") was nonsensical, making the FRC's decision to serve a formal complaint on Baker Tilly unlawful. The Court of Appeal was principally asked to interpret Paragraph 12(1)(f): what is a 'non-trivial failure' to act competently, and is this framed with reference to the definition of misconduct in the FRC Accountancy Scheme (an 'act or omission…which falls significantly short of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member of the member Firm or to the accountancy profession'), or to conduct which is either more or less serious than such misconduct?
After a detailed discussion of misconduct under the FRC Accountancy Scheme and the interpretation of Paragraph 12(1), the Court held that the FRC had appropriately directed itself when applying both the Evidential Test and, in particular, the Public Interest Test, contained within Paragraph 12 of the Guidance. The decision to deliver a formal complaint was not unlawful and Baker Tilly's appeal was unanimously dismissed.
Whilst the Judges reached the same conclusion, they expressed materially different views as to the meaning of Paragraph 12(1)(f). King LJ and Sales LJ held that "a non-trivial failure" was a "significant failure" on the part of the Member to act with professional competence, being over and above that which is necessary to be regarded as likely to result in a finding of "misconduct" under the Accountancy Scheme. Lady Justice Arden concluded that the reference to "misconduct" in Paragraph 12(1) of the Guidance is as defined in the Accountancy Scheme, and that the particular wording of Paragraph 12(1)(f) should be likened to "gross negligence", not that which is only just "not trivial".
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.