Baker Tilly UK Audit, now part of RSM, has been reprimanded and fined £750,000 following the conclusion of a Financial Reporting Council (FRC) investigation into the audit of the financial statements of Tanfield Group and two of its subsidiaries for the year ended 31 December 2007
Richard King, who was the engagement partner for the audits of Tanfield Group, received a reprimand and a fine of £30,000, and Steven Railton, who was the engagement partner for the two subsidiaries under investigation, was reprimanded and fined £35,000. The tribunal also made a costs order against Baker Tilly.
The Misconduct relates to an audit carried out by Baker Tilly but, following the merger of Baker Tilly and RSM. An FRC spokesperson told Accountancy Daily that ‘RSM UK Audit LLP is liable as a ‘Successor Member Firm” under para 5(8) of the Accountancy Scheme’.
Tanfield was at the time, and remains, an AIM listed group whose primary activities at the relevant time were the manufacturing of electric vehicles and powered access equipment. A formal complaint was delivered in June 2014 relating to the audit in respect of the year ended 31 December 2007 only.
Baker Tilly 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.
The sanctions follow an independent tribunal’s findings of misconduct against the firm and partners during hearings in October 2017 and November 2018.
These related to the audit of Tanfield’s inventories and trade receivables, the most significant items on Tanfield’s balance sheet. The independent tribunal found that errors and discrepancies in the audit work were not identified by the partners. The tribunal also found that Railton’s response to a profit warning in Tanfield’s trading statement on 1 July 2008 was inadequate where the subsidiary accounts were still to be approved.
The FRC’s investigation started in September 2009 and focused on the audits of the financial statements of Tanfield and two of its subsidiaries for the years ended 31 December 2007 and 2008.
During the process, Baker Tilly made an application for judicial review to the Court of Appeal, challenging the FRC’s decision to pursue a formal complaint against the firm. This appeal – which was dismissed – formed the final part of a long running legal case in which the firm 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. This was 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 FRC 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.
While Baker Tilly lost its appeal in 2017, the legal challenges were held to have provided clarity on the FRC’s stance in such cases.
A spokesperson for RSM said: ‘RSM is pleased that more than a decade after the audit engagements were performed by Baker Tilly, this matter has reached a conclusion with only limited aspects of the FRC complaints being upheld by a tribunal.
‘In any event our audit processes, like those of other major audit firms, and the auditing and financial reporting standards themselves, have undergone substantial change since 2007. Nevertheless, RSM will take account of the findings of the tribunal in our continuous review of our practices, procedures and training.’
FRC tribunal report on Tanfield issued 15 April 2019
Report by Pat Sweet