R (Baker Tilly LLP & others) v Financial Reporting Council and others [2015] EWHC 1398, Singh JIn the first High Court challenge to the Financial Reporting Council's ('FRC') disciplinary arrangements,
R (Baker Tilly LLP & others) v Financial Reporting Council and others [2015] EWHC 1398, Singh J
In the first High Court challenge to the Financial Reporting Council's ('FRC') disciplinary arrangements, the court conducted a comprehensive review of the authorities on misconduct, and offered interesting observations on judicial review of decisions to prosecute.
The FRC
The FRC investigates cases which may give rise to serious public concern or which may damage public confidence in the accountancy profession in the UK. Those subject to its jurisdiction include individual accountants ('Members') and firms ('Member Firms') who are members of its constituent bodies (such as the ICAEW and ACCA). The FRC operates an Accountancy Scheme ('the Scheme') which provides that a matter may be liable to investigation where it raises or appears to raise important issues affecting the public interest, and sets out the tests to be applied before the FRC's Executive Counsel can deliver a Formal Complaint against a Member or Member Firm. Delivery of a Formal Complaint leads to the matter being considered by a Disciplinary Tribunal.
The Scheme provides that a complaint should be delivered where (a) there is a realistic prospect that a Disciplinary Tribunal will find that the Member or Member Firm has committed 'Misconduct' or has failed to cooperate with a FRC investigation, and that (b) a hearing is desirable in the public interest. The Scheme defines 'misconduct' as acts which fall significantly short of the standards reasonably to be expected of a Member or Member Firm, or which have brought, or are likely to bring, discredit to either the Member or the Member Firm, or to the wider accountancy profession. Paragraph 12 of the FRC's Guidance on the Delivery of Formal Complaints ('the Guidance') fleshes out what may amount to misconduct. In considering whether a hearing is desirable in the public interest, paragraph 12(f) the Guidance highlights, amongst other things, that one factor to consider is whether the alleged conduct 'involved a non-trivial failure on the part of a Member or Member Firm to act with professional competence or due care…'
The Claimants
The first Claimant had audited the accounts of the Tanfield Group ('Tanfield') for a number of years, the second and third Claimants had been the audit partners who signed the Audit Opinion in respect of a number of sets of Tanfield's financial statements. In 2009, the Accountancy and Actuarial Disciplinary Board (an independent operating body of the FRC which had responsibility for the Scheme prior to 2012, when responsibility passed to the FRC) began an investigation into whether there had been an act of misconduct in relation to those audits.
In July 2014, Executive Counsel delivered a Formal Complaint against the three Claimants, alleging that the Claimants' conduct of the audits fell below the standard to be expected (including a failure to obtain appropriate audit evidence). Specifically, the Formal Complaint alleged that the Claimants failed to comply with requirements of the International Standards on Auditing ('ISAs'). Before a Disciplinary Tribunal could be convened to consider the allegations, the Claimants sought judicial review of the decision to deliver the Formal Complaint.
Grounds of challenge
The Claimants advanced three grounds of challenge:
Judgment
The application failed. In relation to the first ground, the judge noted that paragraph 12(f) does not give rise to any presumption that a non-trivial failure will necessarily amount to misconduct, but is merely one of a number of factors to be taken into account (and that no single factor is determinative). Moreover, paragraph 12(f) relates to the question of the whether it is in the public interest that a hearing should be held, rather than the assessment of whether there is a realistic prospect of a finding of misconduct; the definition of 'misconduct' is set out elsewhere in the Scheme and paragraph 12(f) would be unlikely to mislead.
In relation to the second ground, the judge concluded that the ISAs were clearly relevant, but that there was no evidence that Executive Counsel had simply equated the ISAs with the standards reasonably to be expected. In the judge's view, Executive Counsel had expressly directed his mind to how far short of those standards the Claimants' conduct fell and had taken advice from external counsel on the matter. In addition, the judge had regard to the fact that Executive Counsel had directed his mind to the standards set by previous FRC Disciplinary Tribunals which explicitly recognised the 'serious misconduct' test used by the GMC et al.
In relation to the third ground, the court rejected the error of law argument for the reasons set out above, and agreed that 'public interest considerations are par excellence matters for the evaluation by the relevant decision maker', concluding that none of the grounds advanced could give rise to a finding that the decision that a hearing was in the public interest was irrational.
The court also considered whether it was appropriate for the application to have been brought before the Disciplinary Tribunal was convened. The court considered a number of well-established authorities that judicial review of a decision to prosecute is an exceptional remedy of last resort[2], and held that this was not such a case (saying 'it will be rare that it would be appropriate for such challenges to be entertained, since they should normally go, as a matter of principle, to the Disciplinary Tribunal'). The court also considered that the fact that costs do not follow the even before the Disciplinary Tribunal was largely immaterial to the question of 'last resort'. Finally, the court approved an earlier FRC Disciplinary Tribunal's suggestion that 'there is no doubt that any Tribunal has the power to stay its proceedings if there has been an abuse of its process'.
The case is of particular interest in its implicit acceptance that the concept of 'misconduct' is substantially similar across the range of professional disciplines, and the review of the applicable case law will be a useful reference for any practitioners looking for a comprehensive discussion on the subject. Any regulators with a limited set of jurisprudence would be wise to consider the discussion, as well as regulatory bodies of the future. The court's ruling in relation to judicial review of decisions to prosecute will also prove useful, and it is instructive to set it alongside Squier v GMC [2015] EWHC 299 in which a preliminary finding by a GMC Fitness to Practise Panel was held to be judicially reviewable because of its potential impact on the administration of a hearing that was estimated to last up to 90 days. Moreover, the court's comments on the inherent jurisdiction of Tribunals in relation to abuses of their process is timely and useful.
[1] See e.g. R (Remedy UK Ltd) v General Medical Council [2010] EWHC 1245; Roylance v General Medical Council [2000] 1 AC 311; Preiss v General Dental Council [2001] 1 WLR 1926; Meadow v General Medical Council [2007] QB 462; Calhaem v General Medical Council [2008] LS Law Medical 96; Spencer v General Osteopathic Council [2013] 1 WLR 1307
[2] See e.g. Sharma v Brown-Antoine [2007] 1 WLR 780; R (Corner House Research) v Director of the Serious Fraud Office [2009] 1 AC 756; R v Director of Public Prosecutions, ex p. Kebilene [2000] 2 AC 326; and Matalulu v DPP [2003] 4 LRC 712
In the first High Court challenge to the Financial Reporting Council's ('FRC') disciplinary arrangements, the court conducted a comprehensive review of the authorities on misconduct, and offered interesting observations on judicial review of decisions to prosecute.
The FRC
The FRC investigates cases which may give rise to serious public concern or which may damage public confidence in the accountancy profession in the UK. Those subject to its jurisdiction include individual accountants ('Members') and firms ('Member Firms') who are members of its constituent bodies (such as the ICAEW and ACCA). The FRC operates an Accountancy Scheme ('the Scheme') which provides that a matter may be liable to investigation where it raises or appears to raise important issues affecting the public interest, and sets out the tests to be applied before the FRC's Executive Counsel can deliver a Formal Complaint against a Member or Member Firm. Delivery of a Formal Complaint leads to the matter being considered by a Disciplinary Tribunal.
The Scheme provides that a complaint should be delivered where (a) there is a realistic prospect that a Disciplinary Tribunal will find that the Member or Member Firm has committed 'Misconduct' or has failed to cooperate with a FRC investigation, and that (b) a hearing is desirable in the public interest. The Scheme defines 'misconduct' as acts which fall significantly short of the standards reasonably to be expected of a Member or Member Firm, or which have brought, or are likely to bring, discredit to either the Member or the Member Firm, or to the wider accountancy profession. Paragraph 12 of the FRC's Guidance on the Delivery of Formal Complaints ('the Guidance') fleshes out what may amount to misconduct. In considering whether a hearing is desirable in the public interest, paragraph 12(f) the Guidance highlights, amongst other things, that one factor to consider is whether the alleged conduct 'involved a non-trivial failure on the part of a Member or Member Firm to act with professional competence or due care…'
The Claimants
The first Claimant had audited the accounts of the Tanfield Group ('Tanfield') for a number of years, the second and third Claimants had been the audit partners who signed the Audit Opinion in respect of a number of sets of Tanfield's financial statements. In 2009, the Accountancy and Actuarial Disciplinary Board (an independent operating body of the FRC which had responsibility for the Scheme prior to 2012, when responsibility passed to the FRC) began an investigation into whether there had been an act of misconduct in relation to those audits.
In July 2014, Executive Counsel delivered a Formal Complaint against the three Claimants, alleging that the Claimants' conduct of the audits fell below the standard to be expected (including a failure to obtain appropriate audit evidence). Specifically, the Formal Complaint alleged that the Claimants failed to comply with requirements of the International Standards on Auditing ('ISAs'). Before a Disciplinary Tribunal could be convened to consider the allegations, the Claimants sought judicial review of the decision to deliver the Formal Complaint.
Grounds of challenge
The Claimants advanced three grounds of challenge:
- Paragraph 12(f) of the Guidance contains a legally erroneous approach to misconduct since it necessarily equates 'non-trivial misconduct' with 'serious misconduct'. This gives rise to a risk that mere negligence might lead to a finding of misconduct. This would be at odds with a long line of authority in relation to other regulators[1];
- The Formal Complaint adopted an erroneous approach to the legal meaning of 'misconduct' by:
- Treating the ISAs as standards reasonably to be expected,
- Treating non-trivial departures from the ISA as amounting to misconduct; and
- Failing to recognise that a breach of the ISAs must be a gross breach; and
- The approach to the public interest test was flawed by the above errors of law and was irrational.
Judgment
The application failed. In relation to the first ground, the judge noted that paragraph 12(f) does not give rise to any presumption that a non-trivial failure will necessarily amount to misconduct, but is merely one of a number of factors to be taken into account (and that no single factor is determinative). Moreover, paragraph 12(f) relates to the question of the whether it is in the public interest that a hearing should be held, rather than the assessment of whether there is a realistic prospect of a finding of misconduct; the definition of 'misconduct' is set out elsewhere in the Scheme and paragraph 12(f) would be unlikely to mislead.
In relation to the second ground, the judge concluded that the ISAs were clearly relevant, but that there was no evidence that Executive Counsel had simply equated the ISAs with the standards reasonably to be expected. In the judge's view, Executive Counsel had expressly directed his mind to how far short of those standards the Claimants' conduct fell and had taken advice from external counsel on the matter. In addition, the judge had regard to the fact that Executive Counsel had directed his mind to the standards set by previous FRC Disciplinary Tribunals which explicitly recognised the 'serious misconduct' test used by the GMC et al.
In relation to the third ground, the court rejected the error of law argument for the reasons set out above, and agreed that 'public interest considerations are par excellence matters for the evaluation by the relevant decision maker', concluding that none of the grounds advanced could give rise to a finding that the decision that a hearing was in the public interest was irrational.
The court also considered whether it was appropriate for the application to have been brought before the Disciplinary Tribunal was convened. The court considered a number of well-established authorities that judicial review of a decision to prosecute is an exceptional remedy of last resort[2], and held that this was not such a case (saying 'it will be rare that it would be appropriate for such challenges to be entertained, since they should normally go, as a matter of principle, to the Disciplinary Tribunal'). The court also considered that the fact that costs do not follow the even before the Disciplinary Tribunal was largely immaterial to the question of 'last resort'. Finally, the court approved an earlier FRC Disciplinary Tribunal's suggestion that 'there is no doubt that any Tribunal has the power to stay its proceedings if there has been an abuse of its process'.
The case is of particular interest in its implicit acceptance that the concept of 'misconduct' is substantially similar across the range of professional disciplines, and the review of the applicable case law will be a useful reference for any practitioners looking for a comprehensive discussion on the subject. Any regulators with a limited set of jurisprudence would be wise to consider the discussion, as well as regulatory bodies of the future. The court's ruling in relation to judicial review of decisions to prosecute will also prove useful, and it is instructive to set it alongside Squier v GMC [2015] EWHC 299 in which a preliminary finding by a GMC Fitness to Practise Panel was held to be judicially reviewable because of its potential impact on the administration of a hearing that was estimated to last up to 90 days. Moreover, the court's comments on the inherent jurisdiction of Tribunals in relation to abuses of their process is timely and useful.
[1] See e.g. R (Remedy UK Ltd) v General Medical Council [2010] EWHC 1245; Roylance v General Medical Council [2000] 1 AC 311; Preiss v General Dental Council [2001] 1 WLR 1926; Meadow v General Medical Council [2007] QB 462; Calhaem v General Medical Council [2008] LS Law Medical 96; Spencer v General Osteopathic Council [2013] 1 WLR 1307
[2] See e.g. Sharma v Brown-Antoine [2007] 1 WLR 780; R (Corner House Research) v Director of the Serious Fraud Office [2009] 1 AC 756; R v Director of Public Prosecutions, ex p. Kebilene [2000] 2 AC 326; and Matalulu v DPP [2003] 4 LRC 712