High Court rejects Baker Tilly's claims over errors with FRC complaint

Baker Tilly UK and two of its partners have failed in a court bid to challenge a decision of the Executive Counsel of the Financial Reporting Council (FRC) to bring a formal complaint against them in relation to their audit of Tanfield Group plc, an elevator and machinery manufacturer

Sitting at London’s High Court, Mr Justice Singh dismissed the case brought by Baker Tilly, Richard King and Steven Railton, who claimed that the Executive Counsel’s decision to formally complain before the FRC’s Conduct Committee in May 2014 was tainted by ‘errors of law’ and based on unlawful guidance from the Council.

Mr Justice Singh rejected those claims, opening the door for consideration by a disciplinary tribunal and, if appropriate, an appeal.  

He said: ‘I stress that I have considered the claimants' submissions on their merits and have rejected them. However, I also take the view that, as a matter of principle, cases such as this, in which a challenge is made to the defendants' decision to bring proceedings before an independent disciplinary tribunal, should not normally be brought by way of judicial review and should proceed to go before that tribunal.’

Setting the background, he said that Baker Tilly has audited the accounts of AIM-listed Tanfield Group plc, a manufacturer of machinery including lifting gear and elevators, since 2005 and that 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).

In 2007 Tanfield had acquired a US subsidiary called Snorkel and in the second half of 2008 the company encountered a slump as a result of the global economic downturn.

Said Mr Justice Singh: ‘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 £88.8m.’

In September 2009 the Accountancy and Actuarial Discipline Board (AADB) informed the Baker Tilly 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, to determine whether there may have been an ‘act of misconduct’ under the then applicable Accountancy Scheme rules.

However, no formal complaint was delivered until May 2014 and it was not served on baker Tilly until 3 June 2014.

In a statement, Baker Tilly said: ''Following advice from Queen’s Counsel, Baker Tilly obtained the Administrative Court’s permission for a judicial review of the FRC’s decision to deliver a formal complaint in relation to some audit work we performed seven years ago.

'The review of the FRC’s decision raises important issues of law which remain to be resolved, and it would not, therefore, be appropriate to comment further at the present time.'

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