Baker Tilly UK Audit LLP and Others v Financial Reporting Council and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Singh |
| Judgment Date | 19 May 2015 |
| Neutral Citation | [2015] EWHC 1398 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 19 May 2015 |
| Docket Number | Case No: CO/3689/2014 |
[2015] EWHC 1398 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Singh
Case No: CO/3689/2014
The Queen on the application of
Richard Drabble QC and Tim Buley (instructed by Taylor Wessing) for the Claimants
Michael Fordham QC and Jason Pobjoy (instructed by Herbert Smith Freehills) for the Defendants
Hearing dates: 24 and 25 March 2015
Introduction
The first Claimant is a firm of accountants. The second and third Claimants are accountants who are partners in that firm.
The first Defendant is responsible for operating a disciplinary scheme for accountants and auditors known as the Accountancy Scheme. The second Defendant is a committee of the first Defendant which initiates investigations under that Scheme. The third Defendant, the Executive Counsel, carries out such investigations. It is common ground that the Defendants are amenable to judicial review.
The decision under challenge in this case is the decision by the third Defendant to deliver a Formal Complaint to the second Defendant on 29 May 2014.
The Claimants submit that the decision was tainted by two errors of law. They further submit that the decision was based upon guidance issued by the second Defendant, "Guidance on the Delivery of Formal Complaints" (the "Guidance"), which itself contains an error of law at para 12[1](f).
Permission to bring this claim for judicial review was granted on the papers by Collins J on 7 October 2014.
The Financial Reporting Council
The role of the Financial Reporting Council ("FRC"), which is the first Defendant, is described in a witness statement by Anne Mary McArthur, its General Counsel and Company Secretary. She was appointed in July 2006, having joined in November 2003 as Secretary to the former Accountancy Investigation and Discipline Board ("AIDB").
At para 6 of her witness statement Ms McArthur states:
"The FRC is an independent regulator and has a diverse range of responsibilities and functions which together serve to promote high quality corporate governance and reporting in the UK to foster investment. It does so by setting the framework of codes and standards for the accounting, auditing, actuarial and investor communities, and by overseeing the conduct of professionals working in these areas. …"
At para 9 she explains that the FRC acts as the independent disciplinary body for accountants, accountancy firms and actuaries in the UK by contractual arrangement with the relevant professional bodies. The FRC operates two separate disciplinary schemes: one for the accountancy profession and one for the actuarial profession. The present case is concerned with the accountancy profession. It will be seen that the FRC is not itself a professional body. As will be seen later in this judgment, there are professional bodies which regulate the affairs of accountants.
At para 13 she explains that the Accountancy Scheme was originally adopted by the AIDB on 13 May 2004. The AIDB became the Accountancy and Actuarial Discipline Board ("AADB") in 2007 and the Accountancy Scheme was amended by the AIDB on various occasions between September 2007 and 18 October 2012.
Both the AIDB and AADB were independent "operating bodies" of the FRC until 2012, when responsibility passed to the FRC. The Accountancy Scheme has since been amended by the FRC on 1 July 2013 and 1 June 2014. It is the version of the Scheme as amended on 1 July 2013 which is relevant in the present case.
Factual background to the present case
The first Claimant has audited the accounts of Tanfield Group plc ("Tanfield") since 2005. The Formal Complaint in this case relates to the 2007 statutory audits of Tanfield and two of its subsidiaries, Tanfield Engineering Systems Ltd ("TES") and SEV Group Ltd ("SEV"). Tanfield was listed on the Alternative Investment Market, which is a sub-market of the London Stock Exchange which allows smaller companies to float shares with a more flexible regulatory system than is applicable to the main stock market.
The audit work concerned in this case was carried out between November 2007 and July 2008. The second Claimant was responsible for signing the Audit Opinion in respect of Tanfield's 2007 financial statements, which he did on 21 April 2008. The third Claimant was responsible for signing the Audit Opinion in respect of the 2007 financial statements of both TES and SEV, which he did on 21 July 2008.
The background was that in 2007 Tanfield, which was a manufacturer of machinery including lifting gear and elevators, had acquired a US subsidiary called Snorkel. In the second half of 2008 Tanfield encountered a slump as a result of the global economic downturn. It was heavily exposed to the US residential construction market, which contracted fast during that period. In consequence the decision was made that the value of goodwill associated with the acquisition of Snorkel and the value of much of its inventory should be written down. This had no direct impact on the trading profit of Tanfield but was treated under accounting rules as a charge on profit, with the result that the financial statements for 2008 recorded a loss of £88.8 million.
On 14 September 2009 the AADB informed the first Claimant that it was commencing an investigation into the conduct of members and member firms in relation to the preparation, approval and audit of the financial statements of Tanfield for the years ended 31 December 2007 and 2008, so as to determine whether there may have been an "act of misconduct" under the then applicable Accountancy Scheme rules.
There then ensued both correspondence and interviews, including interviews of the second and third Claimants. There was no further communication between April and September 2011. On 14 September 2011 solicitors wrote on behalf of the Claimants asking to know with expedition whether complaints were to be pursued.
On 23 September 2011 the third Defendant replied saying that he had not yet made a decision whether a Formal Complaint would be filed.
He wrote again on 8 November 2011, suggesting that a draft statement of facts should be submitted for consideration. He would then seek an indication as to whether the Claimants wished to enter into a "Carecraft Agreement". This is an agreement involving the admission of matters in the Formal Complaint and the statement of facts. This would then result in an agreed recommendation to a Disciplinary Tribunal relating to appropriate sanctions for misconduct which had been admitted.
In fact no statement of facts was provided in 2011 or 2012.
As I have mentioned, a new version of the Accountancy Scheme came into force on 1 July 2013.
On 10 July 2013 solicitors wrote to the FRC, which had by now superseded the AADB, to complain about the delay.
On 18 July 2013 the new Executive Counsel, Gareth Rees QC, replied.
On 8 October 2013 the Claimants received a proposed draft Proposed Formal Complaint under para 7(10) of the Accountancy Scheme.
On 6 December 2013 written submissions were sent on behalf of the First Claimant in response to that Proposed Formal Complaint.
As already mentioned, the Formal Complaint was delivered to the Conduct Committee by the Executive Counsel on 29 May 2014. It was accompanied by a Statement of Reasons, although that Statement was not disclosed to the Claimants until after the grant of permission in these proceedings.
The Formal Complaint was served on the Claimants on 3 June 2014.
In the meantime there had been commissioned a report by John Leech, although the final version of that report is dated 2 July 2014.
In the ordinary course of events the complaint would now proceed for consideration by a Disciplinary Tribunal and, if appropriate, an appeal. However, the Claimants submit that in the circumstances of the present case this Court should intervene by way of judicial review and should do so at this stage.
Material legislation
Although the first Defendant is not a statutory body, it was common ground before me that its functions do have a statutory underpinning. Schedule 10 to the Companies Act 2006 concerns recognised supervisory bodies. Part 1 of Schedule 10 deals with the grant and revocation of recognition of a supervisory body. Part 2 sets out the requirements for recognition of a supervisory body.
Para 10 of Schedule 10 requires that the body must have rules and practices as to (a) the technical standards to be applied in statutory audit work, and (b) the manner in which those standards are to be applied in practice.
Para 16 of Schedule 10 requires that the body must (a) participate in arrangements within para 24(1), and (b) have rules and practices designed to ensure that, where the designated persons have decided that any particular disciplinary action should be taken against a member of the body following the conclusion of an investigation under such arrangements, that decision is to be treated as if it were a decision made by the body in disciplinary proceedings against that member. "The designated persons" means the persons who, under the arrangements, have the function of deciding whether (and if so, what) disciplinary action should be taken against a member of the body in light of...
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Baker Tilly UK Audit LLP and Ors v Financial Reporting Council and Ors
...IN THE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM Queen's Bench Division Administrative Court The Honourable Mr Justice Singh [2015] EWHC 1398 (Admin) Royal Courts of Justice Strand, London, WC2A 2LL The Right Honourable Lady Justice Arden The Right Honourable Lady Justice King and The......