Baker Tilly UK Audit LLP & Ors v Financial Reporting Council & Ors

The Court of Appeal considered the proper construction and lawfulness of paragraph 12(1)(f) of the FRC's "Guidance on the delivery of Formal Complaints" in the context of the Accountancy Scheme. The court held that "misconduct" in paragraph 12(1) must be read as misconduct defined by the Accountancy Scheme and that paragraph 12(1)(f) identifies a significant or non-trivial failure to act with professional competence (what one judge described as gross negligence) as an example of misconduct of particular gravity. The Guidance requires the Executive Counsel to carry out a qualitative weighing exercise: first assess the gravity of the alleged misconduct under paragraphs 12 and 13 and then apply the usual rule in paragraph 11(2) unless contrary public interest factors clearly outweigh those favouring delivery of a formal complaint. The appellants' challenge that paragraph 12(1)(f) was unlawful or that Executive Counsel misapplied the Guidance was rejected and the decision to deliver a Formal Complaint was held to be rational and lawful.

The appellants (Baker Tilly UK Audit LLP and two individuals), auditors of Tanfield Group plc, sought judicial review of the Executive Counsel's decision to deliver a Formal Complaint under the Accountancy Scheme following alleged audit failings in relation to goodwill arising from the acquisition of Snorkel. The Executive Counsel relied on an expert report and counsel's advice to conclude that the Evidential Test was met and, applying the Guidance, concluded that the Public Interest Test was also met, citing paragraph 12(1)(f) (a "non-trivial failure" to act with professional competence) and the seriousness of the potential consequences.

The appellants argued that paragraph 12(1)(f) was inconsistent with the Accountancy Scheme because it either denoted conduct less serious than the Scheme's definition of "misconduct" or else created an incoherent additional threshold. They sought quashing of the reasoned decision and declaration that the Guidance was unlawful. The application proceeded to the Administrative Court (Singh J), which dismissed the claim ([2015] EWHC 1398 (Admin)). The Court of Appeal heard the appeal.

The issues framed by the Court were (i) the proper construction of paragraph 12(1)(f) of the Guidance in the light of the Accountancy Scheme and the tests (Evidential Test and Public Interest Test), (ii) whether paragraph 12(1)(f) was unlawful or incoherent, and (iii) whether Executive Counsel had lawfully applied the Guidance in delivering the Formal Complaint.

The Court reasoned that the Guidance and Scheme are read together: the Evidential Test must be satisfied before the Public Interest Test is considered. Paragraphs 12 and 13 require a case-specific, qualitative weighing exercise of aggravating and mitigating factors. Paragraph 12(1)(f), properly read, points to a significant (non-trivial) degree of failure to act with professional competence (aligning with the Scheme's definition of misconduct); it is therefore an example of aggravating misconduct that will often, but not invariably, make a hearing desirable in the public interest. The Court rejected the appellants' submissions that the clause was unlawful or that Executive Counsel had acted irrationally. Although the judges differed on nuance as to whether paragraph 12(1) lists aggravating features or examples of misconduct, all concluded that the Guidance was lawfully applied and the appeal was dismissed. The Court suggested that paragraph 12(1)(f) might be redrafted for clarity.

The appeal is dismissed. The court concluded that "misconduct" in paragraph 12(1) of the Guidance is to be read as misconduct defined by the Accountancy Scheme and that paragraph 12(1)(f) identifies a significant (non-trivial) failure to act with professional competence as an example of aggravating misconduct. The Executive Counsel must perform a stand-alone qualitative weighing exercise under paragraphs 12 and 13 and then apply the usual rule in paragraph 11(2) unless contrary public interest factors clearly outweigh those favouring delivery. Executive Counsel's decision to deliver a Formal Complaint in this case was rational and lawful.

Appeal from the Administrative Court (Singh J) [2015] EWHC 1398 (Admin). The appellants sought judicial review of the Executive Counsel's decision of 29 May 2014 to deliver a Formal Complaint under the Accountancy Scheme; Singh J dismissed the claim and the decision was appealed to the Court of Appeal, which dismissed the appeal ([2017] EWCA Civ 406).