FRC begins disciplinary hearing over Baker Tilly and Tanfield

The Financial Reporting Council’s disciplinary tribunal has begun a hearing considering a formal complaint against Baker Tilly UK Audit, ICAEW member Richard King and Steven Railton, an ACCA member

The formal complaint concerns the conduct of Baker Tilly (now RSM) in relation to their audit of the financial statements of the Tanfield Group plc and two of its subsidiaries for the year ended 31 December 2007.

The FRC announced in November 2010 that it would investigate the preparation, approval and audit of the financial statements of Tanfield Group plc for the years ended 31 December 2007 and 2008. Following the conclusion of that investigation it decided no further action will be taken in respect of the 2008 financial statements. The formal complaint now under consideration concerns the audit of significant balance sheet items in the 2007 financial statements.

The complaint alleges that the conduct of Baker Tilly, King and Railton fell significantly short of the standards reasonably to be expected of  members and member firms in that they failed to act in accordance with the fundamental principle of their professional bodies’ codes of ethics requiring them to act with professional competence and due care.

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, Baker Tilly then mounted a legal challenge, arguing 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. 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. It took its case to the High Court in 2015, which dismissed its argument, and a subsequent Court of Appeal ruling upheld that decision.

The FRC disciplinary hearing began on 9 October.

Report by Pat Sweet

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