Baker Tilly UK Audit LLP & Ors, R (On the Application Of) v Financial Reporting Council & Ors

The court considered a judicial review challenge to the Executive Counsel's decision to deliver a Formal Complaint under the FRC Accountancy Scheme (version 1 July 2013) in respect of audits of Tanfield Group and two subsidiaries. Key legal principles examined were the Scheme's definition of "Misconduct" in para 2, the two-stage decision required of the Executive Counsel under para 7(11) (the evidential test and the public interest test), and the Guidance on the Delivery of Formal Complaints (in particular para 12[1](f)).

The claim advanced three principal grounds: that para 12[1](f) of the Guidance was unlawful; that the Executive Counsel misdirected himself as to the legal meaning of "misconduct" (equating mere breaches of ISAs or non-trivial failures with misconduct without the required degree of seriousness); and that the public interest test was applied erroneously, particularly in relation to delay. The court rejected each ground. It held that the Guidance, read fairly as a whole, did not equate a "non-trivial failure" with "serious misconduct" and did not misdirect about the meaning of "misconduct"; that the ISAs are relevant to, but not automatically determinative of, what standards are "reasonably to be expected"; and that the Executive Counsel had a defensible basis for concluding both that the evidential test and the public interest test were satisfied. The court further held that, as a matter of principle, challenges of this kind should normally proceed to the expert Disciplinary Tribunal rather than be determined by judicial review except in rare cases analogous to challenges to prosecutorial decisions.

Background and parties: The first claimant is an accountancy firm; the second and third claimants are partner auditors. The first defendant is the Financial Reporting Council which operates the Accountancy Scheme; the second defendant is its Conduct Committee and the third is Executive Counsel. The Formal Complaint relates to the 2007 statutory audits of Tanfield Group plc and two subsidiaries, with audit work done between November 2007 and July 2008.

Nature of the claim and relief sought: The claim was for judicial review of the Executive Counsel’s decision (29 May 2014) to deliver a Formal Complaint to the Conduct Committee. The claimants sought quashing or a declaration of unlawfulness in respect of guidance (para 12[1](f)) and the decision to deliver the Formal Complaint, advancing three principal legal issues described below.

Procedural posture: Permission for judicial review was granted on the papers by Collins J on 7 October 2014. The application was heard by Singh J on 24–25 March 2015, who gave judgment on 19 May 2015.

Issues framed by the court:

• Whether para 12[1](f) of the FRC Guidance on the Delivery of Formal Complaints was unlawful or misdirected as to the meaning of "misconduct".
• Whether the Executive Counsel applied an erroneous legal test when deciding there were reasonable grounds to suspect "misconduct" and that there was a realistic prospect of an Adverse Finding (the evidential test), in particular by treating breaches of International Standards on Auditing as alone sufficient for misconduct.
• Whether the public interest test was misapplied, including by failing to treat delay as a decisive factor absent particularly serious misconduct.

Court’s reasoning and findings:

• The Guidance: the court read para 12 in context and concluded it provides examples of public interest factors and does not equate "non-trivial failure" with "serious misconduct" or supplant the Scheme’s definition of "misconduct" in para 2. The Guidance is not legally binding and merely guides the Executive Counsel, who must have regard to it.
• Meaning of "misconduct" and the evidential test: the court held that the ISAs are relevant indicia of the standards "reasonably to be expected" but do not automatically determine whether misconduct has occurred; that whether a breach of an ISA amounts to conduct that "falls significantly short" is a fact-sensitive judgment; and that the Executive Counsel had taken appropriate steps including obtaining an independent expert report by John Leech and external counsel advice before deciding the evidential threshold was met. The court emphasised that the merits remain for the independent Disciplinary Tribunal to determine.
• Public interest test and delay: the court rejected the submission that the Guidance or the Executive Counsel required a higher "seriousness" threshold to satisfy the public interest limb. The court held the Executive Counsel’s judgment that a hearing was desirable in the public interest was not irrational. The court emphasised that assessments of public interest are entrusted to the decision-maker and are typically unsuited to judicial review.
• Appropriate forum and alternative remedy: the court explained the analogy with prosecutorial discretion and concluded that challenges to decisions to bring disciplinary proceedings are exceptional matters for judicial review; ordinarily the correct forum is the Disciplinary Tribunal (which can stay proceedings for abuse of process and award costs in certain circumstances), with appeal routes thereafter.

Conclusion: The claims were dismissed. The court observed that even if errors existed, the appropriate course is for the Disciplinary Tribunal to consider them in the first instance and, if necessary, for further appeal.

This was a first-instance judicial review application and the court dismissed the claim. The court held that para 12[1](f) of the Guidance was not unlawful when read in context; that the Executive Counsel did not misdirect himself as to the meaning of "misconduct" (the ISAs are relevant but not automatically determinative); and that the Executive Counsel’s assessment under the public interest test, including in relation to delay, was not irrational. The court further held that, as a matter of principle, challenges to decisions to bring disciplinary proceedings should normally be determined by the expert Disciplinary Tribunal rather than by judicial review except in rare circumstances.