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You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Baker Tilly UK Audit LLP & Ors, R (On the Application Of) v Financial Reporting Council & Ors [2015] EWHC 1398 (Admin) (19 May 2015)
URL: http://www.bailii.org/ew/cases/EWHC/Admin/2015/1398.html
Cite as: [2015] EWHC 1398 (Admin)

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Neutral Citation Number: [2015] EWHC 1398 (Admin)
Case No: CO/3689/2014

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

Royal Courts of Justice
Strand, London, WC2A 2LL
19/05/2015

B e f o r e :

THE HONOURABLE MR JUSTICE SINGH
____________________

Between:
The Queen on the application of (1) Baker Tilly UK Audit LLP
(2) Richard Hamilton King
(3) Steven Laurence Railton

Claimants
- and -

(1) Financial Reporting Council
(2) Financial Reporting Council Conduct Committee
(3) Executive Counsel to the Financial Reporting Council
Defendants

____________________

Richard Drabble QC and Tim Buley (instructed by Taylor Wessing) for the Claimants
Michael Fordham QC and Jason Pobjoy (instructed by Herbert Smith Freehills) for the Defendants

Hearing dates: 24 and 25 March 2015

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Mr Justice Singh :

    Introduction

  1. The first Claimant is a firm of accountants. The second and third Claimants are accountants who are partners in that firm.
  2. The first Defendant is responsible for operating a disciplinary scheme for accountants and auditors known as the Accountancy Scheme. The second Defendant is a committee of the first Defendant which initiates investigations under that Scheme. The third Defendant, the Executive Counsel, carries out such investigations. It is common ground that the Defendants are amenable to judicial review.
  3. The decision under challenge in this case is the decision by the third Defendant to deliver a Formal Complaint to the second Defendant on 29 May 2014.
  4. The Claimants submit that the decision was tainted by two errors of law. They further submit that the decision was based upon guidance issued by the second Defendant, "Guidance on the Delivery of Formal Complaints" (the "Guidance"), which itself contains an error of law at para 12[1](f).
  5. Permission to bring this claim for judicial review was granted on the papers by Collins J on 7 October 2014.
  6. The Financial Reporting Council

  7. The role of the Financial Reporting Council ("FRC"), which is the first Defendant, is described in a witness statement by Anne Mary McArthur, its General Counsel and Company Secretary. She was appointed in July 2006, having joined in November 2003 as Secretary to the former Accountancy Investigation and Discipline Board ("AIDB").
  8. At para 6 of her witness statement Ms McArthur states:
  9. "The FRC is an independent regulator and has a diverse range of responsibilities and functions which together serve to promote high quality corporate governance and reporting in the UK to foster investment. It does so by setting the framework of codes and standards for the accounting, auditing, actuarial and investor communities, and by overseeing the conduct of professionals working in these areas. …"

  10. At para 9 she explains that the FRC acts as the independent disciplinary body for accountants, accountancy firms and actuaries in the UK by contractual arrangement with the relevant professional bodies. The FRC operates two separate disciplinary schemes: one for the accountancy profession and one for the actuarial profession. The present case is concerned with the accountancy profession. It will be seen that the FRC is not itself a professional body. As will be seen later in this judgment, there are professional bodies which regulate the affairs of accountants.
  11. At para 13 she explains that the Accountancy Scheme was originally adopted by the AIDB on 13 May 2004. The AIDB became the Accountancy and Actuarial Discipline Board ("AADB") in 2007 and the Accountancy Scheme was amended by the AIDB on various occasions between September 2007 and 18 October 2012.
  12. Both the AIDB and AADB were independent "operating bodies" of the FRC until 2012, when responsibility passed to the FRC. The Accountancy Scheme has since been amended by the FRC on 1 July 2013 and 1 June 2014. It is the version of the Scheme as amended on 1 July 2013 which is relevant in the present case.
  13. Factual background to the present case

  14. The first Claimant has audited the accounts of Tanfield Group plc ("Tanfield") since 2005. 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"). Tanfield was listed on the Alternative Investment Market, which is a sub-market of the London Stock Exchange which allows smaller companies to float shares with a more flexible regulatory system than is applicable to the main stock market.
  15. The audit work concerned in this case was carried out between November 2007 and July 2008. The second Claimant was responsible for signing the Audit Opinion in respect of Tanfield's 2007 financial statements, which he did on 21 April 2008. The third Claimant was responsible for signing the Audit Opinion in respect of the 2007 financial statements of both TES and SEV, which he did on 21 July 2008.
  16. The background was that in 2007 Tanfield, which was a manufacturer of machinery including lifting gear and elevators, had acquired a US subsidiary called Snorkel. In the second half of 2008 Tanfield encountered a slump as a result of the global economic downturn. 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 £88.8 million.
  17. On 14 September 2009 the AADB informed the first Claimant 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, so as to determine whether there may have been an "act of misconduct" under the then applicable Accountancy Scheme rules.
  18. There then ensued both correspondence and interviews, including interviews of the second and third Claimants. There was no further communication between April and September 2011. On 14 September 2011 solicitors wrote on behalf of the Claimants asking to know with expedition whether complaints were to be pursued.
  19. On 23 September 2011 the third Defendant replied saying that he had not yet made a decision whether a Formal Complaint would be filed.
  20. He wrote again on 8 November 2011, suggesting that a draft statement of facts should be submitted for consideration. He would then seek an indication as to whether the Claimants wished to enter into a "Carecraft Agreement". This is an agreement involving the admission of matters in the Formal Complaint and the statement of facts. This would then result in an agreed recommendation to a Disciplinary Tribunal relating to appropriate sanctions for misconduct which had been admitted.
  21. In fact no statement of facts was provided in 2011 or 2012.
  22. As I have mentioned, a new version of the Accountancy Scheme came into force on 1 July 2013.
  23. On 10 July 2013 solicitors wrote to the FRC, which had by now superseded the AADB, to complain about the delay.
  24. On 18 July 2013 the new Executive Counsel, Gareth Rees QC, replied.
  25. On 8 October 2013 the Claimants received a proposed draft Proposed Formal Complaint under para 7(10) of the Accountancy Scheme.
  26. On 6 December 2013 written submissions were sent on behalf of the First Claimant in response to that Proposed Formal Complaint.
  27. As already mentioned, the Formal Complaint was delivered to the Conduct Committee by the Executive Counsel on 29 May 2014. It was accompanied by a Statement of Reasons, although that Statement was not disclosed to the Claimants until after the grant of permission in these proceedings.
  28. The Formal Complaint was served on the Claimants on 3 June 2014.
  29. In the meantime there had been commissioned a report by John Leech, although the final version of that report is dated 2 July 2014.
  30. In the ordinary course of events the complaint would now proceed for consideration by a Disciplinary Tribunal and, if appropriate, an appeal. However, the Claimants submit that in the circumstances of the present case this Court should intervene by way of judicial review and should do so at this stage.
  31. Material legislation

  32. Although the first Defendant is not a statutory body, it was common ground before me that its functions do have a statutory underpinning. Schedule 10 to the Companies Act 2006 concerns recognised supervisory bodies. Part 1 of Schedule 10 deals with the grant and revocation of recognition of a supervisory body. Part 2 sets out the requirements for recognition of a supervisory body.
  33. Para 10 of Schedule 10 requires that the body must have rules and practices as to (a) the technical standards to be applied in statutory audit work, and (b) the manner in which those standards are to be applied in practice.
  34. Para 16 of Schedule 10 requires that the body must (a) participate in arrangements within para 24(1), and (b) have rules and practices designed to ensure that, where the designated persons have decided that any particular disciplinary action should be taken against a member of the body following the conclusion of an investigation under such arrangements, that decision is to be treated as if it were a decision made by the body in disciplinary proceedings against that member. "The designated persons" means the persons who, under the arrangements, have the function of deciding whether (and if so, what) disciplinary action should be taken against a member of the body in light of an investigation carried out under the arrangements.
  35. Para 24 provides, in sub-para (1), that the arrangements referred to in para 16(1) include appropriate arrangements for the carrying out of investigations into public interest cases arising in connection with the performance of statutory audit functions by Members of the Body. Para 24(2) defines "public interest cases" to mean "matters which raise or appear to raise important issues affecting the public interest."
  36. As I have mentioned, it is common ground that the Defendants are amenable to judicial review, in accordance with the decision of the Court of Appeal in R v Panel On Take-Overs & Mergers, ex p. Datafin plc [1987] QB 815. This is because the Defendants perform public law functions in substance, even if the source of their powers lies in agreement rather than statute. This is in part on the basis that, if the Defendants did not perform these functions in the public interest, the government would have to intervene to regulate these matters. Furthermore, as I have mentioned, there is in the present context (unlike in the Datafin case) some statutory underpinning in the Companies Act provisions to which I have referred.
  37. The Accountancy Scheme

  38. It was common ground before me that the provisions which fall to be considered in the present case can be found in the version of the FRC's Accountancy Scheme which is dated 1 July 2013.
  39. The interpretation provision is in para 2. Of central relevance to the present case is the definition of "misconduct", which is:
  40. "An act or omission or series of acts or omissions, by a Member or Member Firm in the course of his or its professional activities (including as a partner, member, director, consultant, agent, or employee in or of any organisation or as an individual) or otherwise, which falls significantly short of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member or the Member Firm or to the accountancy profession."

  41. It was common ground before me that the second limb of that definition (relating to bringing discredit to the Member etc.) is of no relevance to the present case. It is the first limb of the definition ("falls significantly short of the standards reasonably to be expected") which is of central relevance to the present case.
  42. Para 3 of the Accountancy Scheme deals with the Conduct Committee. Amongst other things it confers power on the Conduct Committee to provide the Executive Counsel with guidance concerning the exercise of duties under the Accountancy Scheme and requires him to have regard to any such guidance issued: see para 3(1)(ii).
  43. Para 5 deals with liability to investigation and disciplinary proceedings. Para 5(1) provides:
  44. "A Member or Member Firm shall be liable to investigation under this Scheme only where, in the opinion of the Conduct Committee: -
    (i)(a) the matter raises or appears to raise important issues affecting the public interest in the United Kingdom ('the first criterion'); and
    (b) there are reasonable grounds to suspect that there may have been Misconduct ('the second criterion'); …"
  45. Para 5(2) provides:
  46. "In deciding whether a matter satisfies the first criterion, the Conduct Committee shall, amongst other things, consider whether it appears to give rise to serious public concern or to damage public confidence in the accountancy profession in the United Kingdom. The Conduct Committee shall also be entitled to consider all the circumstances of the matter including, but not limited to, its nature, extent, scale and gravity."

  47. Para 5(3) provides:
  48. "In considering whether there are reasonable grounds to suspect that there may have been Misconduct by a Member or Member Firm, regard shall be had in particular to any law, whether statutory or otherwise, or regulation of any sort, and to any charter, bye-law, rule, regulation or guidance."

  49. Para 5(4) provides:
  50. "A Member or Member Firm shall be liable to disciplinary proceedings under this Scheme if, following an investigation, the Executive Counsel considers:
    (i) that there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm; and
    (ii) that a hearing is desirable in the public interest."

  51. Para 6 of the Accountancy Scheme deals with the decision to investigate. Para 6(1) provides that an investigation under the Scheme may be instituted in either of the circumstances described in sub-paras (2) and (8). It is sub-para (8) which is relevant.
  52. Para 6(8) provides:
  53. "Where a Participant is conducting an investigation into the conduct of a Member of Member Firm of which the Conduct Committee is aware, or the Conduct Committee otherwise becomes aware of matters relating to the conduct of a Member or Member Firm, and in either case the Conduct Committee is of the opinion that the criteria at paragraph 5(1), taking account of the considerations in paragraph 5(2), have been met, the Conduct Committee may decide that the matter shall be dealt with by the FRC in accordance with this Scheme."

  54. Para 6(9), so far as material, provides that:
  55. "… Where the Conduct Committee decides, pursuant to para 6(8), that it is not appropriate for the matter to be dealt with by the FRC in accordance with this Scheme, it shall advise the relevant Participant of that decision, giving its reasons, so that that Participant can decide whether it should investigate, or continue to investigate, that matter."

  56. Para 7 deals with the investigation. Para 7(1) provides that:
  57. "(i) for the purposes of exercising its powers under para 6, the Conduct Committee and the Executive Counsel on its behalf, has power to require any Participant to provide to the Executive Counsel such documents or other information in its possession, or under its control, as the Conduct Committee or the Executive Counsel, as the case may be, shall reasonably think fit and as the Participant can lawfully provide.
    (ii) the power in para 7(1)(i) shall include the power to require the Participant to: -
    (a) permit the inspection and taking of copies of the documents or other information; and
    (b) supply copies of such documents or other information at its own expense to the extent that is reasonable in all the circumstances."
  58. Para 7(10) provides that:
  59. "(i) If, following his investigation, the Executive Counsel considers that: -
    (a) there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm; and
    (b) a hearing is desirable in the public interest, the Executive Counsel shall notify the Member or Member Firm concerned of his intention to deliver a Formal Complaint to the Conduct Committee.

    (ii) The notice sent in accordance with para 7(10)(i) shall:
    (a) be accompanied by a draft of the Formal Complaint that he proposes to deliver to the Conduct Committee; and
    (b) invite the Member or Member Firm to make written representations to him within the period of eight weeks from the date on which the notice is sent to the Member or Member Firm. …"
  60. Para 7(11) provides:
  61. "If, the Executive Counsel:
    (i) Having reviewed any representations received for the purposes of para 7(10), still considers that:-
    (a) there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm; and
    (b) a hearing is desirable in the public interest; …
    he shall deliver a Formal Complaint against the Member or Member Firm to the Conduct Committee."

  62. Para 7(14) provides:
  63. "If at any stage during or following an investigation, the Executive Counsel considers: -
    (i) that there is no realistic prospect that a Tribunal will make an Adverse Finding against a Member or Member Firm; or
    (ii) a hearing is not desirable in the public interest;

    he shall inform the Conduct Committee of his decision, together with the reasons for that decision, and the Conduct Committee shall notify the Member or Member Firm and the Participants of the decision."

  64. Para 7(15) provides that the Conduct Committee shall then publish the outcome of the Executive Counsel's investigation as soon as practicable unless this would not, in its opinion, be in the public interest.
  65. Para 9 deals with disciplinary proceedings. Para 9(1) requires that, where the Executive Counsel delivers a Formal Complaint in accordance with para 7(11), the Conduct Committee shall serve that Complaint on the Member or Member Firm concerned. Para 9(2) then requires that the Convener shall appoint a Disciplinary Tribunal to hear the Formal Complaint in accordance with the Accountancy Scheme.
  66. Para 9(7) provides:
  67. "After hearing the Formal Complaint, the Disciplinary Tribunal shall, in relation to the Member or Member Firm which is subject of the Formal Complaint, either: -
    (i) make an Adverse Finding in respect of some or all of the alleged Misconduct or failures to comply with the Member's or Member Firm's obligations under paras 14(1) or 14(2) forming the subject matter of the Formal Complaint, or
    (ii) dismiss the Formal Complaint."

  68. Para 9(9) provides that, where the Disciplinary Tribunal dismisses the Formal Complaint it may, on the application of a Member or Member Firm concerned, order that the FRC shall pay a specified sum in respect of legal costs that were reasonably incurred subsequent to the Formal Complaint being served.
  69. Para 9(10) provides that the Tribunal's discretion to award costs under that provision shall be restricted to circumstances "where the Tribunal finds that no reasonable person would have delivered or pursued all or a substantial part of a Formal Complaint under the terms of this Scheme. …"
  70. Para 10 provides for appeals against the decision of the Disciplinary Tribunal.
  71. Para 11 deals with the composition of Disciplinary and Appeal Tribunals. The members of those tribunals are independent and include people with relevant expertise. The chairman of a Disciplinary Tribunal must be a lawyer (a former member of the judiciary, a barrister, an advocate or a solicitor) and the chairman of an Appeal Tribunal must be a former member of the judiciary or a Queen's Counsel: see para 11(2)((ii).
  72. Para 14(1) imposes a duty on Members and Member Firms to co-operate fully with the Executive Counsel and with the Tribunal.
  73. The Guidance on the delivery of Formal Complaints

  74. The present case concerns the Guidance on the delivery of Formal Complaints issued by the FRC in July 2013. That Guidance was issued under para 3(1)(ii) of the Accountancy Scheme. As para 2 of the Guidance makes clear, it is not legally binding nor exhaustive but the Executive Counsel must have regard to it. Para 2 also requires the Executive Counsel to formulate reasons for his decision to deliver the Formal Complaint which will be provided to the Conduct Committee.
  75. Para 3 of the Guidance states that, by virtue of para 7(11) of the Accountancy Scheme, the Executive Counsel must deliver to the Conduct Committee a Formal Complaint if, having conducted such investigation as he thinks necessary and having reviewed any written representations submitted, he considers that two tests are satisfied, namely: first that there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding (the "evidential test"); and secondly that a hearing is desirable in the public interest (the "public interest test").
  76. Para 4 of the Guidance states that both tests must be satisfied before the duty to deliver a Formal Complaint arises. Para 7(14) of the Accountancy Scheme is expressly referred to and makes clear that, if the Executive Counsel considers that either test is not satisfied, he cannot deliver a Formal Complaint but should inform the Conduct Committee of that decision, together with the reasons for it.
  77. Paras 7-9 of the Guidance appear under the heading "The Evidential Test." Para 7 makes it clear that the Executive Counsel's task is to make an informed assessment, based on the information before him, about the likely outcome of a Formal Complaint before a Tribunal which is properly directed on law and fact. He must decide whether it is more likely than not that an Adverse Finding will be made.
  78. Para 8 makes it clear that, in undertaking that task, the Executive Counsel should make an objective evaluation of all the information available to him, including any defence or explanation which might be put forward and in particular any representations received.
  79. The Executive Counsel, having carried out reasonable investigations, should not normally seek to resolve any substantial conflicts of evidence (factual or expert): see para 9 of the Guidance.
  80. Paras 10-16 of the Guidance appear under the heading "The Public Interest Test."
  81. Para 11 provides that:
  82. "In applying the public interest test the Executive Counsel should be especially mindful of four points:

  83. Para 12 provides that:
  84. "The following are examples of public interest facts favouring delivery of a Formal Complaint to the Conduct Committee:
    (a) involved acts of dishonesty or of a criminal nature, or otherwise casts doubt on the integrity of the Member or Member Firm;
    (b) involved a failure to comply with a requirement to cooperate with the FRC pursuant to paragraphs 14(1) or 14(2) of the Scheme;
    (c) was pre-meditated, repeated or systemic;
    (d) involved abuse of a position of authority or trust;
    (e) casts doubt on the objectivity of the Member or Member Firm;
    (f) involved a non-trivial failure on the part of the Member or Member Firm to act with professional competence or due care, or otherwise involved action that could discredit the profession.
    could be undermined if the alleged misconduct and/or breach of obligation were not pursued before a Disciplinary Tribunal.

  85. For convenience, the parties in this case have referred to the crucial passage as para 12[1](f), although, as can be seen, the actual text uses a bullet point rather than a number. I have adopted the same usage in this judgment.
  86. Para 13 provides that:
  87. "The following are examples of factors which indicate that a hearing may not be desirable in the public interest:

    The accountants' professional bodies and standards

  88. As is well known there is a number of professional bodies for accountants in this country. One is the Association of Chartered Certified Accountants ("ACCA"). Its rulebook provides, at para 8:
  89. "(a) A member, relevant firm or registered student shall, subject to bye-law 11 be liable to disciplinary action if:
    (i) he or it, whether in the course of carrying his or its professional duty or otherwise, has been guilty of misconduct;
    (ii) in connection with his or its professional duties, he or it has performed his or its work, or conducted himself or itself, or conduct his or its practice, erroneously, inadequately, inefficiently or incompetently; …"

  90. Another professional body is the Institute of Chartered Accountants in England and Wales ("ICAEW"). Its disciplinary bye-laws, which are effective from 24 July 2013, provide, at para 4.1:
  91. "A member or provisional member shall be liable to disciplinary action under these by-laws in any of the following cases whether or not he was a member or provisional member at the time of the occurrence giving rise to that liability
    a) if in the course of carrying out professional work or otherwise he has committed any act or default likely to bring discredit on himself, the Institute, or the profession of accountancy;
    (b) if he has performed his professional work or the duties of his employment, or conducted his practice, inefficiently or incompetently to such an extent, or on such a number of occasions, as to bring discredit on himself, the Institute of the profession of accountancy; …"
  92. Auditing standards for audits of financial statements include objectives for the auditor, together with requirements and related application and other explanatory material.
  93. The International Standards on Auditing (UK & Ireland) and International Standards on Quality Control (UK & Ireland) are based on the International Standards on Auditing ("ISAs") and International Standards on Quality Control ("ISQC") of the same titles that have been issued by the International Auditing and Assurance Standards Board ("IAASB"), published by the International Federation of Accountants ("IFAC"). At the material time in the present case there were versions of the ISAs which were effective for audits for periods ending after 15 December 2004, based on the ISAs published periodically by the IFAC.
  94. The process in the present case

  95. In his proposed Proposed Formal Complaint in the present case the Executive Counsel said at para 13:
  96. "As set out more particularly below, the allegations of Misconduct relate to opinions issued by the Respondents in respect of the financial statements of TES and SEV dated 21 July 2008, and the consolidated financial statements of Tanfield Group dated 21 April 2008, for the year ended 31 December 2007. In each case the Respondents issued an unqualified (i.e. 'clean') audit opinion. Whilst the evidence does not demonstrate that the financial statements were materially misstated, it is the Executive Counsel's case that the Respondents:
    a. failed to obtain sufficient appropriate audit evidence to support their conclusion that no material error existed;
    b. failed adequately to review the audit documentation and to discuss the audit evidence so as to be satisfied that sufficient appropriate audit evidence had been obtained; and
    c. failed in relation to post balance sheet events to perform sufficient appropriate audit procedures."

  97. Just before that passage, at para 12, the Executive Counsel expressly directed himself as to the definition of "Misconduct" in para 2 of the Accountancy Scheme and quoted that definition.
  98. In the final version of the Formal Complaint, a similar passage can be found at paras 13 and 14. At para 13 the Executive Counsel set out the definition of "Misconduct" in the Accountancy Scheme.
  99. At para 14 he stated:
  100. "As set out more particularly below, the allegations of Misconduct relate to opinions issued by the Respondents in respect of the financial statements of TES and SEV dated 21 July 2008, and the consolidated financial statements of Tanfield Group dated 21 April 2008, for the year ended 31 December 2007. In each case the Respondents issued an unqualified (i.e. 'clean') audit opinion. It is the Executive Counsel's case that the Respondents:
    a. failed to obtain sufficient appropriate audit evidence to support their conclusion that no material error existed, in particular in the context of their work on Inventories and Trade Receivables;
    b. failed adequately to review the audit documentation and to discuss the audit evidence so as to be satisfied that sufficient appropriate audit evidence had been obtained;
    c. failed in relation to post balance sheet events to perform sufficient appropriate audit procedures; and
    d. failed to obtain sufficient appropriate audit evidence in relation to Inventories and Trade Receivables in order to express an unqualified audit opinion on the financial statements."

  101. Part 2 of the Formal Complaint sets out the specific allegations. Particular complaint, by way of example, has been made before this Court of the way in which the Executive Counsel dealt with Allegation 1, which related to "inadequate evidence of the existence and valuation of Inventories."
  102. Allegation 1 states:
  103. "Between 26 November 2007 and 22 July 2008, in relation to the engagement of Baker Tilly to act as auditor of the financial statements of Tanfield Group, TES and SEV for the year ended 31 December 2007 the Respondents failed to obtain sufficient appropriate audit evidence of the existence and valuation of Inventories, thereby:
    (i) Failing to comply with the requirements of paragraph 2 of ISA 500 and paragraph 21 of ISA 220; and/or
    (ii) Failing to act in accordance with the Fundamental Principle of Profession Competence and Due Care of the Code of Ethics of ICAS, ICAEW and ACCA.
    Particulars
    The TES Stocktake – Existence of Inventories
    1. In relation to the TES stocktake on 20 December 2007 the Respondents failed to obtain sufficient appropriate audit evidence of the existence of Inventories in that:
    a) no, or no sufficient, audit evidence was obtained for the existence of Work in Progress and Finished Goods;
    b) at the Tanfield Lea Estate site the Respondents carried out a test for the existence of raw materials which was inadequate and insufficient in that they:
    i) identified a sample size for testing without reference to their assessment at the planning stage, as recorded in the Key Issues Tracker, that there was a significant risk in respect of existence of Inventories;
    ii) tested for the existence of raw materials on the basis of an insufficient sample size, namely a count of five line items from physical inventory to listing and a further count of five line items from listing to physical inventory;
    iii) indentified errors in 7 out of 10 of the items tested and assessed a net error rate in the value of the items tested of 9% but failed sufficiently to evaluate and document whether the identified errors were isolated and therefore failed to consider whether it was appropriate to extrapolate using the net error rate of 9% revealed within the sample, over the entirety of the population being tested;
    iv) used the net error rate of 9% to extrapolate across the entirety of the population being tested despite it being inappropriate to do so;
    v) failed properly to consider their further actions and conclusions once they had identified the high levels of errors in the sample tested. …"
  104. I have referred to the expert report obtained from John Leech, which was finalised on 2 July 2014. Mr Leech's curriculum vitae was attached as Appendix 2 to his report and speaks to his extensive qualifications and experience. His instructions, by way of a letter dated 25 April 2012, were summarised at para 1.1.2. He made the usual declaration as to his role as an expert at section 10 of his report.
  105. At para 1.1.6 Mr Leech stated:
  106. "I am instructed to provide my opinion on whether the conduct of Baker Tilly and/or any individual member of the firm, fell significantly short of the standards reasonably to be expected of a Member or Member Firm in that audit of Tanfield Group and the Subsidiaries for the years ended 31 December 2007 and 2008."

  107. At para 1.1.7 Mr Leech expressly directed himself as to the meaning of "Misconduct" in para 2 of the Accountancy Scheme and set that definition out in terms.
  108. At para 1.8.4 Mr Leech said, that in section 3 of his report, he would summarise the relevant aspects of the key auditing standards which, in his view, encompassed the "standards reasonably to be expected" as related to the specifics of this matter.
  109. In section 9 of his report Mr Leech set out a summary of his opinions. He set out a summary of the key failings identified in sections 4-8 of his report at para 9.2. At para 9.2.1 he stated:
  110. "In my opinion, the Auditor's conduct fell significantly short of the standards reasonably to be expected in the following areas in relation to ISA 500 (Audit evidence): [these are then specified in bullet points]."

    Other failings are then set out at para 9.3.

  111. Mr Leech set out his overall view on Baker Tilly's audit opinion at para 9.4. At para 9.4.1 he stated:
  112. "I consider that for the year ended 31 December 2007 the insufficient audit evidence in relation to the Tanfield Group and subsidiaries' balances for Inventories and Trade Receivables should have led the Auditor to qualify its opinion with a limitation in scope statement in its Auditor's report with respect of these areas. Further, I do not consider that it is now possible to determine if the accounts were materially misstated based on the evidence retained on the audit file."

  113. Mr Drabble QC submits on behalf of the Claimants that, on close analysis, the contents of Mr Leech's report reveal no more than a disagreement with the opinions of the Claimants on various technical matters. In particular he complains that Mr Leech appears to have regarded falling short of the requirements of particular technical standards in the ISA documents as amounting to "misconduct."
  114. Authorities on the meaning of "misconduct"

  115. Mr Drabble QC submits that the meaning of "misconduct" is well established in the authorities in a number of different professional disciplinary contexts, for example in cases concerning the General Medical Council.
  116. He placed particular reliance on the decision of the Divisional Court in R (Remedy UK Ltd) v General Medical Council [2010] EWHC 1245 (Admin). The principal judgment was given by Elias LJ, who reviewed earlier authorities, including decisions of the Privy Council. At para 37 Elias LJ derived ten principles from the case law. It is only necessary to refer to some of those principles. He said:
  117. "(1) Misconduct is of two principal kinds. First, it may involve sufficiently serious misconduct in the exercise of professional practice such that it can properly be described as misconduct going to fitness to practise. Second, it can involve conduct of a morally culpable or otherwise disgraceful kind which may, and often will, occur outwith the course of professional practice itself, but which brings disgrace upon the doctor and thereby prejudices the reputation of the profession. …
    (3) Conduct can properly be described as linked to the practice of medicine, even though it involves the exercise of administrative or managerial functions, where they are part of the day to day practice of a professional doctor. These include functions … such as proper record-keeping, adequate patient communication, proper courtesy shown to patients and so forth. Usually a failure adequately to perform these functions will fall within the scope of deficient performance rather than misconduct, but in a sufficiently grave case, where the negligence is gross, there is no reason in principle why a misconduct charge should not be sustained. …
    (7) Deficient performance or incompetence, like misconduct falling within the first limb, may in principle arise from the inadequate performance of any function which is part of a medical calling. Which charge is appropriate depends on the gravity of the alleged incompetence. Incompetence falling short of gross negligence but which is still seriously deficient will fall under section 35C(2)(b) rather than (a). …
    (10) Accordingly, action taken in good faith and for legitimate reasons, however inefficient or ill-judged, is not capable of constituting misconduct within the meaning of section 35C(2)(a) merely because it might damage the reputation of the profession. …"

  118. Earlier at para 16, Elias LJ said:
  119. "The concept of deficient performance was introduced by the Medical (Professional Performance) Act 1995. Until then the power to take action in relation to a person's registration was limited to cases of serious professional misconduct, the commission of criminal offences or serious impairment of fitness to practise by reason of ill health. Whilst some acts of incompetence could be brought within the scope of misconduct, not all could. The 1995 Act was intended to fill that lacuna, as the Registrar made clear in her decision in this case. In fact as initially drafted, the focus of this provision was not on competence as such but rather on the related but distinct concept of 'past professional performance', as the Privy Council pointed out in Krippendorf v General Medical Council [2001] 1 WLR 1054. As the facts of that case demonstrated, this could sometimes cause difficulties in effectively regulating lack of competence. However, there is now a definition of professional performance in section 55 of the 1983 Act which states that it 'includes a medical practitioner's professional competence.' It appears, therefore, that all aspects of competence may now be the subject of investigation in the fitness to practise procedures."

  120. Before leaving the Remedy UK case it is important to observe that what was under consideration in that case was the interpretation of the relevant legislation, in particular section 35C of the Medical Act 1983. Section 35C(2) provides:
  121. "A person's fitness to practice shall be regarded as 'impaired' for the purposes of this Act by reason only of –
    (a) misconduct;
    (b) deficient professional performance;
    (c) a conviction or caution in the British Islands for a criminal offence, or a conviction elsewhere for an offence which, if committed in England and Wales, would constitute a criminal offence;
    (d) adverse physical or mental health; or
    (e) a determination by a body in the United Kingdom responsible under any enactment for the regulation of a health or social care profession to the effect that his fitness to practice as a member of that profession is impaired, or a determination by a regulatory body elsewhere to the same effect."

  122. One of the authorities referred to by Elias LJ was the decision of the Privy Council in Roylance v General Medical Council [2000] 1 AC 311. The judgment in that case was delivered by Lord Clyde, who said at pp.330- 331:
  123. "The expression 'serious professional misconduct' is not defined in the legislation and it is inappropriate to attempt any exhaustive definition. It is the successor of the earlier phrase used in the Medical Act 1858 (21 & 22 Vict. c. 90) 'infamous conduct in a professional respect', but it was not suggested that any real difference of meaning is intended by the change of words. This is not an area in which an absolute precision can be looked for. The booklet which the General Medical Council have prepared, 'Professional Conduct and Discipline: Fitness to Practice' (December 1993), indeed recognises the impossibility in changing circumstances and new eventualities of prescribing a complete catalogue of the forms of professional misconduct which may lead to disciplinary action. Counsel for the doctor argued that there must be some certainty in the definition so that it can be known in advance what conduct will and what will not qualify as serious professional misconduct. But while many examples can be given the list cannot be regarded as exhaustive. Moreover the Professional Conduct Committee are well placed in the light of their own experience, whether lay or professional, to decide where precisely the line falls to be drawn in the circumstances of particular cases and their skill and knowledge requires to be respected. However the essential elements of the concept can be identified.
    Serious professional misconduct is presented as a distinct matter from a conviction in the British Islands of a criminal offence, which is dealt with as a separate basis for a direction by the committee in section 36(1) of the Medical Act 1983. Analysis of what is essentially a single concept requires to be undertaken with caution, but it may be useful at least to recognise the elements which the respective words contribute to it. Misconduct is a word of general effect, involving some act or omission which falls short of what would be proper in the circumstances. The standard of propriety may often be found by reference to the rules and standards ordinarily required to be followed by a medical practitioner in the particular circumstances. The misconduct is qualified in two respects. First, it is qualified by the word 'professional' which links the misconduct to the profession of medicine. Secondly, the misconduct is qualified by the word 'serious'. It is not any professional misconduct which will qualify. The professional misconduct must be serious. The whole matter was summarised in the context of serious professional misconduct on the part of a registered dentist by Lord Mackay of Clashfern in Doughty v. General Dental Council [1988] A.C. 164, 173:
    'In the light of these considerations in their Lordships' view what is now required is that the General Dental Council should establish conduct connected with his profession in which the dentist concerned has fallen short, by omission or commission, of the standards of conduct expected among dentists and that such falling short as is established should be serious. On an appeal to this Board, the Board has the responsibility of deciding whether the Committee were entitled to take the view that the evidence established that there had been a falling short of these standards and also entitled to take the view that such falling short as was established was serious.'
    In the present case the critical issue is whether, if there was misconduct, the misconduct was 'professional misconduct'. As counsel for the General Medical Council pointed out it is not simply clinical misconduct which is in issue. Professional misconduct extends further than that. So it is not simply misconduct in the carrying out of medical work which may qualify as professional misconduct. But there must be a link with the profession of medicine. Precisely what that link may be and how it may occur is a matter of circumstances. The closest link is where the practitioner is actually engaged on his practice with a patient. Cases here may occur of a serious failure to meet the necessary standards of practice, such as gross neglect of patients or culpable carelessness in their treatment, or the taking advantage of a professional relationship for personal gratification."
  124. Another decision of the Privy Council relied upon is Preiss v General Dental Council [2001] 1 WLR 1926, in which the judgment was delivered by Lord Cooke of Thorndon. At para 28 Lord Cooke said:
  125. "It is settled that serious professional misconduct does not require moral turpitude. Gross professional negligence can fall within it. Something more is required than a degree of negligence enough to give rise to civil liability but not calling for the opprobrium that inevitably attaches to the disciplinary offence. Having formed their own view of the evidence, their Lordships do not hold that any of the findings of the PCC on the detailed allegations were wrong, but they consider that in the context of the treatment of this particular patient the specific shortcomings established against the appellant vary in gravity. The core and most serious shortcoming was summarised by the PCC as failure to ensure that the state of the patient's oral health was appropriate in view of the ambitious treatment plan. That is covered specifically by charge (a) as to the period after December 1994 and charge (b)(i). It was an elementary and grievous failure warranting the description of serious professional misconduct. The Board does not consider that in this case the other charges that have been established come within that description, either individually or collectively. Some or all of them may well have constituted simple professional negligence, and they are part of the setting in which the seriousness of the appellant's conduct has to be judged; but the findings directly related to oral health are dominant."

  126. Another case relied upon is the decision of the Court of Appeal in Meadow v General Medical Council [2007] QB 462, in which the main judgment was given by Auld LJ. At para 200 he referred to Lord Clyde's judgment in Roylance. He also referred to the judgment of Collins J in Nandi v General Medical Council [2004] EWHC 2317 (Admin), where it was emphasised that there is a need to give the question of seriousness proper weight, observing that in other contexts it has been referred to as "conduct which would be regarded as deplorable by fellow practitioners." At para 201 Auld LJ said:
  127. "It is also common ground that serious professional misconduct for this purpose may take the form, not only of acts of bad faith or other moral turpitude, but also of incompetence or negligence of a high degree: see Preiss v General Dental Council … . It may also be professional misconduct where, as here, a medical practitioner, purporting to act or speak in such expert capacity, goes outside his expertise. Whether it can properly be regarded as 'serious' professional misconduct, however, must depend on the circumstances, including with what intention and/or knowledge and understanding he strayed from his expertise, how he came to do so, to what possible, foreseeable effect, and what, if any, indication or warning he gave to those concerned at the time that he was doing so."

  128. Reference was also made to the decision of Jackson J in Calhaem v General Medical Council [2008] LS Law Medical 96. At para 39 Jackson J said:
  129. "(1) Mere negligence does not constitute 'misconduct' within the meaning of section 35C(2)(a) of the Medical Act 1983. Nevertheless, and depending upon the circumstances, negligent acts or omissions which are particularly serious may amount to 'misconduct'.
    (2) A single negligent act or omission is less likely to cross the threshold of 'misconduct' than multiple acts or omissions. Nevertheless, and depending upon the circumstances, a single negligent act or omission, if particularly grave, could be characterised as 'misconduct'.
    (3) 'Deficient professional performance' within the meaning of 35C(2)(b) is conceptually separate both from negligence and from misconduct. It connotes a standard of professional performance which is unacceptably low and which (save in exceptional circumstances) has been demonstrated by reference to a fair sample of the doctor's work.
    (4) A single instance of negligent treatment, unless very serious indeed, would be unlikely to constitute 'deficient professional performance'.
    (5) It is neither necessary nor appropriate to extend the interpretation of 'deficient professional performance' in order to encompass matters which constitute 'misconduct'."
  130. Finally in this context reference was made to the decision of Irwin J in Spencer v General Osteopathic Council [2013] 1 WLR 1307. In that case what was under consideration was the interpretation of the code of conduct issued under the Osteopaths Act 1983. In particular consideration had to be given to the meaning of "unacceptable professional conduct" within the meaning of section 20 of that Act. It was suggested in that case that an analogy can be drawn between "misconduct" in the successive versions of the Medical Act and "unacceptable professional conduct." Reliance was placed on the decision of the Privy Council in Preiss.
  131. Reliance was placed in particular on the concluding remarks of Irwin J in Spencer at paras 23-24 where he said:
  132. "23 In my judgment, the starting point for interpreting the Osteopaths Act 1993 must be the language of the Act itself. Although one notes that 'unacceptable professional conduct' has the definition in section 20(2): 'conduct which falls short of the standard required of a registered osteopath', there is an unhelpful circularity to the definition. Indeed one might not unfairly comment that the statutory definition adds little clarity. The critical term is 'conduct'. Whichever dictionary definition is consulted, the leading sense of the term 'conduct' is behaviour, or the manner of conducting oneself. It seems to me that at first blush this simply does imply, at least to some degree, moral blameworthiness. [Speaking for myself I am not at all sure that that follows from the dictionary definition but this may be immaterial in the present context]. Whether the finding is 'misconduct' or 'unacceptable professional conduct', there is in my view an implication of moral blameworthiness, and a degree of opprobrium is likely to be conveyed to the ordinary intelligent citizen. That is an observation not merely about the natural meaning of the language, but about the likely effect of the finding in such a case as this, given the obligatory reporting of the finding under the Act.
    24 In my view, this starting point receives support rather than otherwise from the carefully specified use to which the code of practice may be put under section 19(4) of the 1993 Act. Breach of the code of practice may be established, and may be significant, without making out 'unacceptable professional conduct'. It must be the case that a breach of the code of practice may also be relevant to a finding of professional incompetence, as opposed to unacceptable professional conduct. No single instance of negligence or unacceptable care would be sufficient to found a conclusion of 'professional incompetence'. Hence, for both purposes a breach of the code of practice is a starting point and is relevant, but cannot be definitive or indeed even raise a presumption that 'professional incompetence' or 'unacceptable professional conduct' is made out."

    The Disciplinary Tribunal

  133. In the decision of the Disciplinary Tribunal in Deloitte & Touche and Einollahi (2 September 2013) it was said at para 18:
  134. "Before we can make a finding that the Respondents or either of them are guilty of misconduct and make a finding adverse to them we have to be satisfied not only that there has been a departure from the conduct reasonably expected of a Member or a Member Firm but that that departure has been significant. Whether that departure is significant is a matter for our judgment. A trivial departure will not suffice. We have to be satisfied before we reach a conclusion that there has been such a departure, that the Executive Counsel has proved that no reasonable accountant would have acted in the way that the Respondents have acted."

  135. At para 24 the Tribunal stated:
  136. "We accept the Respondents' contention that for the Respondents to be guilty of misconduct and to have acted in a way that no reasonable professional would have acted the conduct would have to amount to more than mere carelessness or negligence and has to cross the threshold of real seriousness. It is not sufficient for the Executive Counsel to prove that the Respondents failed to act in accordance with good or best practice or that most or many members of the profession would have acted differently. The conduct has to be more serious than that."

  137. At para 25 the Tribunal stated that the meaning of "misconduct" has been considered frequently by the Courts, particularly in cases involving the medical profession. It made express reference to the decision of Jackson J in Calhem v General Medical Council [2007] EWHC 2606 (Admin). It also referred at para 26 to the judgment of Irwin J in Spencer v General Osteopathic Council [2013] 1 WLR 1307.
  138. At para 27 the Tribunal directed itself as follows:
  139. "Under the Scheme and the Regulations with which we are concerned we are satisfied that no element of moral blameworthiness or opprobrium is required for a Member or Member Firm to be guilty of misconduct. If a Member is inefficient or incompetent either in what he does or fails to do, he can be guilty of misconduct. In the various decisions in relation to Accountants disciplinary matters there does not seem to be any suggestion that there has to be a requirement of moral blameworthiness or opprobrium before a finding of misconduct can be made. If there is an element of moral blameworthiness or opprobrium it may be difficult to say that there has not been misconduct."

  140. At para 28 the Tribunal said:
  141. "It is, however, sufficient if the Executive Counsel proves on the balance of probability that the Respondents fell below the standards reasonably expected of a professional accountant."
  142. That decision by the Disciplinary Tribunal was applied in its decision in the case of Executive Counsel to the FRC v Newsham (5 September 2014). It was noted at para 17 of that decision that these principles had not been the subject of dispute in the proceedings before the Tribunal and it had applied them.
  143. In the same paragraph the Tribunal went on to state:
  144. "It is common ground between the parties that whether or not Mr Newsham fell significantly sort of the standards reasonably to be expected of him is a matter for the Tribunal to decide. Expert evidence was led before us in which views were advanced both for Executive Counsel and for Mr Newsham as to whether or not such a significant failure had taken place. We have, however, reached our own conclusions in respect of the appropriate standard to apply. In so doing we have had regard, of course, to the Fundamental Principles and to the relevant Standards which are of general application. We have been careful to apply the relevant Standards which would have been of application at the time of the alleged misconduct, which occurred over 5 years ago."
  145. My attention was drawn by Mr Fordham QC to the fact that, when applying the principles to the facts of the case in Newsham, the Tribunal was clearly aware that mere negligence would not suffice. For example, at para 31 it said that certain conduct had fallen below the standards expected of a reasonably competent auditor.
  146. "Our view is that this was plainly negligent and careless, and our assessment is that Mr Newsham failed to carry out his planning obligations adequately. We view this as a serious matter which set the scene for the audit. … However, applying the principles we have quoted from the Deloitte decision, our unanimous view is that while the shortcomings are undoubtedly serious, on balance we do not consider that the threshold into significance was crossed."

  147. By way of contrast, at para 72 of its determination, the Tribunal found that in one respect there had been a complete failure to carry out what should have been done.
  148. "We consider this was negligent, careless and serious such that it fell significantly short of the standards reasonably to be expected of a Member. Accordingly we find misconduct …"

    The Claimants' grounds of challenge

  149. On behalf of the Claimants three grounds were advanced by Mr Drabble QC at the hearing before me, although they were numbered differently in the original grounds.
  150. The first ground is that the Guidance is unlawful, at para 12[1](f). The Claimants submit that this Court should either quash the Guidance in that respect or make a declaration that it is unlawful.
  151. The second ground is that the decision to deliver the Formal Complaint is flawed by a fundamentally erroneous approach to the legal meaning of "misconduct" within the Accountancy Scheme. That error is alleged to consist of (a) treating the ISAs as in themselves "standards reasonably to be expected"; (b) treating the requirement for a "significant" departure from such standards as capable of being met by a departure which is "non-trivial" and/or treating "non-trivial" departure from the ISAs or lack of professional competence as amounting to misconduct; (c) failing to recognise the need for a serious or gross breach of standards of professional competence to establish misconduct. For those reasons the Claimants submit that the Defendants' approach to the evidential test which had to be met in this case was erroneous in law.
  152. The third ground is that the Defendants' approach to the public interest test, which also had to be satisfied before the Formal Complaint could be delivered, was flawed by errors of law. This is alleged to be so particularly because of the long delay which occurred in this case. It is submitted that the public interest test would not be met in this case unless the alleged misconduct can be described as "serious", i.e. more serious than is needed to meet the basic threshold of misconduct. It is also submitted that, even applying the Guidance at its face value, it was irrational to conclude that the public interest test was met in this case.
  153. The Claimants' first submission: lawfulness of the Guidance

  154. On behalf of the Claimants Mr Drabble QC submits that the Guidance is unlawful, at para 12[1](f), because (a) it contains, or at least inferentially supports, a legally erroneous approach to "misconduct"; and (b) it contains a misdirection as to what is capable of being "serious misconduct", thereby directing a legally flawed approach to the public interest test.
  155. He submits that the error was material to the decision to deliver the Formal Complaint in the present case. He also submits that the error is capable of continuing to produce erroneous decisions in future cases since it involves a fundamental misconception as to the meaning of "misconduct" within the Accountancy Scheme.
  156. The fundamental difficulty with this submission is that nowhere in para 12 is there any suggestion made by the Guidance that a "non-trivial failure" is to be equated with being either misconduct or serious misconduct.
  157. The submission also ignores the fact that the passage in the Guidance of which complaint is made appears in para 12, in a section under the heading "The Public Interest Test." It is not concerned with the "evidential test", which is expressly dealt with at paras 7-9 of the Guidance. Although para 12 does use the term "misconduct", it does not seek to give that a definition. Everyone operating or affected by the Accountancy Scheme can reasonably be expected to know of the definition of "misconduct", which is to be found in para 2 of the Scheme, and to cross-refer to that definition.
  158. Furthermore, nowhere in the Guidance is it stated that, if a breach is non-trivial, it must be the subject of a Formal Complaint. Para 11 makes clear, in particular in the fourth bullet point, that the application of the public interest test is not simply a matter of comparing the number of factors on each side of the balance. The Executive Counsel is given guidance in terms to be careful and fairly weigh each factor and then make an overall assessment. It is specifically said that no single factor or combination of factors is necessarily determinative. In this context it is also worth recalling that the second bullet point of para 11 makes it clear that a Formal Complaint satisfying the evidential test should usually be delivered to the Conduct Committee unless contrary public interest factors clearly outweigh those favouring delivery.
  159. What para 12 then does is simply to provide a number of examples of public interest factors favouring delivery of a Formal Complaint to the Conduct Committee. One of those is "a non-trivial failure" as mentioned in the first bullet point at sub-para (f). Para 13 sets out examples of factors which indicate that a hearing may not be desirable in the public interest. These factors also will not necessarily be determinative of where the ultimate assessment of the public interest lies. Mr Drabble QC observes in this regard that the final bullet point of para 13 mentions the situation where there has been long delay between the alleged misconduct and/or breach of obligation and the likely date of a hearing before a Tribunal, but then a countervailing factor can be where the alleged misconduct is "serious."
  160. In my view it cannot be said that, when the Guidance is read fairly and as a whole, the concept of "non-trivial failure" is simply equated to the concept of "serious." These are not terms of art. These are concepts which require the making of a judgment in their application to the facts of each individual case.
  161. Mr Drabble QC also submits that, on the facts of the present case, the Executive Counsel equated a "non-trivial failure" with being not only misconduct but also serious misconduct. However, it seems to me that, at this stage of the argument, what has to be demonstrated is that the Guidance is inherently and necessarily unlawful in all cases: this submission does not turn on the facts of any particular case. In my judgment the Guidance is not unlawful as alleged.
  162. The Claimants' second submission: the approach to "the evidential test"

  163. On behalf of the Claimants Mr Drabble QC submits that the definition of "misconduct" is one which is now well defined in the case law which has been cited earlier and that the Defendants proceeded on a misdirection as to its meaning in the present case. He submits that it requires an "ingredient X": that ingredient lies on a spectrum between simple negligence and a lack of integrity. Although he accepts that it does not always require moral culpability, he submits that it does require a high degree of negligence: simple negligence will not suffice.
  164. First Mr Drabble complains that both the Executive Counsel and Mr Leech simply equated the concept of "standards reasonably to be expected" within the definition of "misconduct" in the Accountancy Scheme with breach of standards to be found in the ISAs.
  165. In my view it cannot be said, as a matter of law, that the ISAs are irrelevant to the question of what standards are reasonably to be expected of a Member or Member Firm. I did not understand Mr Drabble QC to contend otherwise. This view is supported by the view which the Disciplinary Tribunal, the expert Tribunal in this field, has also come to: see the Newsham decision, at para 11. In that case the Tribunal then went on to apply the ISAs as relevant standards later in its decision.
  166. However, in my view, it is wrong to suggest that the Executive Counsel and Mr Leech simply equated the ISAs with the standards reasonably to be expected. Depending on the individual facts, sometimes the breach of an ISA may amount to a failure to comply with the standards reasonably to be expected; in other cases it may not. It all depends on the facts of the individual case and calls for the judgment of the person applying the test of "misconduct."
  167. The Executive Counsel's statement of reasons records, at para 10, that in respect of each of the matters set out in the Formal Complaint, the independent expert (Mr Leech) had stated his opinion that the conduct "fell significantly short of the standards reasonably to be expected." As I have already mentioned earlier, Mr Leech in his report noted instances where, although there was said to be a breach of an ISA, the breach was not regarded as sufficiently serious to be "significant."
  168. Furthermore, it is to be recalled that the Executive Counsel did not simply rely on the advice of Mr Leech in his report. He also took advice from external counsel. In his witness statement before this Court Mr Rees QC refers to an opinion prepared by Joanna Smith QC and Nicholas Medcroft on 8 May 2014, which was before him and which he paraphrased at para 10 of his statement of reasons, that Mr Leech's report:
  169. "constitutes robust and credible evidence, capable of proving misconduct to the required standard."

  170. Moreover, and of fundamental importance, both Mr Leech and the Executive Counsel were well aware of the definition of "misconduct" in the Accountancy Scheme and went on to apply that definition to the facts of the case before them. They may or may not have got that decision right. Nothing I say in this judgment should be taken to express a view on that assessment of the merits of this particular case. The fundamental point is that all that the Executive Counsel has decided to date is that the Formal Complaint should be made. The case will then have to be considered on its merits by the independent Disciplinary Tribunal. Not only is that an expert body, which is well equipped to assess the merits of the allegations, it has directed itself as to the definition of "misconduct": see the decisions in Deloitte and Newsham, which I have already cited.
  171. I did not understand Mr Drabble QC to complain about the approach which has been taken in those cases to the meaning of "misconduct" by the Tribunal. The Tribunal expressly referred to the case law to which I have made reference earlier. However, even assuming that the Tribunal has to date approached the definition of "misconduct" wrongly as a matter of law, that is a matter which can be the subject of submission by the parties and, if necessary and appropriate, may be the subject of further appeal. None of that, in my view, should lead to the conclusion that this Court should stop the case proceeding for hearing before the Disciplinary Tribunal in the first place.
  172. The Claimants' third submission: the approach to the "public interest test"

  173. Mr Drabble QC complains that the Executive Counsel's decision that the delivery of the Formal Complaint complied with the public interest test was flawed for several reasons.
  174. First he submits that the decision that the public interest test was met was premised on para 12[1](f) of the Guidance, which was flawed as a matter of law. For the reasons which I have already given I do not accept the submission that the Guidance is unlawful as alleged. This argument therefore falls away in this context also.
  175. Secondly, Mr Drabble submits that all of the errors he alleges were committed by the Executive Counsel as to the approach to the question of "misconduct" bear on his conclusion that the misconduct in this case was serious. Again, for the reasons which I have already given, I do not accept the submission that the Executive Counsel erred in his approach to the concept of "misconduct."
  176. Thirdly, Mr Drabble submits that the Executive Counsel erred in his approach to the concept of public interest because he concluded that the delay in this case could be forgiven because the misconduct was "serious." This submission is made by reference to para 13 of the Guidance.
  177. On proper analysis, in my view, what this amounts to is a complaint that the judgment of the Executive Counsel in this regard was irrational. Indeed Mr Drabble does not shrink from making the submission that it was irrational: see para 161 of the Claimants' skeleton argument. I do not accept that submission.
  178. As Mr Fordham QC submitted, the Executive Counsel concluded that a hearing was desirable in the public interest. He had regard to the Guidance. That included what the Guidance had to say in relation to the question of delay at para 13. Having regard to all relevant matters, including the Guidance, the Executive Counsel came to the view that the alleged misconduct was "serious." The Claimants disagree with that view. However, I am unable to regard it as being irrational or otherwise unlawful. As Mr Fordham QC submits, public interest considerations are par excellence matters for evaluation by the relevant decision maker.
  179. Relevance of the pending proceedings before the Disciplinary Tribunal

  180. As is well established, in the exercise of its discretion, this Court will not normally entertain a claim for judicial review where there exists an adequate alternative remedy. The Claimants submit that they have no alternative remedy available in respect of either their first submission or their third submission. Further they submit that, in the exceptional circumstances of this case, it is appropriate for this Court to intervene by way of judicial review even in relation to their second submission. They submit that that procedure is more convenient, expeditious and effective.
  181. Mr Drabble QC submits in particular, and does so with his customary eloquence, that the Claimants have no remedy in respect of errors in the approach taken to the public interest test under para 7(11)(b) of the Accountancy Scheme. He submits that, if the Court were to refuse relief on alternative remedy grounds in this context, it would render compliance with the public interest test unenforceable.
  182. Initially Mr Drabble QC also submitted before me that one reason for this is that costs are not available to a successful Defendant who has been the subject of Disciplinary Tribunal proceedings. He also submitted that, unlike a criminal court, which can stay a prosecution on the ground that it is an abuse of process, there is no abuse jurisdiction which vests in the Disciplinary Tribunal. In fact, the position is not quite so simple, as I will explain later.
  183. Much of the argument in this regard was framed before me on behalf of the Claimants by reference to the well-established principle that judicial review will not usually lie when there is an adequate alternative remedy available.
  184. In my view, this case raises questions which do not go simply to the general principle, applicable in all judicial review cases, of adequate alternative remedies as a discretionary basis for not entertaining or granting a claim for judicial review. In my view, the case raises a point which goes deeper than that and is more fundamental.
  185. It is worth recalling that the concepts of an evidential test and the public interest test are also to be found in the context of decisions whether or not to prosecute in criminal cases. Most commonly that decision will be taken by the Crown Prosecution Service. As is well-known there is a code for Crown Prosecutors which addresses the concepts of the evidential stage and the public interest stage. If Mr Drabble's submission were correct, it seems to me to follow that, in principle, every case in which a defendant to a criminal charge disagrees with the assessment of the CPS as to whether the public interest supports the bringing of a prosecution would found a claim for judicial review.
  186. It is important to stress that this is not a "floodgates" argument. It is, as Mr Fordham QC submits, an argument based on principle. In my view it is wrong as a matter of principle that such cases should ordinarily be brought before this Court by way of judicial review.
  187. Mr Fordham QC submits on behalf of the Defendants that an analogy can be drawn between the present case and a well established line of authorities in the context of applications for judicial review of the decision to prosecute in criminal cases.
  188. In Sharma v Brown-Antoine [2007] 1 WLR 780 the Privy Council summarised the principles in that context. Although the judgment of Lord Bingham of Cornhill and Lord Walker of Gestingthorpe was the minority one, the governing principles set out at para 14 were ones with which the majority agreed: see para 30 in the judgment of Baroness Hale of Richmond, Lord Carswell and Lord Mance where it was said:
  189. "… We start however by expressing our full agreement with the proposition that judicial review of a decision to prosecute is an exceptional remedy of last resort, for all the reasons which Lord Bingham and Lord Walker identify in para 14."

  190. In para 14 the governing principles were summarised by Lord Bingham and Lord Walker. At sub-para (5) they said:
  191. "It is well established that a decision to prosecute is ordinarily susceptible to judicial review, and surrender of what should be an independent prosecutorial discretion to political instruction (or, the Board would add, persuasion or pressure) is a recognised ground of review: Matalulu, at pp 735–736; Mohit v Director of Public Prosecutions of Mauritius [2006] 1 WLR 3343, paras 17, 21. It is also well established that judicial review of a prosecutorial decision, although available in principle, is a highly exceptional remedy. The language of the cases shows a uniform approach: 'rare in the extreme' (R v Inland Revenue Comrs, Ex p Mead [1993] 1 All ER 772, 782); 'sparingly exercised' ( R v Director of Public Prosecutions, Ex p C [1995] 1 Cr App R 136, 140); 'very hesitant; (Kostuch v Attorney General of Alberta (1995) 128 DLR (4th) 440, 449); 'very rare indeed' (R (Pepushi) v Crown Prosecution Service [2004] Imm AR 549, para 49); 'very rarely': R (Bermingham) v Director of the Serious Fraud Office [2007] 2 WLR 635 , para 63. In R v Director of Public Prosecutions, Ex p Kebilene [2000] 2 AC 326, 371, Lord Steyn said:
    'My Lords, I would rule that absent dishonesty or mala fides or an exceptional circumstance, the decision of the Director to consent to the prosecution of the applicants is not amenable to judicial review.'
    With that ruling, other members of the House expressly or generally agreed, at pp 362, 372, 376. The Board is not aware of any English case in which leave to challenge a decision to prosecute has been granted. Decisions have been successfully challenged where the decision is not to prosecute (see Mohit [2006] 1 WLR 3343, para 18): in such a case the aggrieved person cannot raise his or her complaint in the criminal trial or on appeal, and judicial review affords the only possible remedy: see R (Pretty) v Director of Public Prosecutions (Secretary of State for the Home Department intervening) [2002] 1 AC 800, para 67, and Matalulu [2003] 4 LRC 712 , 736. In Wayte v United States (1985) 470 US 598, 607, Powell J described the decision to prosecute as 'particularly ill-suited to judicial review'. The courts have given a number of reasons for their extreme reluctance to disturb decisions to prosecute by way of judicial review. They include
    (i) 'the great width of the DPP's discretion and the polycentric character of official decision-making in such matters including policy and public interest considerations which are not susceptible of judicial review because it is within neither the constitutional function nor the practical competence of the courts to assess their merits' (Matalulu [2003] 4 LRC 712 , 735, cited in Mohit [2006] 1 WLR 3343, para 17);
    (ii) 'the wide range of factors relating to available evidence, the public interest and perhaps other matters which [the prosecutor] may properly take into account' (counsel's argument in Mohit, at para 18, accepting that the threshold of a successful challenge is 'a high one');
    (iii) the delay inevitably caused to the criminal trial if it proceeds ( Kebilene [2000] 2 AC 326, 371; Pretty [2002] 1 AC 800, para 77);
    (iv) 'the desirability of all challenges taking place in the criminal trial or on appeal': Kebilene, at p 371; and see Pepushi [2004] Imm AR 549, para 49. In addition to the safeguards afforded to the defendant in a criminal trial, the court has a well-established power to restrain proceedings which are an abuse of its process, even where such abuse does not compromise the fairness of the trial itself: R v Horseferry Road Magistrates' Court, Ex p Bennett [1994] 1 AC 42. But, as Lord Lane CJ pointed out with reference to abuse applications in Attorney General's Reference (No 1 of 1990) [1992] QB 630, 642: 'We would like to add to that statement of principle by stressing a point which is sometimes overlooked, namely, that the trial process itself is equipped to deal with the bulk of complaints which have in recent Divisional Court cases founded applications for a stay.'
    (v) The blurring of the executive function of the prosecutor and the judicial function of the court, and of the distinct roles of the criminal and the civil courts: R v Humphrys [1977] AC 1, 24 , 26, 46, 53, Imperial Tobacco Ltd v Attorney General [1981] AC 718, 733, 742, R v Power [1994] 1 SCR 601, 621–623, Kostuch 128 DLR (4th) 440, 449–450 and Pretty [2002] 1 AC 800, para 121."

  192. Mr Fordham QC also relies upon the judgment of Lord Bingham in R (Corner House Research) v Director of the Serious Fraud Office [2009] 1 AC 756, at paras 30-32:
  193. "30 It is common ground in these proceedings that the Director is a public official appointed by the Crown but independent of it. He is entrusted by Parliament with discretionary powers to investigate suspected offences which reasonably appear to him to involve serious or complex fraud and to prosecute in such cases. These are powers given to him by Parliament as head of an independent, professional service who is subject only to the superintendence of the Attorney General. There is an obvious analogy with the position of the Director of Public Prosecutions. It is accepted that the decisions of the Director are not immune from review by the courts, but authority makes plain that only in highly exceptional cases will the court disturb the decisions of an independent prosecutor and investigator: R v Director of Public Prosecutions, Ex p C [1995] 1 Cr App R 136, 141; R v Director of Public Prosecutions, Ex p Manning [2001] QB 330, para 23; R (Bermingham) v Director of the Serious Fraud Office [2007] QB 727 , paras 63–64; Mohit v Director of Public Prosecutions of Mauritius [2006] 1 WLR 3343, paras 17 and 21 citing and endorsing a passage in the judgment of the Supreme Court of Fiji in Matalulu v Director of Public Prosecutions [2003] 4 LRC 712 , 735–736; Sharma v Brown-Antoine [2007] 1 WLR 780 , para 14(1)-(6). The House was not referred to any case in which a challenge had been made to a decision not to prosecute or investigate on public interest grounds.
    31 The reasons why the courts are very slow to interfere are well understood. They are, first, that the powers in question are entrusted to the officers identified, and to no one else. No other authority may exercise these powers or make the judgments on which such exercise must depend. Secondly, the courts have recognised (as it was described in the cited passage from Matalulu v Director of Public Prosecutions)
    'the polycentric character of official decision-making in such matters including policy and public interest considerations which are not susceptible of judicial review because it is within neither the constitutional function nor the practical competence of the courts to assess their merits.'
    Thirdly, the powers are conferred in very broad and unprescriptive terms.
    32 Of course, and this again is uncontroversial, the discretions conferred on the Director are not unfettered. He must seek to exercise his powers so as to promote the statutory purpose for which he is given them. He must direct himself correctly in law. He must act lawfully. He must do his best to exercise an objective judgment on the relevant material available to him. He must exercise his powers in good faith, uninfluenced by any ulterior motive, predilection or prejudice. In the present case, the claimants have not sought to impugn the Director's good faith and honesty in any way."
  194. At para 38 Lord Bingham said:
  195. "…The objection to the principle formulated by the Divisional Court is that it distracts attention from what, applying well-settled principles of public law, was the right question: whether, in deciding that the public interest in pursuing an important investigation into alleged bribery was outweighed by the public interest in protecting the lives of British citizens, the Director made a decision outside the lawful bounds of the discretion entrusted to him by Parliament."

  196. As was noted in Sharma, in R v Director of Public Prosecutions, ex p. Kebilene [2000] 2 AC 326, at p. 371 Lord Steyn said:
  197. "I would rule that absent dishonesty or mala fides or an exceptional circumstance, the decision of the Director to consent to the prosecution of the Applicants is not amenable to judicial review. … The effect of the judgment of the Divisional Court was to open the door too widely to delay in the conduct of criminal proceedings. Such satellite litigation should rarely be permitted in our criminal justice system."

  198. It is fair to observe that to some extent the reasoning of the House of Lords in Kebilene was influenced by the exclusionary effect of section 29(3) of the Supreme Court Act 1981 (now the Senior Courts Act), even though that provision was not directly applicable, since the application for judicial review challenged not a decision of the Crown Court as such but the decision of the Director of Public Prosecutions.
  199. Finally in this context Mr Fordham relied upon the decision of the Supreme Court of Fiji in Matalulu v DPP [2003] 4 LRC 712 (which was cited in the passages I have quoted earlier from Sharma and Corner House), in the judgment of Von Doussa J at pp.736- 737:
  200. "… A mistaken view of the law upon which a proposed prosecution is based will not constitute a ground for judicial review in connection with the institution of a prosecution. The appropriate forum for determining the correctness of the prosecutor's view is the Court in which the prosecution is commenced. Where a complaint is particularised in such a way as to raise the question of law for determination it may be struck out or where an indictment does the same, the indictment may be quashed. Such an error of law does not fall within the category of an error of law which goes to the DPP's powers to prosecute.
    Where the DPP decides to discontinue a prosecution on the basis of a mistaken view of the law then, by definition, there is no court proceeding within which that view can be tested and it may be a stronger case for review can be made. In R v DPP, ex p Kebeline [2003] 3 LRC 377 at para 420, Lord Steyn stated, as a general principle, that in the case of a decision not to prosecute, judicial review is available. His Lordship cited R v DPP, ex p C [1995] 1 Cr App R 136 observing that 'in such a case there is no other remedy'. That, however, was a case in which the Crown prosecutor, acting on behalf of the DPP in making the decision not to prosecute, had failed to comply with the settled policy of the DPP set out in a Code for Crown Prosecutors issued by the DPP pursuant to s10 of the Prosecution of Offences Act 1985. It was nevertheless accepted by the Divisional Court in that case that the power to review a decision of the DPP not to prosecute was to be sparingly exercised. …"

  201. In my view, the factors which have led the courts to say that challenges to decisions to prosecute will be rare in the criminal context are also relevant in the present context. Those factors are not equally applicable to the present context but the underlying analogy suggested by Mr Fordham QC is, in my view, a sound one.
  202. First, such cases should in the ordinary course of events be determined by the Disciplinary Tribunal, which is the expert Tribunal in this field. If necessary and appropriate the decisions of that Tribunal can be taken further on appeal.
  203. Secondly, by definition the present sort of case involves alleged misconduct in which the public interest requires, in the opinion of the Defendants, that a hearing should take place before the Disciplinary Tribunal. It is undesirable in principle that the public interest should be impeded by delaying proceedings before the Tribunal in such cases. As Mr Fordham QC submitted before me, decisions as to where the public interest lies are par excellence decisions for those entrusted to make such judgments.
  204. Thirdly, the Tribunal will have the opportunity to consider the evidence in full, including live evidence as appropriate and to reach a view on the merits of the allegations before it. Those are things which this Court is not well equipped to do in judicial review proceedings.
  205. Fourthly, the Tribunal does in principle have the jurisdiction to stay proceedings on grounds of abuse of its own process. In Executive Counsel to the AADB v Deloitte & Touche and Einollahi (undated) the Disciplinary Tribunal said, at p.4, that:
  206. "There is no doubt that any Tribunal has the power to stay its proceedings if there has been an abuse of its process."

  207. If the persons affected by disciplinary proceedings are able to persuade the independent Disciplinary Tribunal that the proceedings are an abuse of process, that Tribunal will stay the proceedings. Conversely, if the Tribunal is not persuaded that the proceedings are an abuse of process, it should have the opportunity to consider whether the allegations made are in fact made out on their merits.
  208. Finally, in appropriate cases and where the rules so provide, the Tribunal does have the power to order costs: see para 9(9) and (10) of the Accountancy Scheme. It is true that costs will not necessarily follow the event. However, it is not unusual for tribunal and similar proceedings to have a costs regime in which costs do not follow the event. It may often be the case that costs can only be granted where the proceedings should not reasonably have been brought or there is some other limitation of that kind. This should not ordinarily lead to such cases becoming appropriate in the Administrative Court where otherwise they would not be.
  209. Although there is no jurisdictional bar to claims for judicial review in cases such as this (nor did Mr Fordham QC suggest that there is), in my view it will be rare that it would be appropriate for such challenges to be entertained, since they should normally go, as a matter of principle, to the Disciplinary Tribunal.
  210. As the authorities I have cited earlier mention, different considerations may apply in a case where there has been a decision not to bring proceedings. That is because in such a case there will be no consideration by an independent tribunal of the lawfulness of the decision at all.
  211. There may also be cases in which it is appropriate to entertain a claim for judicial review of the content of a relevant policy such as the Guidance in this case: see, by way of analogy, R (Purdy) v Director of Public Prosecutions [2010] 1 AC 345 and R (Nicklinson) v Ministry of Justice [2014] 3 WLR 200. However, in my view, the present case is not such a case: the Claimants' first submission was closely related to their third submission, as to the approach to be taken to the assessment by the Executive Counsel of the public interest. If there had been no decision to make the Formal Complaint in the present case against these particular claimants, it is unlikely that they would have brought the challenge to the Guidance, since it would have had no practical effect on them. By way of contrast, in the cases I have mentioned, the challenge was to a policy as to prosecution which had a real and practical impact on the claimants and their families.
  212. Conclusion

  213. For the reasons which I have given this claim for judicial review is dismissed.
  214. 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.


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URL: http://www.bailii.org/ew/cases/EWHC/Admin/2015/1398.html