The Court of Appeal has dismissed an application for judicial review brought by Baker Tilly challenging a Financial Reporting Council (FRC) decision to pursue a formal complaint against the firm, in a decision which legal experts suggest will provide clarity on when disciplinary proceedings are appropriate
The appeal formed part of a long running legal challenge by Baker Tilly, which sought to argue that the guidance used by the FRC in determining whether a case satisfied the public interest test for proceeding to a formal complaint was unlawful. [Baker Tilly UK Audit and Ors and Financial Reporting Council and Ors,  EWCA Civ 406].
Baker Tilly was the auditor of Tanfield Group and signed an unqualified report on its 2007 group accounts. Doubts subsequently arose as to the value of goodwill shown as arising on the acquisition of a company called Snorkel in the relevant period, and as to the adequacy of the audit work done in relation to that asset.
As the result of an FRC investigation, the regulator’s executive counsel signed reasons to deliver a formal complaint against the firm and two of its audit partners, on the grounds the alleged misconduct fell within the category of conduct described in the FRC guidance as a ‘non-trivial failure’.
However, the firm claimed that the guidance's reference to a ‘non-trivial failure’ to act with professional competence did not match the definition of ‘misconduct’ in the FRC’s accountancy scheme disciplinary arrangements.
Baker Tilly argued that courts generally impose a high threshold for professional conduct for disciplinary purposes and have often held that the word ‘misconduct’ in other professional schemes requires more than mere negligence. The High Court dismissed the firm’s case in 2015, and now the Court of Appeal has upheld that decision.
Michael Fletcher, professional negligence expert at law firm Pinsent Masons, said the latest decision provided greater clarity for the future.
‘The circumstances in which the FRC may successfully instigate disciplinary proceedings against accountants that it considers have been negligent may only arise relatively rarely, given the need for the FRC to show a realistic prospect of establishing “misconduct” and to meet the public interest test when delivering a formal complaint.
‘Most negligence will not meet this standard. However, in any accountancy negligence claim, both claimants and defendants should consider whether disciplinary proceedings are also a possibility, and the test for this now has greater clarity’, he said.
While two of the Court of Appeal judges said the guidance should be rewritten, the court held that the factors in the FRC guidance had to be read in the context of, and were not inconsistent with, the accountancy scheme requirement and definition of ‘misconduct’.
The court ruled the FRC had performed the assessment exercise appropriately.
Baker Tilly UK was represented by Taylor Wessing.
A spokesman for Baker Tilly UK Audit said: ‘Baker Tilly is grateful to the Court of Appeal for its careful scrutiny of the FRC executive counsel’s application of the guidance on the delivery of formal complaints under the Accountancy Scheme, and its recognition that the relevant section of the guidance merits re-drafting by the FRC.’
Baker Tilly UK Audit and Ors and Financial Reporting Council and Ors,  EWCA Civ 406 is here.